General Structure of Problems

Every finite project, even if it involves replacement, has basically three stages: *. The beginning, that is the starting part. *. The operating period, which is the middle part. *. The close up, which is the end part.

Fig. 9.1 is the graphic presentation of the problem structure and illustrates the above parts.

There are important elements of a project that you have to understand and employ in financial analysis in each of the stages mentioned above. These elements or factors are the basic ingredients of a cash flow diagram and are shown under each of the stages in Fig. 9.1. Not all of these elements are involved in all of the projects. For example, if we are considering a new project, then there are no capital gains or losses to be considered in the beginning of the period. On the other hand, in a replacement project where the opportunity cost has to be calculated, the capital gain or loss at the starting point is an important factor. The list however is a reminder of what factors may be involved.

Beginning

Middle

End

Initial Investment

Operational Costs

Resale

Opportunity Cost

Operational Profit

Removal

Capital Gain or Loss

Dépréciation

Capita] Gain of [jjss

DeprccUti&i Method

tax

Tax

Tax

The cash flow diagram is constructed using the information available and the above factors. We then have to decide what measure to use in gauging the viability of the project, or in comparing two or more projects. If it is the NPW, then we have to bring everything to the front. If it is the NFW, we have to move everything to the end. If it is the EUAW, we have to spread everything in the time span of the project. Finally if our measure is the ROR, we have to assume the interest rate as an unknown that makes NPW = 0.

<><><><><><><><><><><><>

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook


Post a comment