IA- static methods

Cost comparison method
1. answers to: 1. which project should be realized & 2. what is the optimal replacement time for an already realized asset
2. choose the one with lowest costs!!!
3. calculate total costs: variable costs + fixed costs
4. depreciation: initial outlay/economic life
5. Average tied-up capital: initial outlay/2 (for calculating interest)
6. fixed costs= capital costs
7. if investment sold after the economic life- liquidation!!!
  1. depreciation: (initial outlay - liquidation value)/ economic life
  2. ATC: (initial outlay + liquidation value)/ 2
8. critical quantity =volume of production which leads to equal costs
  1. fixed c + variab/unit *x = fixed c. + variab/unit *x
  2. lower fixed costs = lower costs before critical quantity
  3. higher fixed costs = lower costs after critical quantity
basics
1. values represented through costs and revenues
2. average value of a representative period (not the whole economic life
3. time value of money not considered
profit comparison method
1. target measure: average annual profit (profit/period)
  1. average annual profit: annual revenue - annual total costs
2. absolute profitability = profit greater than zero
3. relative profitable = the one with the higher profit
4. critical quantity of output
  1. leads an equal profit of both alternative investment projects
  2. (revenue/unit- variable cost/unit)* x - fixed costs = (rev./u-var.cost/u)* x -fixed cost)
5. evaluation of the model
  1. acknowledges the fact of different revenues
  2. allows individual project evaluations
  3. impossible to allocate revenues to the projects
  4. usage of average values is questionable
  5. investment assessed only according to the realized profit
average rate of return
1. target measure is the average rate of return
  1. = ((average profit + average interest)/ ATC) *100
2. can be used for a single investment or to compare
3. absolute profitability= average rate of return higher than a given %
4. relative profitability= investment leads to a higher ARR than alternative investment project
5. risk premium!! add to the fixed interest
static payback period method
1. target measure is the time it takes to recover the capital invested to the project
2. payback period = initial outlay + (if so) liquidation value/ average annual cash flow
3. absolute profitability= payback period is shorter than the target length of time
4. relative profitability= investment project has a shorter payback period than alternative investment project
5. result in years!!
6. equity financed--> add interest!!!
  1. profit + depreciation + interest = average annual cash flow)
7. debt financed: average annual cash flow = profit + depreciation
8. evaluation of the model
  1. advantage: provides some indication of the risk
  2. disadvantage: excludes profits and cash flows after the payback beriod
  3. disadvantage: can't be used for evaluation of long-term assets, difficult to determine an objective acceptable payback period

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IA- static methods

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	Created by so liu over 10 years ago