Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- 1 Benefit-Cost Analysis: Introduction and Overview
- 2 Investment Appraisal: Principles
- 3 Investment Appraisal: Decision-Rules
- 4 Private Benefit-Cost Analysis: Financial Analysis
- 5 Efficiency Benefit-Cost Analysis
- 6 Calculating the Net Benefits to the Referent Group
- 7 Consumer and Producer Surplus in Benefit-Cost Analysis
- 8 Valuing Traded and Non-traded Commodities in Benefit-Cost Analysis
- 9 Incorporating Risk in Benefit-Cost Analysis
- 10 The Social Discount Rate, Cost of Public Funds, and the Value of Information
- 11 Weighting Net Benefits to Account for Income Distribution
- 12 Valuation of Non-marketed Goods
- 13 Economic Impact Analysis
- 14 Writing the Benefit-Cost Analysis Report
- Appendix 1 Case Study Assignment
- Appendix 2 Discount and Annuity Tables
- Index
3 - Investment Appraisal: Decision-Rules
Published online by Cambridge University Press: 05 September 2012
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- Acknowledgements
- 1 Benefit-Cost Analysis: Introduction and Overview
- 2 Investment Appraisal: Principles
- 3 Investment Appraisal: Decision-Rules
- 4 Private Benefit-Cost Analysis: Financial Analysis
- 5 Efficiency Benefit-Cost Analysis
- 6 Calculating the Net Benefits to the Referent Group
- 7 Consumer and Producer Surplus in Benefit-Cost Analysis
- 8 Valuing Traded and Non-traded Commodities in Benefit-Cost Analysis
- 9 Incorporating Risk in Benefit-Cost Analysis
- 10 The Social Discount Rate, Cost of Public Funds, and the Value of Information
- 11 Weighting Net Benefits to Account for Income Distribution
- 12 Valuation of Non-marketed Goods
- 13 Economic Impact Analysis
- 14 Writing the Benefit-Cost Analysis Report
- Appendix 1 Case Study Assignment
- Appendix 2 Discount and Annuity Tables
- Index
Summary
Introduction
In this Chapter the discussion shifts to applications of the various investment decision-rules discussed in the previous Chapter. Some of the applications rely on the simple algebraic concepts already discussed in Chapter 2, while some are developed using the basic tool of the benefit-cost analyst – the spreadsheet. Some issues already raised in Chapter 2, such as the time value of money and the calculation of present value and internal rate of return, are explored further, while new concepts, such as comparison of projects under capital rationing, are introduced and discussed. Finally, the use of spreadsheets in project appraisal is discussed in detail.
Discounted Cash Flow Analysis in Practice
We now turn to evaluating multi-period investment projects – projects that have a net benefit stream occurring over many years. The remainder of this Chapter aims at familiarizing the reader with the practical application of discounted cash flow (DCF) decision-making techniques. At the end of the section the reader should know how decisions are made: to accept or reject a particular project; to select a project from a number of alternatives; and, to rank a number of projects in order of priority. Slightly different DCF decision-rules apply in each case. Although some examples are given to illustrate the use of these techniques, the exercises at the end of this section are also useful.
The widespread availability and relatively low cost of personal computers have transformed the task of the project analyst. Electronic spreadsheets such as Excel, Lotus 1–2–3, and Quattro have greatly facilitated the previously laborious, computational side to benefit-cost analysis. Repetitive, mechanical calculations can now be performed at will, which has the enormous advantage of allowing more project options and alternative scenarios to be considered than ever before.
- Type
- Chapter
- Information
- Benefit-Cost AnalysisFinancial and Economic Appraisal using Spreadsheets, pp. 36 - 61Publisher: Cambridge University PressPrint publication year: 2003
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