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APPENDIX C:
Glossary of Economic Terms
benefit An incoming (positive) cash flow.
benefit decline factor (BDF) Fractional year-to-year decline in benefits,
incorporated into estimate to allow for effects of unforeseen events.
contingency factor Fraction of initial optimistic cost estimate added on
to cover unexpected costs.
control performance A measure of how well a control system meets its
objective, typically expressed as some function of deviation from target
(e.g., range, standard error). Contrast with process performance, eco-
nomic performance.
cost An outgoing (negative) cash flow.
decision tree A method for displaying the effect of choices during a
project or among projects.
discount factor The value by which a future cash flow must be multi-
plied to convert it into a present cash flow.
economic performance A measure of how well a plant or unit meets its
objective, expressed in financial terms (e.g., ROI). Contrast with process
performance, control performance.
first cost Initial investment in a project, before operation starts and bene-
fits are realized.
fixed cost Any cost that does not vary with production rate.
internal rate of return (IRR) The rate of return that will set net present
value = 0.
market limited If the output of a production facility is limited by the
amount of its product that can be profitably sold, it is said to be market
limited. Contrast with production limited.
net cash flow The algebraic sum of positive and negative cash flows.
net present value (NPV) The current value of future cash flow(s).
opportunity cost Income that could be earned by an alternative use of
resources committed to a project.
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174 APPENDIX C: Glossary of Economic Terms
payback One of the earliest criteria used for project evaluation. The pay-
back period is the time required to recover the first cost of a project
probability tree A method for displaying the outcomes of a project that
is subject to chance effects.
process performance A measure of how well a process meets its objec-
tive. The most common measures are production rate and efficiency. Con-
trast with control performance, economic performance.
production limited If the output of a production facility is limited by
one or more internal physical constraints, the facility is said to be produc-
tion limited. Contrast with market limited.
profitability index The ratio of the net present value of operating cash
flow to initial investment.
return on investment (ROI) The ratio of average yearly operating cash
flow to initial investment. Usually expressed as a percentage.
sunk cost A cost that has already been spent, before the project under
consideration. It should not be included in a project evaluation.
variable cost Any cost that varies with production rate. Also known as
operating cost.
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