Engineering economics

Unit 1
Time value of money:
Simple and compound interest
Time value equivalence
Compound interest factors
Cash flow diagrams
Calculations of time-value equivalences
Present worth comparisons
Comparisons of assets with equal, unequal and infinite
lives
Comparisons of deferred investments
Future worth comparisons
Pay back period comparisons

Unit 2
Use and situations for equivalent annual worth comparison
Comparisons of assets of equal and unequal life
Rate of return
Internal rate of return
Comparison of IIR with other methods
IIR misconceptions

Unit 3
Analysis of public projects:
benefit/cost analysis
Quantification of project
Cost and benefits
Benefit/cost applications
Cost effectiveness analysis

 Unit 4
Depreciation
Computing depreciation charges

After tax economic comparison

Break-even analysis
Linear and non-linear models
Product and process costing
Standard costing
Cost estimation
Relevant cost for decision making

Cost control and cost reduction techniques

PERCENTAGE CHART
1.
2.

3.
4.
5.
6.
7.
8.
9.

100=1/1
50=1/2
33.33=1/3
25=1/4
20=1/5
16.67=1/6
14.28=1/7
12.5=1/8
11.11=1/9

INCREASE

10. 10=1/10
11. 9.09=1/11

12. 8.33=1/12

DECREASE

UNIT-1

Chapter 1 TIME VALUE OF MONEY

TIME VALUE OF MONEY-:It is the value of money figuring in a

given amount of interest and over a given amount of time. It is

an important concept in financial management. It can be used
to compare investment alternatives and to solve problems
involving loans, mortgages, leases, savings and annuities.

 CONCEPT OF TIME VALUE OF MONEY

Money has a time value. The sooner we receive money the

better it is.
The money you hold today is worth more than in future. This
phenomenon is referred to as time preference for money.
REASONS FOR TIME PREFERENCE OF MONEY
(i) The future is uncertain and involves risk
(ii) The present needs are considered as urgent as compared
to future needs
(iii) Postponing use of money means postponing
consumption

SOME DEFINATIONS
INTREST-:It is the charge for borrowing money usually

stated as a percentage of the amount borrowed over a specific

period of time.
PERIODS-:Periods are evenly spaced intervals of time.
PAYMENTS-:These are series of equal, evenly spaced cash
flows.
PRESENT VALUE-:It is an amount today.
FUTURE VALUE-:Future value is the amount of money that
an investment with a fixed, compound interest rate will grow
to by some future date.
LOAN AMORTIZATION-:A method for paying a loan in
equal installments.
Part of each payment goes towards interest and remainder is
used to reduce the principal.
CASH FLOW DIAGRAM-: It is a picture of a financial
problem that shows all cash inflows and outflows along a
time line.

TECHNIQUES OF TIME VALUE OF

MONEY
There are two techniques for adjusting the time value of
money-:
1. COMPOUNDING TECHNIQUE
2. DISCOUNTING OR PRESENT VALUE TECHNIQUE

1.COMPOUNDING TECHNIQUE
Vn=V0(1+i)n
Vn=Future value at the period n
V0=Value of money at time 0; i.e., original sum of

money
i=interest rate
For e.g.-:after 10 years the value of 100 at 8% rate of
interest shall be?

DOUBLING PERIOD
Length of period can easily be calculated by putting
vn=2v0 and then finding n. But it can be calculated by
adopting following rules-:
Rule of 72: Doubling period= _________72_________
(rate of interest) {approx}
Rule of 69: Doubling period=0.35+ ______69_____
(rate of interest)
For e.g. Mr. X deposited Rs. 10,000 today at 6% rate of
interest, in how many years will this amount double?
Work out this problem using rule of 72 and rule of 69.

MULTIPLE COMPOUNDING
PERIODS
If interest compounds more than once a year then we use

multiple compounding periods like bank may allow

interest on quarterly basis or a company may allow
compounding of interest twice a year. The future value of
money in such cases can be calculated as-:
Vn=V0(1+i/m)m*n
Vn=Future value at the period n
V0=Value of money at time 0; i.e., original sum of money
i=interest rate
m= frequency of compounding per year{for quarterly m=4,
for half yearly m=2}

a. Find the amount of Rs 500 lent for 5 years at 16% p.a.

compound interest payable quarterly?

b. When a child was born, a sum of Rs 5000 was placed
in a bank a/c for the child's benefit. The bank pay
12%p.a. interest compounded half-yearly. What
amount would be received by child on its 6th year?

EFFECTIVE RATE OF INTREST IN

CASE OF MULTI-PERIOD
COMPOUNDING
When we need to find effective rate of interest from

nominal rate of interest.

For e.g. the future value of Rs 100 at the end of one year , at
the rate of 10% will become 110. But if interest is calculated
half yearly then it becomes 110.25 i.e. 10.25% while nominal
rate is 10%. It can be calculated by the formula-:
EIR= 1+ i m -1
m
EIR=effective rate of interest
i=nominal rate of interest
m=frequency of compounding per year

a. A company offers 9%rate of interest on deposits.

What is the effective rate of interest if compounding

is done (i) half-yearly (ii) quarterly and (iii) monthly
b. A national saving certificate issue at Rs.100 realizes
Rs.200 at maturity after 7 years. Find out the rate of
interest, assuming the rate of interest is added halfyearly.

FUTURE VALUE OF A SERIES OF

PAYMENTS
Till now we have studied about future value of a single

payment. But in many cases we are interested to know the

future value of a series of payments made at different times.
This can be calculated as below-:
Vn=R1(1+i)n-1 + R2(1+i)n-2 + ..+Rn-1(1+i) + Rn
For e.g. Calculate the future value at the end of 5 years of the
following series of payments at 10% rate of interest:
R1=Rs.5,000 at the end of 1st year
R2=Rs 10,000 at the end of 2nd year
R3=Rs 15,000 at the end of 3rd year
R4=Rs 10,000 at the end of 4th year
R5=Rs 8,000 at the end of 5th year?

COMPOUND VALUE OF AN ANNUITY

An annuity is a fixed sum paid at regular intervals of time

under certain conditions. For e.g. premium paid of a life

insurance policy.
If the cash flow occurs at the end of each period the annuity
is called a regular annuity or a deferred annuity.
If the cash flow occur at the beginning of each period the
annuity is called as annuity due.
FUTURE VALUE OF AN ANNUITY-:(F.V.A)=
A[(1+i)n-1]
i
where a is the annuity
n is the number of years i=rate of interest
100
FUTURE VALUE OF ANNUITY DUE-:
=A[(1+i)n+1](1+i)
i

 Find future value of Rs. 1000 deposited annually for 12

years compound interest at 16% p.a.?

To accumulate a fund for his sons higher education, a
person invests a sum of Rs. 100 on the sons birthday
and an equal amount on each of the subsequent birth
days. If the interest is compounded half-yearly at the
rate of 6% p.a. Find the amount accumulated just after
the investment has been made on the 18th birthday.

DISCOUNTING OR PRESENT VALUE

TECHNIQUE
Present value is exactly opposite of future value. While

future value shows how much a sum of money

becomes at some future period, present value shows
what is the value today of some future sum of money.
Present value(v0)=future value (Vn)
(1+i)n

 Mr. Vipin is to receive Rs 5000 after 5 years from now.

His time preference for money is 10% p.a. Calculate the

present value.

Present value of a series of payments

In many cases we may have to calculate present value

of several sums of money, each occurring at different

point of time. If a series of payment is represented by
R1,R2,R3,.etc. the present value of such a series of
payments will be:
V0=R1 + R2 + R3 + Rn-1 + Rn
(1+i) (1+i)2 (1+i)3
(1+i)n-1 (1+i)n

A man borrows a certain sum and pays back it in two

equal installments. If compound interest is recokned

at 4% and if he pays back annually Rs 676, what sum
did he borrow?

 Calculate present value of the following cash flows

assuming a discount rate of 10%

year
1
2
3
4
5

cash flows(Rs)
5000
10,000
10,000
3,000
2,000

PRESENT VALUE OF AN ANNUITY

An annuity is a series of equal payments lasting for

some specific period.

Value of annuity is calculated as-:
PVA=V0= A[(1+i)n-1]
i(1+i)n
Present value of an annuity due:
PVA due=A[(1+i)n-1]
i(1+i)n-1

 A loan of Rs 20,000 is to be paid in 10 equal

installments. Find the amount of each installment to

cover both principal and interest at 4% p.a.
compound.

SIMPLE
AND
COMPOUND
INTEREST
Since this section involves what can
happen to your money, it should be of
INTEREST to you!

BASIC CONCEPTS
Principal-:The amount lent out or borrowed

is known as principal and is denoted by P.

Amount-:The borrowed money and the
interest is called amount and is denoted by
A.
Amount=principal + interest
A=P+I
Rate-:Per hundred extra amount, which is
paid by the borrower is called rate and is
denoted by R or r.

 Types of interest : Interest is of two types

Simple interest : The interest which is computed on

original principal is known as simple interest(S.I). In
simple interest principal remains fixed.
2. Compound interest: When interest is not paid by
the borrower in fixed time , then money lender adds
the interest in the principal amount, this sum
becomes the principle for the second unit of time.
It is clear that borrower pays interest on interest.
This type of interest is called compound interest.
1.

IMPLE INTEREST
FORMULA
Interest paid

Annual interest rate

I = PRT
Principal
(Amount of money
invested or
borrowed)

100

Time (in years)

If you invested $200.00 in an account that paid

simple interest, find how long youd need to
leave it in at 4% interest to make $10.00.
enter in formula
as a decimal

I = PRT
100
10 = (200)(0.04)T
1.25 yrs = T

Typically interest is NOT simple interest but if paid semi-annually (twice a year),
quarterly (4 times per year), monthly (12 times per year), or even daily (365 times
per year).

FORMULA FOR SIMPLE INTEREST

S.I=P*R*T
100
2. Amount=Principal + interest
A
=P + PRT
100
A=P 1+ RT
100
1.

AMOUNT

RT
A P 1

100

 What is the interest of Rs. 7300 at 4% simple interest

from January 10 , 1996 to April 11, 1997?

Certain sum of money amounts to Rs 678 in 2 years

and Rs 736.50 in 3.5 years. Find the principal and rate

of interest?

COMPOUND INTEREST
FORMULA
Principal
(amount at
start)
amount at the
end

annual interest rate

(as a decimal)

A P 1

100
hundred

time
(in years)

Find the amount that results from $500 invested

at 8% compounded quarterly after a period of 2
years.
(2)
4nt

A 500
P 1
n
8

100*4

A $585.83

Effective rate of interest is the equivalent annual simple rate of

interest that would yield the same amount as that made
compounding. This is found by finding the interest made when
compounded and subbing that in the simple interest formula and
solving for rate.
Find the effective rate of interest for the problem above.
The interest made was $85.83. Use the
simple interest formula and solve for r to get
the effective rate of interest.

I = Prt

85.83=(500)r(2)

r = .08583 = 8.583%

 Find compound interest of amount Rs 10,000 at the rate

of 10% for 3 years.

HALF YEARLY, QUARTERLY

If interest is paid half yearly

Rate=r/2% Time=(2*n )years

If interest is paid quarterly
Rate=r/4% Time=(4*n)years
When interest is paid annually and time is n years
and m months
A=P 1+ r n
1+ r *m/12
100
100
When rate of interest is different every year r1% ,
r2% , r3%
A=P(1+r1/100)(1+r2/100)(1+r3/100)

 Find the amount and compound interest at Rs 5000 in

3/2 years at 10% p.a. compounded half yearly?

INSTALMENTS
Instalments of variable amount
2. Instalments of equal amount
1.

Instalments of variable amount-: In this type person

pays fixed part of the principal amount + interest due
at the time of payment
A man borrows Rs 6000. He has to repay the money in
3 annual instalments of Rs 2000 which will also
include interest in addition. If rate is 5% p.a. then find
the amount of each instalment payable after a year?

 Instalments of equal amount-:Let amount of each

instalment be X. If r is the rate of interest then

instalment
X=Y + r% of Y, where Y is the principal amount paid
X=Y (1+r/100)
X=Y 100+r
100
Y=X 100
(a), similarly in second instalment
100+r
2 (b), and in 3rd instalment
Y=X 100
100+r
3 (c), etc. then (a)+(b)+(c)+...=principal amt
Y=X 100
100+r

 What equal annual instalment will discharge a debt of

Rs 9200 in 4 years at 10% S.I p.a.?

CASH FLOW DIAGRAMS

It is a picture of a financial problem that shows all cash

inflows and outflows along a time line.

A CFD(cash flow diagram) is created by drawing a
segmented horizontal line divided into appropriate
time units.
The time units on the CFD can be months, quarters,
years or any other consistent time unit.
Advantages-:
1. It is a tool used by accountants and engineers to
represent the transaction which will take place over
the course of a given project.
2. It may also be used to represent payment schedules
for bonds, mortgages and other types of loans.

At time zero
1 time period from today
2 time period from today
3 time period from today
4 time period from today
Rs 100
Rs 100
(+)
0
1
2
(-)
Rs 100

a positive cash flow of Rs 100

a negative cash flow of Rs 100
a positive cash flow of Rs 100
a negative cash flow of Rs 100
a negative cash flow of Rs 50

4
Rs 50

Rs 150
An example cash flow diagram

METHODS OF ACCELERATING CASH

INFLOW

METHODS OF SLOWING CASH

INFLOW

UNIT-2

CAPITAL BUDGETING
MEANING-:

CAPITAL BUDGETING CONSIST IN PLANNING THE

DEVELOPMENT OF AVAILABLE CAPITAL FOR THE

PURPOSE OF MAXIMIZING THE LONG-TERM
PROFITABILITY(ROI-RETURN ON INVESTMENT) OF
THE FIRM.
CAPITAL BUDGETING IS A MANAGEMENT
TECHNIQUE WHICH IS USED FOR MAXIMISING THE
PROFITS OF THE FIRM BY INVESTING FIRMS FUNDS
IN SUCH ASSETS WHICH GENERATE INCOME FOR A
NUMBER OF YEARS.

 FEATURES OF CAPITAL BUDGETING-:

1. EVALUATION OF PROPOSALS: CB(CAPITAL

BUDGETING) HELPS MANAGEMENT TO EVALUATE

PROPOSALA AND TAKE CORRECT DECISIONS.
2. TOOLS OF CONTROL:CB HELPS TO CONTROL
CAPITAL EXPENDITURE.
3. OPTIMAL SELECTION:CB HELPS TO CHOOSE BEST
ALTERNATIVE FROM A NUMBER OF PROJECTS.
4. HELPS TO MAINTAIN CO-ORDINATION:HELPS TO
MAINTAIN GOOD CO-ORDINATION B/W VARIOUS
CAPITAL EXPENDITURES IN MANY PROJECTS.

5. CAPITAL EXPENDITURE DECESIONS:SUCCESS OR

FAILURE OF FIRM DEPENDS ON CAPITAL

EXPENDITURE DECISIONS. THIS IS ONE OF THE
MOST IMPORTANT WORK OF MANAGEMENT.
6. PROPER MANAGEMENT OF FINANCE:CD
REQUIRES LARGE INVESTMENTS IN DIFFERENT
PROJECTS.
7. TO AVOID AND REDUCE LOSSES:CB HELPS IN
AVOIDING OR REDUCING LOSSES.
8. CONSIDERATION OF OTHER FACTORS:CB
DECISIONS HAVE LONG LASTING EFFECTS FOR A
NUMBER OF YEARS.

NATURE OF CAPITAL BUDGETING-:

1.

2.
3.
4.
5.
6.

7.
.

LONG TERM EFFECTS: CBD HAS LONG TERM EFFECTS ON FUTURE

PROFITABILITYAND COST STRUCTURE OF FIRM.
CB DETERMINES DESTINY OF THE FIRM.
HIGH DEGREE OF RISK: CBD IS EXPOSED TO DIFFERENT TYPES
OF RISK, DUE TO TECHNOLOGICAL ADVANCEMENT, DUE TO
CHANGE IN THE TASTE AND FASHIONS OF CUSTOMER.
HUGE FUNDS: CBD REQUIRE HUGE FUNDS.
IRREVERSIBLE DECISIONS: AMOUNT INVESTED CANT BE
REALIZED BACK.
MOST DIFFICULT DECISIONS: CBD ARE VERY DIFFICULT AS
ASSESSMENT DEPENDS UPON UNCERTANITY OF FUTURE EVENTS
AND ACTIVITIES OF FIRM.
IMPACT ON FIRMS COMPETITIVE STRENGTH: IF CBD FAILS AND
FIRM FACES LOSS THAN IT LOSSES COMPETITIVE STRENGTH.
SIMILARLY IF COMPANY EARNS PROFIT IT GAINS COMPETITIVE
STRENGTH
IMPACT ON COST STRUCTURE: CBD RESTRICTS A FIRM TO A
SIZABLE AMOUNT OF FIXED COSTS.

OSTER YOUNG S FEATURES OF

CAPITAL BUDGETING-:
POTENTIALLY LARGE ANTICIPATED BENEFITS.
A RELATIVELY HIGH DEGREE OF RISK.
A RELATIVELY LONG-TERM PERIOD B/W THE

INITIAL OUTLAY AND THE ANTICIPATED RETURN.

OBJECTIVES OF CAPITAL BUDGETING

WEALTH MAXIMIZATION OF SHAREHOLDERS: CBD ARE

EXPECTED TO MAKE MAXIMUM CONTRIBUTION TO THE

WEALTH OF SHAREHOLDERS.
EVALUATION OF PROPOSED CAPITAL EXPENDITURES: WITH
THE HELP OF CAPITAL BUDGET EVALUATION OF CAPITAL
EXPENDITURES TO BE INCURRED ON VARIOUS ASSETS CAN BE
MADE.
DETERMINATION OF PRIORITY: IT MEANS ARRANGING
VARIOUS PROJECTS IN ORDER OF THEIR PROFITABILITY.
COST CONTROL: CONTROL OVER EXPENDITURE IS
EXERCISED THROUGH CAPITAL BUDGETING.
ANALYSIS OF PAST DECISION: EXPENDITURES INCURRED ON
VARIOUS PROJECTS IN THE PAST ARE ANALYZED IN CAPITAL
BUDGETING.
VALUATION OF FIXED ASSETS: DATA FOR VALUATION OF
FIXED ASSETS IS REQUIRE TO PREPARE BALANCE SHEET.
CAPITAL STRUCTURE PLANNING: BY DIONG CAPITAL
BUDGETING CAPITAL STRUCTURE PLANNING IS
AUTOMATICALLY DONE.

FACTORS AFFECTING CBD-:

TECHNOLOGY CHANGE: DUE TO OBSELENCE OF

TECHNOLOGY
COMPETITORS STRATEGY: AN INVESTMENT IS TAKEN TO
MAINTAIN COMPETITIVE STRATEGY OF THE FIRM
DEMAND FORECAST: LONG TERM DEMAND FORECAST OF
INVESTMENT IS DONE
TYPES OF MANAGEMENT: MODERN AND PROGRESSIVEENCOURAGES INNOVATION ELSE CONSERVATIVEDISCOURAGES INNOVATION
FISCAL POLICY: VARIOUS TAX POLICIES OF GOVT DOES
AFFECT CBD
CASH FLOWS: CASH FLOWS HELPS MGMT. IN SELECTING
DESIRED PROJECT
RETURN EXPECTED FROM THE INVESTMENT: IMPORTANT
DECISIONS ARE MADE ON THE BASIS OF ROI
NON-ECONOMIC FACTORS: IT ALSO INFLUENCES CBD FOR
E.G. IMPROVED WORKING PLACE THIS CAN HELP IN
IMPROVING PRODUCTIVITY.

NEED FOR CAPITAL BUDGETING-:

SUCCESS OF FIRM
ANALYSIS OF UNCERTANITY AND RISK
CONTROL OVER CAPITAL EXPENDITURE
SELECTION OF THE BEST PROJECT
MANAGING SOURCES OF FINANCE
TO AVOID LOSSES
CO-ORDINATION B/W VARIOUS CAPITAL

EXPENDITURES
ANALYSIS OF CAPITAL EXPENDITURE

IMPORTANCE OF CAPITAL
BUDGETING-:
CB SHOWS POSSIBILITY OF INCREASED PRODUCTION FOR

MEETING ADDITIONAL SALES AS SHOWN IN SALES BUDGET.

CB SHOWS COMPARATIVE POSITION OF AVAILABLE ASSETS
AND ALSO HELPS IN SELECTION OF BEST ASSET.
HELPFUL IN INCREASING PROFITABILITY OF FIXED ASSET.
HELPFUL IN LONG-TERM FINANCING AND POLICY
FORMULATION.
CB IS GOOD SOURCE OF INFORMATION FOR PURCHASING
ASSETS AND THEIR FINANCING.
CB GIVES NECESSARY INFORMATION FOR CASH BUDGETING.
CB IS HELPFUL IN COST REDUCTION AND COST CONTROL.
WITH CB FIRM CAN MAKE EFFECTIVE DEPRICIATIN AND
REPLACEMENT POLICY.
HELPFUL IN CALCULATING WORK DONE BY MACHINE SIN
PLACE OF MEN.
ESTIMATES CAPITAL COST OF PROGRAMME.
IT TESTS THE COST OF LABOUR WELFARE PROGRAMME.

PROCEDURE OF CAPITAL
BUDGETING
1. IDENTIFY THE INVESTMENT PROPOSAL
2. SCREENING THE PROPOSALS
3. EVALUATION OF PROJECTS
4. ESTABLISHING PRIORITIES
5. FINAL APPROVAL
6. IMPLEMENTING PROPOSALS
7. EVALUATION

KINDS OF CAPITAL BUDGETING

DECISIONS
1. ACCEPT-REJECT DECISION
2. MUTUALLY EXCLUSIVE DECISION
3. CAPITAL RATIONING DECISION

ACCEPT-REJECT DECISION
IT IS RELATED TO INTERDEPENDENT PROJECTS
PROJECTS WHICH DO NOT COMPETE WITH ONE

ANOTHER
DECISIONS TAKEN ON THE BASIS OF RATE OF RETURN
ALL PROPOSALS THAT YIELD OF RATE OF RETURN
THAN MINIMUM ARE ACCEPTED AND OTHERS ARE
REJECTED
E.G. MINI RATE OF RETURN IS 10% , ONE GIVES 12.5%
AND ANOTHER GIVES 8% THEN 8% IS REJECTED AND
12.5% IS ACCEPTED

MUTUALLY EXCLUSIVE DECISION

SUCH DECISIONS THAT ARE RELATED TO 2 OR MORE

ALTERNATIVE PROJECTS ARE CALLED MUTUALLY

EXCLUSIVE DECISIONS
WHEN ACCEPTANCE4 OF ONE AUTOMATICALLY
REJECTS ALL OTHER
ONE PROPOSAL IS SELECTED AT THE COST OF OTHER
IN SUCH CASE FIRM SELECTS BEST ALTERNATIVE BY
ADOPTING SUITABLE METHORD OF CAPITAL
BUDGETING

CAPITAL RATIONING DECISION

CAPITAL RATIONING MEANS DISTRIBUTION OF

CAPITAL IN FAVOUR OF SOME ACCEPTABLE

PROPOSALS.
A FIRM CANT TAKE ALL PROFITABLE PROPOSALS
BECOZ IT HAS LIMITED FUNDS
THUS, A SITUATION WHERE A FIRM IS NOT ABLE TO
FINANCE ALL THE PROFITABLE INVESTMENTS
OPPORTUNITIES DUE TO LIMITED RESOURCES IS
KNOWN AS CAPITAL RATIONING.
IN SUCH CASE FIRM RANKS ALL THE PROPOSALS
ACCORDING TO PRIORITY FROM HIGHEST TO LOWEST
AND CONSIDER A CUT-OFF ALL PROPOSALS ABOVE
CUT-OFF ARE ACCEPTED AND PROPOSALS BELOW CUTOFF ARE REJECTED.

INFORMATION REQUIRED FOR

CAPITAL BUDGETING
1. COST AND BENEFITS OF PROPOSALS
2. REQUIRED RATE OF RETURN
3. ECONOMIC LIFE OF THE PROJECT-:PERIOD DURING

WHICH EARNINGS ARE EXPECTED FROM THE

PROJECT IS CALLED ITS ECONOMIC LIFE
4. AVAILABLE FUNDS-:ALL INTERNAL AND EXTERNAL
SOURCES SHOULD BE CONSIDERED
5. RISK OF OBSOLESCENCE-: DUE TO NEW
INNOVATIONS THEREFORE ESTIMATION OF SUCH
LOSS IS NECESSARY
6. INTANGIBLE FACTORS-:PRESTIGE OF FIRM, MORALE
OF EMPLOYEE SHOULD BE CONSIDERED

TYPES OF CAPITAL EXPENDITURE

1.
2.

3.
4.

5.
6.

EXPANSION PROJECTS-:FOR EXPANDING BUSINESS

PROJECTS
REPLACEMENT PROJECTS-:OBSELETE OR
MACHINES WORN OUT
EXTENSION PROJECTS-:FINDING NEW MARKET OR
PROJECTS UNDERTAKEN FOR MORE SALES
PRODUCT OR PROCESS IMPROVEMENT PROJECTS:PROJECTS FOR COST REDUCTION
HOUSE-KEEPING PROJECTS-:INCREASING MORALE
OF EMPLOYEES OR EDUCATIONAL PROJECTS
RESEARCH AND DEVELOPMENT PROJECTS-:RND
PROJECTS

PROBLEMS IN CAPITAL BUDGETING

1. FUTURE UNCERTAINITY-:ALL CAPITAL

DECISIONS INVOLVE LONG TERM PROJECT

EVEN IF CARE IS TAKEN 100% ACCURACY &
FORECAST IS NOT POSSIBLE
2. TIME ELEMENT-:COST OF PROJECT IS
OCCURRED IMMEDIATELY WHILE RECOVERED
IN A NUMBER OF YEARS
3. MEASUREMENT PROBLEM-:MEASUREMENT OF
COST AND BENEFITS IN A QUNTITATIVE TERM
IS A TEDIOUS TASK

LIMITATIONS OF CAPITAL BUDGETING

1. NO ACCURACY OF ESTIMATES-: ACCURACY CANT BE

100%
2. COMPARABILITY OF COSTS AND BENEFITS-:COST
AND BENEFITS ARE AT DIFFERENT TIME PERIODS
HENCE COMPARABILITY IS DIFFICULT
3. CONSIDERATION OF CERTAIN COST AND BENEFITS:QUANTIFIABLITY OF SOME DECISIONS ARE NOT
POSSIBLE SUCH AS EMPLOYEE WELFARE, PRESTIGE OF
THE FIRM.

ESSENTIAL COMPONENTS OF
CAPITAL BUDGETING ANALYSIS
1. NET CASH OUTFLOW OR NET CAPITAL

INVESTMENT
2. NET OPERATING CASH INFLOWS
3. CHOICE OF HORIZON

NET CASH OUTFLOW OR NET CAPITAL

INVESTMENT
It refers to marginal investment in a project at a point of

time.
It represents the net amount of capital expenditure which
includes purchasing land, building , plant and working
capital.
Its current book value is sunk cost.
Net investment is deducted from capital outlay.
Income tax, tax on profit is added to the capital outlay.
Investment allowance (if any) is deducted from capital
outlay.

NET OPERATING CASH INFLOWS

Net cash inflows = cash revenues - cash expenditures.
At the end of operational life the salvage value of an asset is

another component of cash inflow.

Removal of expenses and capital gains taxes are deducted
from salvage value of asset.
Net cash inflow=cash revenues-(cash expenses + tax benefits
+ salvage value of asset).
Therefore -:cash expenditure=cash expenses + tax benefits +
salvage value of asset.

CHIOCE OF HORIZON
It is selection of time period considered for evaluating the

benefits and cost of an investment proposal.

The most particular way of resolving the horizon problem
is to let discount rate take care of it.

NATURE OF CAPITAL BUDGETING

PROBLEMS
Demand for capital-:need for money to resolve CB
problems.
2. Supply of capital-:from where the money will come.
3. Capital rationing
1.

INVESTMENT APPRAISAL
TECHNIQUES

PRESENT
WORTH
COMPARISON

FUTURE
WORTH
COMPARISON

ANNUAL
WORTH
COMPARISON

Investment Appraisal Techniques

Present worth comparison
Useful lives equal the analysis period
Useful lives different from analysis period
Infinite analysis period
Future worth comparison
Pay-back period method
Annual worth comparison
Average rate of return
Net present value method
Internal rate of return method
Profitability index

PRESENT WORTH COMPARISION

One of the easiest way to compare mutually exclusive

alternatives is to resolve their consequences to the

present time
It is used to determine the present value of future
money receipts and disbursements.
For e.g., the value of stocks or bonds based on the
anticipated future benefits.
In present worth analysis, careful consideration must
be given to the time period covered by the analysis;
called analysis period or planning horizon.

 Three different analysis period situations are resolved-:

Useful lives equal the analysis period

2. Useful lives different from analysis period
3. Infinite analysis period
1.

FUTURE WORTH COMPARISONS

PAY BACK PERIOD
Q-A project costs Rs50000 and yields an annual inflow
of Rs 10000 for 8 years. Calculate its pay-back period.
1.

Q-A project with an investment of Rs100000 earns Rs

20000,Rs 30000,Rs40000,Rs50000 respectively in 1st
,2nd , 3rd and 4th year respectively, calculate the pay
back period.

 Q-a company is considering its expansion . It can either

go for machine A or machine B. Machine A costs Rs

200000 with an estimated life of 5 years and machine B
costing Rs100000 with an estimated life of 8yrs.The
annual sales and costs are estimated as follows:
Machine A

Machine B

1,20,000

1,20,000

Material

40,000

40,000

Labour

10,000

30,000

Variable overheads

24,000

20,000

sales
Costs:

Calculate the pay-back period and advice the management

Assume tax rate of 50%.

 Q-Calculate the pay-back period of the following

projects each requiring a cash outlay of Rs 1,00,000.

Suggest which project(s) are acceptable if the standard
pay-back period is 5 years.
projects

investment

Annual cash
inflow

Estimated life

1,00,000

25,000

10 Years

70,000

15,000

8 Years

32,500

9,000

12 Years

97,000

18,000

15 Years

58,500

15,500

6 Years

Present value index or

profitability index

It is also termed as benefit-cost ratio which is a variant of NPV

technique. The profitability index is calculated as follows:

PI or PVI= Total present value of cash inflows
Total present value of cash outflows
OR
Net profitability or NPVI=Net present value
Initial cash outflows
Accept the project if its PI is more than 1 and reject the proposal if
the PI is less than 1. However if PI is equal to 1, then the firm may
be indifferent. If NPVI is used then accept the project if NPVI is
positive and reject the project if NPVI is negative. In case of
ranking of mutually exclusive projects, the proposals with the
highest PI are given top priority while the proposal with the lowest
PI will be assigned lowest priority. The proposal having PI less
than 1 is likely to be rejected straightforward.

 Q-The initial cash outlay of a project is Rs.50,000 and it

generates cash inflow of 20,000;15,000;25,000;10,000; in first

4 years. Using present value index method, appraise
profitability of proposed investment assuming 10% rate of
discount. The present value of 1 at discount factor for 4 years
is 0.909, 0.826, 0.751 and 0.683.

Comparison of NPV with IRR method

Similarities-:
1. Both (NPV and IRR) give similar accept-reject decisions

independent of investment proposals.

An independent investment proposal is one in which
acceptance of one does not eliminate the acceptance of
others, so all profitable projects can be accepted without
constraints.
2. In case of NPV method, NPV is +ve than proposal is
accepted i.e. when the required rate of return on investment
is higher than required rate of return. In IRR method a
proposal is accepted only when IRR is higher than the cut-off
rate. Therefore both of these methods give identical accept
reject decisions.

 Differences-:
1. Rate of return-: NPV takes rate of return as a known factor

whereas IRR takes it as an unknown factor.

2. Reinvestment-: IRR method considers the intermediate cash
inflows at the IRR itself. As different projects yields diff. rates of
interest, the same firm cant reinvest the cash inflow at different
rates. Hence for ranking 2 or more capital investment proposals
NPV method is more reliable than IRR method.
3. Investment amount-: IRR finds out maximum rate of interest
at which invested amount could be rapid out. While NPV method
attempts to find out the amount which can be invested in a
particular project so that its earning is sufficient to repay the
amount.
4. Mutually exclusive projects-:Both methods may give
contradictory results in terms of acceptance or rejection of
mutually exclusive projects. If projects contain different initial
cash outlays, different cash inflows and different expected lives.
These methods will give different rankings to different projects
but objective would be same i.e. maximizing share holders
income.
Still NPV method is superior to IRR method.

IRR method-:
IRR or Internal rate of return is another technique which

takes into consideration the magnitude and timing of cash

flow.
CHARACTERSTICSOF IRR-:
1. It recognizes time value of money like NPV method.
2. It considers cash flows over the entire life-span of the
project.
3. Its objective is maximizing shareholders wealth.
It is better in such conditions where cost of capital cant be
determined easily.

MISCONCEPTIONS OF IRR
IRR does not rate what a project is worth to a company, it
only determines whether a project is beneficial as an
investment in this way.
2. It acts as an investment tool rather than guarantee of
performance.
3. A project having lower expected rate of return but larger
increase in shareholders wealth should be selected over
others even if initial investment is higher.
1.

IRR
IRR is also known by various names-:
1. Time adjusted rate of return
2. Marginal rate of return
3. Marginal efficiency of capital

IRR can be expressed as-:

C1 + C2 +..+ Cn -I=0
(1+r) (1+r)2
(1+r)n

Where I=initial investment

C1,C2,Cn=Net cash inflows in 1,2,..n years;
For example if an investment of Rs 1,000 generates cash inflows
of Rs 1,080 at the end of first year at the end of first year the rate
of return required to equate the present value of cash inflows
with the cost of investment will be?

 IRR is calculated with the help of present value tables. There

are two types of cash inflows-:

1. Even cash inflows
2. Uneven cash inflow

EVEN CASH INFLOWS

Q-A project involves an initial investment of Rs 10,000 and is

expected to generate a stream of annual cash inflows of Rs

3,000 for 5 years. In this case write down steps involved in
calculation of IRR ?
Soln-: Step 1-:first of all we calculate P.V. factor
P.V. factor=Initial investment(I)
= 10000 =3.33
Annual cash inflows(C)
3000
Now search for a value nearest to P.V. factor in the 5th
row(becoz. time is 5 years)
The closest figure is 15%(3.352) and 16%(3.274)
It means IRR is between 15% and 16%.

 Step 2-:Find the present value of the project for both these rates as

below-:
Present value=annual cash inflow* P.V. factor for an annuity
P.V. at 15%=3000*3.352=10056
P.V. at 16%=3000*3.274=9822
Step 3-:Find out exact IRR between two rates between
interpolation techniques-:
IRR=LDR+P1-Q *(HDR-LDR)
P1-P2
Where-:
LDR=lower discounted rate
P1=present value at lower rate of interest
P2=present value at higher rate of interest
Q=net cash outlay
HDR=higher discounted rate i.e.
IRR=15+10056-10000 * (16-15) = 15.24%
10056-9822

UNEVEN
CASH
INFLOWS
In uneven cash flow IRR is calculated by Trial and error method.
It require given steps-:
Step 1-:Establishing the first trial rate

P.V. factor=Initial investment

Average annual cash inflows
Now search for a value nearest to P.V. factor in the cumulative
present value table according to the number of years of the
projects. This rate will be first trial rate.
Step 2-:Establishing the second trial rate
Total of the present value of cash inflow calculated by 1st trial rate
will be compared with cost of project
1. If value is more than cost of project then second trial will be
greater than higher than 1st
2. If value is less than cost of project then second trial will be
lower than higher than 1st

 Step 3-:Computing actual IRR

Actual IRR is calculated by interpolation technique.

ADVANTAGES OF IRR
1.
2.

3.
4.

5.
6.

Maximization of shareholders wealth.

Projects having different degrees of risk can be
compared easily.
Helps in ranking of projects in mutually exclusive
projects.
IRR takes into account time value of money.
It considers whole life of the project.
IRR does no require any cut-off rate.

DISADVANTAGES OF IRR
Difficult to understand
2. Difficult in making decision
3. Results of IRR does not match with NPV
4. Results obtained by IRR are uncertain
1.

UNIT-3

ANALYSIS OF PUBLIC PROJECTS

Good management consists primarily of making wise decisions; wise decisions in
turn Analysis involve making a choice between alternatives. To determine the
possibility of a project being carried out and point out the alternative ways in
which the project could be handled. Economic considerations also largely
determine a project's desirability and dictate how it should be carried out. A
feasible study to determine which or whether the proposed project should be
carried out: which way to do it, or whether do it at all.
In an engineering sense, analysis to check the project is it technically possible.
Economic feasibility, in addition is to measures the overall desirability of the
project in financial terms and indicates the superiority of a single approach over
others that may be equally feasible in a technical sense.
The ultimate objective of the analysis is to provide a decision-making tool which
can be used not only for the pilot project but also for demonstration purposes.

STEPS FOR ANALYSIS OF A PROJECT

a. Understand the problem.
b. Define the energy integrated system.
c. Collect the data
d. Interpret the data.
e. Devise the alternatives.
f. Evaluate the alternatives.
g. Identify the best alternative
h. Suggest the best alternative to the director of the
project and get the feedback information.
i. Monitor the results.
j. Determine that the energy integrated system could
be disseminated, including where, and under what
conditions.

 Electing an interest rate-: many non govt. firm use cost of

capital or opportunity cost concepts when setting an

interest rate, on the other hand involves the use of public
resources to promote the general welfare and secure the
benefits of the given project.
1. Cost of capital-:
Meaning-:It is the minimum required rate of earning or the
cut-off rate for capital expenditure.
Cost of capital is not a cost as such
It is the minimum rate of return
It comprises of 3 components:
a) Expected normal rate of return
b) Premium for business risk
c) Premium for financial risk

FEW DEFINATIONS
Components cost-:It refers to the cost of individual

components of capital e.g. equity shares, preference shares,

debentures etc.
Composite cost-:It refers to the combined or weighted
average cost of capital of the various individual component.
Average cost-:It refers to the weighted average cost of capital.
Marginal cost-:It refers to the incremental cost attached with
new funds raised by the company.
Explicit cost-:Cost which is attached with the sources of
capital apparently.
Implicit cost-:It is the hidden cost which is not incurred
directly.
Opportunity cost-:It is the ROR the govt. forgoes by not
putting the funds elsewhere. It is the cost to a government
agency.

COST BENEFIT RATIO

It is one of the alternative economic analysis method for

evaluating prospective projects.

The reason for the use of benefit-cost ratio(B/C ratio) in
public decision making is its simplicity.
B/C ratio=Equivalent worth of net benefits
Equivalent worth of cost
=present worth benefits=future worth benefits
Present worth costs future worth costs
=annual worth benefits
annual worth costs

B/C RATIO
B/C ratio=(equivalent worth(EW) of net benefits to

whomsoever they may accrue/EW of cost to the sponsors of

the project)
Conventional B/C ratio=(EW of net benefits)/(EW of initial
costs + EW of operating and maintenance costs)
Modified B/C ratio=(EW of net benefits-EW of operating and
maintenance costs)/(EW of initial costs)
Benefit (B) -- Advantages to the public
Disbenefit (D) -- Disadvantages to the public
Cost (C) -- Expenditures by the government
Note: Savings to government are subtracted from
costs

B/C Relations
Conventional B/C ratio = (BD) / C
Modified B/C ratio = [(BD) C] / Initial
Investment
Profitability Index = NCF / Initial
Investment

Note 1: All terms must be expressed in same units, i.e., PW, AW, or
FW(present worth, annual worth and future worth)
Note 2: Do not use minus sign ahead of costs
9-98

Decision Guidelines for B/C and PI

Benefit/cost analysis
If B/C 1.0, project is economically justified at
discount rate applied
If B/C < 1.0, project is not economically acceptable

Profitability index analysis of

revenue projects
If PI 1.0, project is economically justified at
discount rate applied
If PI < 1.0, project is not economically acceptable

9-99

B/C Analysis Single Project

Conventional B/C ratio =

B-D
C

Modified B/C ratio =

PI =

B D M&O
C

PW of NCFt

PW of initial investment
If PI 1.0,
accept project;
otherwise, reject

If B/C 1.0,
accept project;
otherwise, reject

Denominator
is
initial
investment

9-100

Alternative Selection Using Incremental B/C

Analysis Two or More ME Alternatives
(1)
(2)
(3)
(4)

Determine equivalent total cost for each alternative

Order alternatives by increasing total cost
Identify B and D for each alternative, if given, or go to step 5
Calculate B/C for each alternative and eliminate all with B/C <
1.0
(5) Determine incremental costs and benefits for first two
alternatives
(6) Calculate B/C; if >1.0, higher cost alternative becomes defender
(7) Repeat steps 5 and 6 until only one alternative remains

Example: Incremental B/C Analysis

Compare two alternatives using i = 10% and B/C ratio
Alternative
X
Y
First cost, $
M&O costs, $/year
Benefits, $/year
Disbenefits, $/year
Life, years

320,000

540,000

45,000
110,000
150,000
20,000
10

35,000
45,000
20

Solution: First, calculate equivalent total cost

AW of costsX = 320,000(A/P,10%,10) + 45,000 = $97,080
AW of costsY = 540,000(A/P,10%,20) + 35,000 = $98,428

Order of analysis is X, then Y

X vs. DN: (B-D)/C = (110,000 20,000) / 97,080 = 0.93 Eliminate X

Y vs. DN:
(150,000 45,000) / 98,428 = 1.07 Eliminate DN

Example: B/C Analysis; Selection Required

Must select one of two alternatives using i = 10% and B/C ratio
Alternative
X
Y
First cost, $
M&O costs, $/year
Benefits, $/year
Disbenefits, $/year
Life, years

320,000
45,000
110,000
20,000
10

540,000
35,000
150,000
45,000
20

Solution: Must select X or Y; DN not an option, compare Y to X

AW of costsX = $97,080

AW of costsY = $98,428

Incremental values: B = 150,000 110,000 = $40,000

D = 45,000 20,000 = $25,000
C = 98,428 97,080 = $1,348
Y vs. X: (B - D) / C = (40,000 25,000) / 1,348 = 11.1 Eliminate X

B/C Analysis of Independent Projects

Independent projects comparison does not require
incremental analysis
Compare each alternatives overall B/C with DN option
+ No budget limit: Accept all alternatives with B/C 1.0
+ Budget limit specified: capital budgeting problem;

selection follows different procedure (discussed in

chapter 12)

9-104

Cost Effectiveness Analysis

Service sector projects primarily involve intangibles, not physical
facilities; examples include health care, security programs, credit card
services, etc.

Cost-effectiveness analysis (CEA) combines monetary cost

estimates with non-monetary benefit estimates to calculate the
Cost-effectiveness ratio (CER)

CER=

= C/E

Equivalent total costs

Total effectiveness measure

Ethical Considerations
Engineers are routinely involved in two areas
where ethics may be compromised:
Public policy making Development of strategy, e.g., water system
management (supply/demand strategy; ground vs. surface sources)

Public planning - Development of projects, e.g., water operations

(distribution, rates, sales to outlying areas)

Engineers must maintain integrity and impartiality and

always adhere to Code of Ethics

Differences: Public vs. Private

Projects
Characteristic

Size of Investment

Life
Annual CF

Funding
etc.
Interest rate
Selection criteria

Public

Private

Large

Longer (30 50+ years)

No profit

Small, medium, large

Shorter (2 25 years)
Profit-driven

Taxes, fees, bonds, etc. Stocks, bonds, loans,

Lower
Multiple criteria

2012 by McGraw-Hill
All Rights
Reserved
Environment of evaluation
Politically
inclined

Higher
Primarily ROR
Economic9-107

Some Differences between

Government and Private Projects
Many government projects are huge, having first costs of

hundreds of billions of TL.

They tend to have extremely long lives.
Multiple-use concept is common (i.e. wild land preservation
and recreation projects (camping, hiking) are each
considered uses of import for the land.
Benefits or enjoyment of government projects are often
completely out of proportion to the financial support of
individuals or groups.
There are almost always multiple government agencies that
have an interest in a project.

QUANTIFICATION OF PROJECT
It is the process to quantify the climate impact of global and

European transport systems for the present situation and for

several scenarios of future development. The climate impact of
various transport modes (land surface, shipping, aviation) will be
assessed, including those of long-lived greenhouse gases like CO2
and N2O, and in particular the effects of emissions of ozone
precursors and particles, as well as of contrails and ship tracks.
The project goal includes the provision of forecasts and other
policy-relevant advice, which will be supplied to governments and
to international assessments of climate change and ozone
depletion, such as the IPCC reports (Kyoto Protocol) and WMOUNEP ozone assessments (Montreal Protocol). Using significantly
improved transport emission inventories, better evaluated and
hence more reliable models, these new forecasts in QUANTIFY
will represent a considerable improvement of current predictions.

 QUANTIFY, is an Integrated Project coordinated by the

DLR-Institute of Atmospheric Physics, started in March 2005

with a large kick-off event in Landshut. It dealt with the
climate impact of transport and was funded until February
2010 by the European Commission within the 6th research
framework programme. QUANTIFY also included the DLR
Institute of Transport Research (Berlin) and the Research
Flight Facility Oberpfaffenhofen. In total, 41 participants and
6 associated members from 17 European countries, the
U.S.A., China and India were cooperating in QUANTIFY. The
research topics were organized in 8 closely linked
subprojects. They focused on quantification of the impact of
air, sea and land traffic on the global climate.

General Procedure for Cost-Effectiveness

Studies
Step 1: Establish the goals to be achieved by the analysis.
Step 2: Identify the imposed restrictions on achieving the
goals, such as budget or weight.
Step 3: Identify all the feasible alternatives to achieve the
goals.
Step 4: Identify the social interest rate to use in the
analysis.
Step 5: Determine the equivalent life-cycle cost of each
alternative, including research and development, testing,
capital investment, annual operating and maintenance
costs, and salvage value.

111

 Step 6: Determine the basis for developing the cost-

effectiveness index. Two approaches may be used;

(1) the fixed-cost approach and
(2) the fixed-effectiveness approach.
If the fixed-cost approach is used, determine the
amount of effectiveness obtained at a given cost.
If the fixed-effectiveness approach is used, determine
the cost to obtain the predetermined level of
effectiveness.
Step 7: Compute the cost-effectiveness ratio for each
alternative based on the selected criterion in Step 6.
Step 8: Select the alternative with the maximum costeffective index.

112

UNIT-4

DEPRICIATION AND COSTING

Depreciation-:It is the gradual and permanent
decrease in the value of an asset from any cause
It is also defined as the permanent and continuing
diminution in the quality, quantity or the value of an
asset.
2. Depletion-:It is used to measure and record the
exhaustion of natural resources such as deposits, oilwells, quarries etc.
Depletion differs from depreciation as depletion
reduces the availability of a natural resources, while
depreciation reduces service capacity of an asset.
1.

ADVANTAGES OF DEPRICIATION
CALCULATION
1.
2.
3.
4.
5.
6.

Ascertainment of true profit or loss

Presentation of true financial position
Replacement of assets
Calculation of correct cost of production
Prevention to withdrawal of capital
Excess payment of income tax

CAUSES OF DEPRICIATION
1.
2.
3.
4.
5.
6.
7.
8.

By constant use
By expiry of legal rights
By expiry of time
By expiry of time By obsolescence
By depletion
By accidents
By permanent fall in market price
Changes in economic environment

FACTORS DETERMINING
DEPRECIATION
Total cost of asset
2. Estimated useful life of an asset
3. Estimated scrap value of an asset
1.

DEPRICIATION CALCULATION
t

BV1=COST BASIS- dj
j=1
BV1=book value of the depreciated asset at the end of time t
Cost basis=B=rupees amount that is being depreciated this include the
assets purchase price as well as any other costs necessary to make the asset
ready for use
dj=depreciations in year j
FOR YEARLY DEPRICIATION CALCULATION-:
DEP=COST OF ASSET-SCRAP VALUE
ESTIMATED LIFE OF AN ASSET
RATE=DEPRECIATION
COST

*100

BREAK EVEN ANALYSIS

One of the most common tool used in evaluating the

economic feasibility of a new enterprise or product is

the break-even analysis.
The break-even analysis is the point at which revenue
is exactly equal to costs.
At this point no profit is made no losses are incurred.
It can be expressed in terms of unit sales

BREAK EVEN ANLYSIS:ALGEBRIC

METHOD

P=price per unit of commodity sold

Q=quantity produced and sold
TFC=total fixed cost
AVC=average variable cost per unit of output
=TR-TC
TR=P*Q
TC=TVC+TFC
TC=(AVC*Q)+TFC
At break-even point-:
Let Qb indicates break-even quantity then-:
TR=TC
P* Qb=TFC+(AVC* Qb)
(P- AVC) Qb =TFC
Qb ={TFC/(P-AVC)}

REVELANT COST OF DECISION

MAKING
Relevancy of costs is an important aspect to deal.

Whenever alternatives are evaluated, the decision

maker has to decide which costs are relevant. Relevant
costs are those that are pertinent and bear upon the
decision to be made. Relevant costs are information
that will affect the accomplishment of the objectives of
the objectives of the decision-maker and will changes
as a result of the decision.

COST-BENEFIT ANALYSIS
It is a process by which business decisions are

analyzed. The benefits of a given situation or business

related action are summed and then the cost
associated with taking that actions are subtracted.
Some consultants or analysts also built the model to
put a dollar value or intnngible items such as the
benefits and costs associated with dividind in a certain
town.

ADVANTAGES
Cost benefit proves as a means of evaluating all the
potential costs and revenues that may be generated
of the project is complete

RELATION BETWEEN TAX AND

DEPRECIATION
The tax base of an asset or liability is the amount
attributed to that asset or liability for tax purposes.
2. The tax base of an asset in the amount that will be
deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it
recovers the carrying amount of the asset.
3. The tax base of a liability is its carrying amount, less
any amount that will be deductible for tax purposes
in respect of that liability in future periods.
1.