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It explains core concepts and presents methods including present value, equivalent annual amount, and internal rate of return. Coverage includes handling multiple alternatives, the relationship between interest and inflation, and selecting an appropriate discount rate. 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It also addresses how these techniques apply when comparing multiple alternatives.",{"name":119,"@type":110,"acceptedAnswer":120},"When should a cost analyst consider time value of money instead of payback period or ROI?",{"text":121,"@type":113},"It is advisable when comparing alternatives with costs and/or receipts distributed over time, since payback period and ROI criteria typically do not recognize time value of money.","https://schema.org",{"og:url":83,"og:type":124,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":126,"canonical":83},"index,follow",{"doc_id":128,"site_id":62},657240,1792976245,{"code":4,"msg":5,"data":131},{"doc_id":128,"user_id":132,"nickname":92,"user_avatar":133,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":134,"file_id":135,"file_url":136,"file_type":137,"file_size":138,"view_count":8,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":139,"language":140,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":141,"faqs":142,"seo_title":143,"seo_description":67,"update_tm":129,"read_time":144},962090880963,"https://ap-avatar.wpscdn.com/davatar_6f874abed73319feea01a86fa6f0fab8","A Refresher on Engineering Economics  \nInternational Society of Parametric Analysts (ISPA)  \nand  \nSociety of Cost Estimating and Analysis  \n2009 Development and Training Workshop  \nSt. Louis Missouri  \nJoe Hamaker, SAIC  \n2-5 June 2009  \n1  \n. . . Tom and me found the money that the robbers hid in the cave, and it made us rich. We got six thousand dollars apiece – all gold. It was an awful sight of money when it was piled up. Well, judge Thatcher, he took it and put it out at interest, and it fetched us a dollar a day apiece, all year round – more than a body could tell what to do with.  \nMark Twain in Adventures of Huckleberry Finn  \nTopics  \n¾ This session covers the most common analytical techniques used in discounted cash flow studies to account for the time value of money when choosing between alternatives.  \n¾ The underlying logic of the concepts is explained and the techniques of present value, equivalent annual amount, and internal rate of return are presented.  \n¾ Special coverage is included for cases involving the choice between multiple alternatives, the relationship between interest and inflation, and the choice of the proper discount rate.  \n3  \nThe Time Value of Money Concept and When It Applies  \n¾ All money has time value.  \n􀂃 Borrowed money has the time value equal to the interest payments made on the loan, whereas invested money has a time value equal to the returns or income that accrue from the investment.  \n􀂃 Money that is held as cash or in noninterest bearing accounts has time value because the money is forgoing either profits or interest that could have been earned if it had been invested in some other way.  \n¾ Whenever an organization is contemplating an investment that involves more than one option, the time value of money will potentially affect the decision.  \n􀂃 This is true regardless of the source of the funding.  \n4  \nThe Time Value of Money Concept and When It Applies  \n¾ It is not necessary that borrowed funds be involved, or is it necessary that the funds are visibly forgoing interest because they re being taken out of some interest bearing account.  \n¾ Thus it is advisable for the cost analyst to consider the time value of money whenever the costs of two or more alternatives are being compared that have disbursementsand/or receipts distributed overtime .  \n􀂃 Relying solely on payback period or return on investment (ROI) criteria, which, as normally calculated, do not recognize the time value of money, isinadvisable.  \n5  \nCash Flows  \n¾ The techniques for analyzing the time value of money are generally referred to as discounted cash flow analysis techniques  \n¾ A cash flow is the expected life cycle costs and revenues (or savings) of a contemplated investment  \n¾ Machine A is an existing machine with 3 years left in its design life of 5 years, an annual operating cost of $67,000, and a residual value (say, in this case, the scrap value after deducting the cost of dismantling the machine) of $500, and a value of $3000 if sold now .  \n¾ Machine B is a proposed replacement costing $30,000, with an annual operating cost of $60,000, and a residual value of $3000 at the end of its operational life of 8 years.  \n􀂃 Because Machine A has 3 years of service left and Machine B would last 8 years, the assumption is made that Machine A would be replaced with an identical machine for $5000 at the end of the 3 years which would give 5 more years of service, thus equalizing the service of the two machines at 8 years each.  \nMachine A  \n$5 ,000- $500 $500  \n0 1 2 3 4 5 6 7 8  \n$30 ,000  \nMachine B  \n- $3 ,000 $63 ,000  \n$3 ,000  \n0 1 2 3 4 5 6 7 8  \nFigure 1 Cash flow diagrams  \n6  \nCosts Only? Costs and Revenues?  \n¾ It is useful to recognize that discounted cash flow analysis applies to several different cash flow situations the cost analyst might encounter.  \n¾ The problem may involve only cash outflows such as an equipment selection, which is comparing alternatives that have identical output capability ","cbCaibJSfOKZW4r1","https://ap.wps.com/l/cbCaibJSfOKZW4r1","pdf",1752582,45,"English","# Topics\n## The Time Value of Money Concept and When It Applies\n## Cash Flows\n## Costs Only? Costs and Revenues?\n## Cost Only Versus Cost and Revenues (or Savings)\n## Net Cash Flows","[{\"question\":\"What does the time value of money mean in these discounted cash flow studies?\",\"answer\":\"Money has time value because borrowed funds accrue interest costs while invested funds generate returns. Even cash or noninterest-bearing accounts forgo potential profit or interest.\"},{\"question\":\"Which discounted cash flow techniques are presented for evaluating alternatives?\",\"answer\":\"The material presents present value, equivalent annual amount, and internal rate of return. It also addresses how these techniques apply when comparing multiple alternatives.\"},{\"question\":\"When should a cost analyst consider time value of money instead of payback period or ROI?\",\"answer\":\"It is advisable when comparing alternatives with costs and/or receipts distributed over time, since payback period and ROI criteria typically do not recognize time value of money.\"}]","A Refresher on Engineering Economics - Joe Hamaker - 2-5 June 2009 | PDF",113]