Cost Benefit Analysis

Topics: Costs, Cost, Cost-benefit analysis Pages: 40 (4290 words) Published: June 19, 2013
10/22/2011

Cost benefit analysis (Cba) Nuqul Group
Dr. Abdallah Abdallah, CSSBB
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Dr. Abdallah Abdallah

What do you expect to get out of this training?

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Dr. Abdallah Abdallah

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Contents
Introduction CBA Concept CBA Steps Feasibility Studies Change Management In Practice Exercises

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Cost benefit analysis (Cba)

Introduction
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What do you know about the following? • Cost Benefit Analysis (CBA). • Activity Base Costing (ABC). • Net Present Value. • Decision Making with Financial Data. • Financial Statements. • Feasibility Studies.

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Dr. Abdallah Abdallah

Engineering Economic Decisions
Manufacturing Profit

Planning

Investment Marketing
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Predicting the Future
 Estimating a Required investment  Forecasting a product demand  Estimating a selling price  Estimating a manufacturing cost  Estimating a product life 7

Dr. Abdallah Abdallah

Role of Engineers in Business
Create & Design • Engineering Projects

Analyze • Production Methods • Engineering Safety • Environmental Impacts • Market Assessment

Evaluate • Expected Profitability • Timing of Cash Flows • Degree of Financial Risk 8

Evaluate • Impact on Financial Statements • Firm’s Market Value • Stock Price

Dr. Abdallah Abdallah

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Accounting Vs. Engineering Economy
Evaluating past performance Evaluating and predicting future events

Accounting
Past

Engineering Economy
Future Present

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Two Factors in Engineering Economic Decisions
The factors of time and uncertainty are the defining aspects of any engineering economic decisions

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Fundamental Principles of Engineering Economics
Principle 1: A nearby dollar is worth more than a distant dollar Principle 2: All it counts is the differences among alternatives Principle 3: Marginal revenue must exceed marginal cost Principle 4: Additional risk is not taken without the expected additional return

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Principle 1: A nearby dollar is worth more than a distant dollar

Today
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6-month later
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Principle 2: All it counts is the differences among alternatives Option
Monthly Fuel Cost Monthly Cash Maintena outlay at nce signing Monthly payment Salvage Value at end of year 3

Buy Lease

$960 $960

$550 $550

$6,500 $2,400

$350 $550

$9,000 0

Irrelevant items in decision making
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Principle 3: Marginal revenue must exceed marginal cost
Marginal cost Manufacturing cost 1 unit

Sales revenue
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1 unit

Marginal revenue
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Principle 4: Additional risk is not taken without the expected additional return Investment Class Potential Risk Expected Return 1.5%

Savings account Low/None (cash) Bond (debt) Moderate

4.8%

Stock (equity)

High
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11.5%
Dr. Abdallah Abdallah

Time Value of Money
Money has a time value because it can earn more money over time (earning power). Money has a time value because its purchasing power changes over time (inflation). Time value of money is measured in terms of interest rate.

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The Interest Rate


Interest is the cost of money—a cost to the borrower and an earning to the lender

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Cash Flow Transactions for a Loan Repayment Series

End of Year Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Receipts $30,000.00

Payments $300.00 7,712.77 7,712.77 7,712.77 7,712.77 7,712.77

The amount of loan = $30,000, origination fee = $300, interest rate = 9% APR (annual percentage rate) 18

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Cash Flow Diagram

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Methods of Calculating Interest


...
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