PROJECT INTERACTIONS èErosion e.g., diet and regular soft drinks èEnhancement e.g., “The Lion...
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PROJECT INTERACTIONS Erosion e.g., diet and regular soft drinks Enhancement e.g., “The Lion King” & merchandising Contingent Projects e.g., need road to develop mine Mutually Exclusive Projects e.g., replacement equipment
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Transcript of PROJECT INTERACTIONS èErosion e.g., diet and regular soft drinks èEnhancement e.g., “The Lion...
PROJECT INTERACTIONS
Erosione.g., diet and regular soft drinks
Enhancemente.g., “The Lion King” & merchandising
Contingent Projectse.g., need road to develop mine
Mutually Exclusive Projectse.g., replacement equipment
PRESENT VALUE OF AN ANNUITY
1. PERPETUITY STARTING NEXT PERIOD
PMT PMT PMT PMT PMT PMT
PV =PMT/r
2. PERPETUITY STARTING AT n
PMT PMT PMT PMT
PV = (PMT/r)/(1+r)n
PV OF N-period annuity = PMT/r - (PMT/r)/(1+r)n =(PMT/r)(1-1/(1+r)n)
ANNUITY PV (CONT.)
• Given annuity PMT, r and n, we can find PV
• Given annuity PV, r and n, we can find PMT
• EAC technique converts an uneven stream into an annuity with same PV
1)r1(
)r1(rPVPMT
)r1(r
1)r1(PMT
)r1(
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rPMTPV
n
n
n
n
n
INFLATION & CAPITAL BUDGETING
nr
nr
r
r1
nnr
nnr
r
r1
rn
)r1(
CF...
)r1(
CF
)i1()r1(
)i1(CF...
)i1)(r1(
)i1(CFPV
)i1)(r1()r1(
nr
nr
r
r1
nnr
nnr
r
r1
rn
)r1(
CF...
)r1(
CF
)i1()r1(
)i1(CF...
)i1)(r1(
)i1(CFPV
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INFLATION & CAP. BUD. (cont.)
To calculate NPV with inflation:Discount nominal cash flows at nominal
discount rate
ORDiscount real cash flows at real discount rate
Watch out for depreciation tax shields
INVESTMENT OPTIONS
Be aware of future choices (options) that might be associated with projects - these can add to the value of the projectFuture investment optionsAbandonment optionPostponement option
