The identification of benefits and costs depends on the particular project under consideration. Thus, in the case of fire prevention or control activities, the benefits are based on fire losses prior to such activities. Fire losses may be classified as direct or indirect. Direct economic losses are property and contents losses. Indirect losses in-clude such things…
Benefit-cost analysis, also referred to as cost-benefit analysis, is a method of comparison in which the conse-quences of an investment are evaluated in monetary terms and divided into the separate categories of benefits and costs. The amounts are then converted to annual equivalents or present worths for comparison. The important steps of a benefit-cost analysis are 1. Identification…
Rate of return is, by definition, the interest rate at which the present worth of the net cash flow is zero. Com-putationally, this method is the most complex method of comparison. If more than one interest factor is involved, the solution is by trial and error. Microcomputer programs are most useful with this method. The calculated…
To compare alternatives by annual cost, all cash flows are changed to a series of uniform payments. Current ex-penditures, future costs or receipts, and gradients must be converted to annual costs. If a lump-sum cash flow occurs at some time other than the beginning or end of the eco-nomic life, it must be converted in a…
In a present worth comparison of alternatives, the costs associated with each alternative investment are all converted to a present sum of money, and the least of these values represents the best alternative. Annual costs, future payments, and gradients must be brought to the present. Converting all cash flows to present worth is of-ten referred to as discounting….
Provision for inflationmay be made in two ways: (1) estimate all future costs and benefits in constant prices, and use a discount rate which represents the opportunity cost of capital in the ab-sence of inflation; or (2) estimate all future benefits and costs in current or inflated prices, and use a discount rate which includes an…
The term discount rate is often used for the interest rate when comparing alternative projects or strategies. Selection of discount rate: If costs and benefits accrueequally over the life of a project or strategy, the selection of discount rate will have little impact on the estimated benefit-cost ratios. However, most benefits and costs oc-cur at different times over the…
Most decisions are based on economic criteria. In-vestments are unattractive, unless it seems likely they will be recovered with interest. Economic decisions can be di-vided into two classes: 1. Income-expansion—that is, the objective of capitalism 2. Cost-reduction—the basis of profitability engineering economic analysis are pri-marily concerned with cost-reduction decisions, finding the least expensive way to fulfill certain…
Additional concepts involved in interest calculations include continuous cash flow, capitalized costs, begin-ning of period payments, and gradients. Continuous cash flow: Perhaps the most useful func-tion of continuous interest is its application to situations where the flow of money is of a continuous nature. Con-tinuous cash flow is representative for 1. A series of regular payments for which the interval be-tween payments…
As with the other factors,there is a corresponding inverse to the capital recovery factor. The series present worth factor is found by solving the capital recovery equation for P. or, symbolically P =A(P/A, i, N)