Elmazi-Shkumbin-Week6-5A

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New Jersey Institute Of Technology *

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492

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Industrial Engineering

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Oct 30, 2023

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docx

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Shkumbin Elmazi Professor Tchouassi IE 492 10/13/23 5A Assigned Questions-Schaums Chapters 8-9 1 ) Provide a definition for each of the tools provided above and provide 1 problem scenario for the use of one of these tools. NPV: A method that discounts all the future cash flows to the present value using a discount rate and then calculating if the project is worth investing in or not. Simply, this is used to measure whether the cashflows received from the project over its life will be more/less than the cash outflow which the project entails. IT is very useful to make critical investment decisions in the long-term projects, businesses, purchase of machines etc. ROR: Rate of Return also called as the return on investment is the return earned on any asset (real estate, bond, stock etc) its simple formula is (Current Value - Initial value /Initial Value). It typically gives an increase in the value of any underlying asset. For example: it can be used to calculate the return on any investment let's say I purchased a building at 1 dollar and the current value of the building is 4 dollars, now the rate of return will tell me whether my investment was worth or not, how much the return i earned on this investment. It will find the difference in the initial value and the current value (4 dollars - 1 dollars) that is 3 dollars and divide it with the initial value, so 3 dollars / 1 dollars gives me 3X the return. PBP: Simply put payback period is the time you will need to get back and recover the cost of the entire investment. It’s the time when the cashflow reaches a break-even point. It is used to know how much time I have to wait to recover my investment from the projects and businesses. for example, I invested 20,000 in a business if the business makes 4000 profit per month, then in 5 months I can recover my investment of 20,000. SO, 5 months is the payback period. It can be used for calculating the breakeven point for machinery, businesses, projects. etc. It is used for capital budgeting exercises. BCR: It basically calculates all the costs and the associated benefits from any project. It shows the relationship between costs and benefits from a specific project. If BCR > 1 then projects are accepted. benefits should always be greater than costs. IT can also be shown in monetary terms, meaning how much benefits (revenues) are more than the costs. Like others it is used for capital budgeting exercises, to evaluate whether to invest in a project, purchase of the machine, investing in a business etc. It also helps in outlining all the costs and the benefits accrued from the specific project.

2) What does MARR stands for and how is it used in project selection and budget allocation? MARR stands for Minimum Acceptable Rate of Return, also very commonly known as the hurdle rate of return. This is the return that the project/investment MUST earn for the project to be profitable. It is the minimum rate that must be earned, any rate of return below the MARR will lead to declining and abandoning of the project/investment etc. So, the project is selected if the internal rate of return (IRR) is more than MARR. If the rate of return is less than the MARR then the project is not selected. For example, if the MARR stands at 10% (the hurdle rate) then the IRR of the project must be more than 10% for it to get the management's approval.

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