Project Economics & Decision Making Training Course Manual Issued To: MDT International 45 Albert Street Aberdeen AB25 1XT United Kingdom Tel +44 1224 561521 Fax +44 1224 561530 Email info@mdtinternational.com http:/Avwww.mdtinternational.com Copytight © MDT Intemational 2004, Al rights reserved. No att ofthis publication covered by copyright may be reproduced, ord in rexieval sytem or transmitted in any form or by any meas, clesronic, mechanical, photocopying. recording or otherwise, without the prior ‘wrtan conan ofthe autho, ‘apes fr los oxasond to any pao ning o fining om an a rk fay karl inthis pblction can be sexpa thor,Project Economics & Decision Making Contents Introduction Sra u Course Objectives cece Si nae eo aire near Suggested Attendees... : 1 Criterion for Decision Making 2 The Project Life Cycle..... 7 eee, 3 Decision Analysis 4 Accountants’ vs Economists’ View of Financial Decisions ...... if Accountant’s Rate of Return ..... 8 Definition... 8 Criteria for Decision Making 8 o EXAMPLE - ACCOUNTANTS RATE OF RETURN 9 Critique of ARR Method escoessveseneeenueesinenueeenneetin 7 SOME esti UAW coTMaRIDR ee eee cece caca eens eee ees sees 10 Payback Period Method. 13 Investment Decision Criteria. 2 13 a EXAMPLE - PAYBACK PERIOD... - a 13 Critique of Payback Period Method 14 Present Value Concept - the Time Value of Money mae 15 a EXAMPLE - DISCOUNT FACTORS TABLE. ................sssssssesssssssesssssssssssse 16 a EXAMPLE - PRESENT VALUES. 17 The Cost of Capital... The Cost of Equity The P/E Growth Model. The Capital Asset Pricing (CAPM) Model.. ‘Net Present Value Method. eae 22 Investment Decision Criteria. 22 EXAMPLE - NET PRESENT VALUE... . aan Critique of NPV Method 23 Discounted Payback Period Method .... 224 EXAMPLE - DISCOUNTED PAYBACK PERIOD. 24 Project Economics & Decision Making 7 ©MDT Imernational 2004 C:MDT Training Public Zconomies REVISIONS 2004MfanualECONOMIC.DOC Ver 06Project Economics & Decision Making Critique of Discounted Payback Method......... Internal Rate of Return Method ... Definition. ( EXAMPLE- INTERNAL RATE OF RETURN. IRR Criteria for Decision Making... Critique of IRR Method (EXAMPLE - IRR Cash Flow “Change of Signs”. Profitability Index Method... Definition : Criteria for Decision Making (EXAMPLE - PROFITABILITY INDEX Critique of PI Method eee fesse NPV/Max Exposure Qo EXAMPLE - ‘NPV/MAX EXPOSURE.. Critique of NPV/MaxExp Method Methods Compared... (EXAMPLE - COMPARISON OF APPRAISAL METHODS....... Decision Making Under Capital Rationing (1 EXAMPLE - DECISIONS UNDER CAPITAL RATIONING. —_ EXAMPLE - COMPARISON OF NPVs The Impact of Rising Prices and Inflation. 1 EXAMPLE - RISING COSTS....... (EXAMPLE - INFLATION ADJUSTED DCF ‘The Impact of Exchange Rates... Oo EXAMPLE —- EXCHANGE RATES. The Impact of Taxation Introduction 0 UK Corporation Tax... Writing Down Allowances... im EXAMPLE - WRITING DOWN ‘ALLOWANCE Impact of Tax on the Cost of Capital. eaten fees EXAMPLE - IMPACT OF TAX ON COST OF: CAPITAL OG -EXAMPLE - IMPACT OF TAX ON DISCOUNTED CASH FLOW......... Incremental Development Investment Criteria for Decision Making .... 46 Project Economics & Decision Making ©MDI International 2004 (C/MDI Training Public Economics REVISIONS 2004\Mfanual ECONOMIC.DOC Ver 06