Finance — ISEN 302

Analysis Techniques

Future Worth Analysis

Following directly from the equations and techniques for present worth analysis, this technique simply evaluates future worth.

Benefit-Cost Ratio Analysis

This analysis metric also follows directly from present worth analysis metrics. An alternative is only desirable as compared to doing nothing if $B/C\ge 1$.

$$ \frac BC=\frac{NPW_{Benefits}}{NPW_{Costs}}=\frac{EUAB}{EUAC}\ge 1 $$

Payback Period

This technique ignores the time value of money, simply evaluating the time at which the sum of all costs and benefits goes to zero

$$ t|\>\Sigma_0^t CF_i =0 $$

Discounted Payback Period

This modification on the payback period technique takes into account the time value of money, but still neglects cash flows after the payback. It evaluates the time at which the present worth of all preceding costs and benefits goes to zero.

$$ t|\>\Sigma_0^t\frac{CF_i}{(1+r)^{n_i}} $$

Metrics

Amortization Schedule

This is a record of loan payments that shows the principal amounts and interest included in each annuity payment. The amount paid on interest is given by $C_{r_k}=rB_{k-1}$, in terms of discount rate, $r$, and the previous remaining balance, $B_{k-1}$. The amount paid on principle is given by $C_{p_k}=C_k-C_{r_k}$, in terms of the total payment, $C_k$.

Definitions

Capital Recovery refers primarily to (1) recovering initial costs of an investment, making it a break-even measure. This can also refer to (2) recouping invested funds through disposition of assets or (3) corporate debt collection.

Caveat Emptor (Buyer Beware) is the principle that the buyer alone is responsible for ensuring the quality and suitability of goods before purchasing.

End-of-year Convention is the standard that annuities are paid at the end of the year.