Introduction

• Financial analysis methods gives us the capability to
find a common measure to reflect all the costs and benefits and their time of occurrence  securing financing or credit for implementation of a project Cost and benefit

• At the beginning of a project an investment is usually required to purchase equipment's, to construct buildings, and to conduct other activities. All of these activities require expenditure of resources. • If the system is producing an end item, such as a factory, then the revenue received by selling the produced items is the benefit obtained.

the present time (time zero) equivalent value of all the costs and benefits incurred during the life of the project is calculated using a specific interest rate. • In this method. • the equivalent present value of a future value (cost or benefit) at n equal consequent intervals of time t from present time with the constant interest rate i per interval prevalent during the total time nt given by. .Present Worth Present Value (PV) • The present value is a function of time t and interest rate i.

the present worth is called uniform series present worth factor. • the present value of the uniform series can be calculated by multiplying A and equation .Cont’d Net Present Worth • The net difference of the present costs and benefits is the net present worth Present Value of Uniform Annual Series • If the same benefits and/or costs occur for every period.

Future Worth Future Value (FV) • A corollary to the present value and net present worth is the future value and the net future worth(NFW). Future Value of Uniform Annual Series • the future value of a uniform annual series of A is • The cash flow diagram corresponding to the above equation is . • the future value is obtained by transposing equation for present value.

. • For systems having more than one year of life. we can calculate a single virtual number that represents an equivalent annual net benefit or cost for the duration of the system life. • This virtual number is called the equivalent uniform annual worth (EUAW) and is equal to the total benefit and cost of the system as if it was spread evenly throughout the years of its life.Annual Worth Annual Worth and Equivalent Uniform Annual Worth • The annual worth is the net of all the benefits and costs incurred over a one-year period.

Cont’d For calculating this number it takes only two steps • Step 1: All the costs and benefits are transferred to the present year using equation to calculate the NPW • Step 2: Multiplying the NPW by a factor called capital recovery factor converts it to EUAW .

then the project is acceptable. This rate is called the rate of return (ROR) and is denoted by i*. • If this rate is higher than the minimum rate that satisfies the investor or the project manager. This has to be done by trial and error. Excel .g. but there are computer programs that make this calculation simple and fast. • This minimum rate is called the Minimum Acceptable Rate of Return (MARR) • There is no mathematical formula for calculating MARR.Rate of Return • It is another useful method for comparing the financial advantages of alternative systems using the cash flow diagram • We calculate that specific rate of interest for the system that makes the net present value equal to zero. • e.

we first construct the net cash flow diagram and then by simple arithmetic calculation add the benefits and the cost year by year until the total equals the initial investment. • If this ratio is greater than one. • In this method. • It is obvious that the payback period neglects the time value of money and is only accurate when the interest rate is zero .Benefit-Cost Ratio and Payback Methods  Benefit-Cost Ratio • Another method of assessing the viability of a system or comparing several systems is to calculate the net present value of the costs and the benefits and obtain the benefit-cost ratio (B/C). Payback • The time in any unit that it takes to recover the initial investment is called the payback period. then the project is profitable.

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