Two Strategies of Personal Investment

B Accumulated Dollars –vs- Your Age

Project Evaluation ekm p:/CEPDtxt/Investments You propose a project that will cost $5,000,000 and will return $1,500,000 in year 1 $2,500,000 in year 2 $2,800,000 in year 3. The company has other opportunities that will return 12% on money invested – OR the company is interested only in investments that return a minimum of 12% (the ‘hurdle rate’). Management looks at this alternative and says: to earn the 1,500,000 of the first year, we would have to invest 1,500,000 / ( ) or $1,339,286 right now; to earn the 2,500,000 of the second year we would have to invest 2,500,000 / (1+0.12) 2 or $1,992,985 right now; and to earn the 2,800,000 of the third year we would have to invest 2,800,000 / (1+0.12) 3 or $1,992,984 right now. Summing the investments, $5,325,255 will earn us the same amount as you are proposing to earn with $5,000,000. Your proposed project has a Net Present Value of 5,325,255 – 5,000,000 or positive $325,255. WORTH EXAMINING MORE CLOSELY.

Your proposed project has a Return on Investment (ROI) of 15.4 percent. 1,500,000 / ( ) = 1,299,827 2,500,000 / ( ) 2 = 1,877,277 2,800,000 / ( ) 3 = 1,821,967 adding up to $4,999,071 The 15.4% is alternatively called Internal Rate of Return or IRR. In fact it would be better than that because, hopefully, the profits would keep coming in for many more than just three years.

The Context of Process Design Business Management | _____________|___________________ | | | | | | Project Implementation | _____________|______________ | | | | | Process Design _____|_____ | | SYNTHESIS DOCUMENTATION - Process flow sheet - Equipment data sheets - Piping & Instrumentation Drawing