AGECFNR 406 LECTURE 10.ppt

Benefit-Cost Measures Lecture Goals: Three BCA tools: Net Present Value (NPV) NPV Formula Key Point NPV Example Benefit Cost Ratio (BCR) BCR Formula Key Point BCR Example Internal Rate of Return (IRR) IRR Formula Key Point IRR Example Advantages of BCA Disadvantages of BCA * AGEC/FNR 406 LECTURE 10 Rice drying on the Philippine National Highway 1. Present three tools of benefit-cost analysis 2. Discuss advantages and disadvantages of BCA Don’t neglect to review the BCA packet! 1. Net Present Value (NPV) 2. Benefit-Cost Ratio (BCR) 3. Net Present Value (NPV) The net present value of benefits is the present value of those net benefits. Net benefit is simply the sum of benefits minus the sum of costs. NPV is the current value of all net benefits associated with a project The net benefits are converted to present value by discounting. If the project has a NPV 0, then it is worth considering on its economic merits. If the project has a NPV 0, then it fails to return benefits greater than the value of the resources used. -50/(1+.1)0 + 0/(1+.1)1 + 50/(1+.1)2 = -8.68 BCR is computed as the PV of Benefits divided by the present value of Costs. Discounted benefits and discounted costs are calculated and summed separately, then divided. If the project has a BCR 1, then it is worth considering on its economic merits. If the project has a BCR 1, then it fails to return benefits larger than its costs. Num. = 100/(1.1)0 + 100/(1.1)1 +100/(1.1)2 = 273.54 Den. = 150/(1.1)0 + 100/(1.1)1 +50/(1.1)2 = 282.22BCR = 273.54/282.22 = 0.97 1 The IRR is the maximum interest rate that could be paid for the project resources that would leave enough money to cover investment costs and still allow society to break even. The IRR is the discount rate at which the PVof benefits equals the present value of costs. Solve for the IRR by finding i that solves