Investors make decisions relying on the relative profit potential of investment alternatives. The wrong choices may be made if systematic and quantitative methods are not used. In a given investment situation, it is necessary to consider several economic and technical parameters with respect to costs, profits, savings, the choice of time, tax and loyalty, project life, etc. If a reliable approach is not used to quantify the effects of these factors, it is very difficult to correctly assess each alternative and make the best choice.
The economic viewpoint assumes that capital accumulation is the primary investment objective of capitalistic individuals, companies and societies. From late 1980s to late 1990s, it is estimated that more capital investment dollars were spent in the US than were spent cumulatively in the past 200 years in the US. And the numbers in the 2010s are even larger. The importance of proper economic evaluation techniques in determining the most economically-effective way to spend this money seems evident for individuals, companies, and societies. This course presents the development and application of these economic evaluation techniques.
Investment decisions are analyzed over the lifetime of a project which can be decades long and there are many input data that are related to time such as escalation and inflation of costs and revenues. Therefore, predictions, forecasting, estimations, and assumptions are required for these data which is involved with risk and uncertainty. Consequently, results of the analysis are highly dependent on accuracy and correctness of the proposed inputs. However, the techniques provided in this text can give the decision maker much better ideas about the relative risks and uncertainties between alternatives. This information, along with the numerical economic evaluation results, can help the investors to make a better choice than without using them.
In the majority of cases, making business decisions means dealing with alternative choice problems, which includes selecting the best alternative from several possible choices. The economic evaluation techniques in this course are based on the premise that profit maximization is the investment objective; that is, the alternation that maximizes the future worth of available investment dollars. In general, this involves answering the question, “Is it better to invest cash in a given investment situation, or will the cash earn more if it is invested in an alternative situation?”
Several applicable and useful techniques for evaluating various investment situations will be covered in this course and include future, present, annual value, and break-even analysis. But, the course focuses mainly on methods such as compound interest rate of return (ROR) analysis, as the primary decision-making criterion used by the majority of firms and organizations, and net present value (NPV) analysis, as the second-most used technique, properly applied on an after-tax basis.
Taxes are a cost relevant to most evaluation situations and economic analysis must be done after-tax. This course will cover the scenarios that it is proper to neglect taxes such as government project evaluations where taxes do not apply. Also, the cases with taxes incorporated will also be discussed and analyzed.
There are two main categories of projects or investments that economic evaluation decision-making can be applied to:
- Revenue producing investments
- Service producing investments
A possible third classification, “Saving producing projects” will be illustrated later in the course.