Some Basic Truths You can’t add or subtract two cash flows that occur at different points in time. You can’t compare two equivalent values that occur at different points in time. You can’t compare two cash flow series that span different lengths of time.

Some Basic Truths The interest rate frequency must match the payment frequency.

Decoding Interest Statements Assume that all interest rates are nominal rates (r) unless you’re told otherwise. Assume the compounding frequency is m = 1 unless you’re told otherwise. Assume that the time period of interest is a year unless you’re told otherwise.

Weighted Average Cost of Capital Four basic ways companies can raise capital: Sell part of the company to investors by issuing stock (equity capital) Use retained earnings from previous profitable investments (equity capital) Borrow money from investors by issuing bonds (debt capital) Borrow money from a bank by taking out a loan (debt capital)

PW, FW, AW If the equivalent worth is positive, the project earns more than the MARR If the equivalent worth is negative, the project earns less than the MARR If the equivalent worth is equal to zero, the project earns exactly the MARR

Cost vs. Revenue Do nothing is usually not an option with cost projects; it usually is an option with revenue projects For cost projects, select the project with the least negative equivalent worth For revenue projects, select the one with the most positive equivalent worth or, if none of them has a positive worth, do nothing

Cost vs. Revenue For cost projects with unequal lives, assume repeatability (if possible) and use AW to make a fair comparison For revenue projects with unequal lives, assume reinvestment at the MARR (if possible) and use PW to make a fair comparison Otherwise, select a common study period and use additional info to make a fair comparison

Independent Projects If money is no object, select all projects with a positive worth. If there is a budget, select the one bundle of feasible projects with the highest PW. If there are k projects, there are 2 k possible bundles (including “do nothing”).

Capitalized Cost Present worth of a long-lived (“permanent”) project.