Scribd Logo
Upload

Welcome to Scribd!

  • 5 views

    Equivalence of Alternatives

    Uploaded by

    Ariful Islam
    The document provides examples and explanations of different interest computation formulations and cash flow analysis methods. It discusses equivalence of alternatives using examples comparing the net present value of two cash flow streams with different payment amounts but equivalent total present value. It also covers the capital asset pricing model, weighted cost of capital calculation, and equivalence evaluations for alternatives with non-uniform cash flows.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Equivalence of Alternatives

    Uploaded by

    Ariful Islam
    5 views35 pages
    The document provides examples and explanations of different interest computation formulations and cash flow analysis methods. It discusses equivalence of alternatives using examples comparing the net present value of two cash flow streams with different payment amounts but equivalent total present value. It also covers the capital asset pricing model, weighted cost of capital calculation, and equivalence evaluations for alternatives with non-uniform cash flows.

    Original Title

    CE401_L5_L6_L7_L8_2023

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document provides examples and explanations of different interest computation formulations and cash flow analysis methods. It discusses equivalence of alternatives using examples comparing the net present value of two cash flow streams with different payment amounts but equivalent total present value. It also covers the capital asset pricing model, weighted cost of capital calculation, and equivalence evaluations for alternatives with non-uniform cash flows.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    5 views35 pages

    Equivalence of Alternatives

    Uploaded by

    Ariful Islam
    The document provides examples and explanations of different interest computation formulations and cash flow analysis methods. It discusses equivalence of alternatives using examples comparing the net present value of two cash flow streams with different payment amounts but equivalent total present value. It also covers the capital asset pricing model, weighted cost of capital calculation, and equivalence evaluations for alternatives with non-uniform cash flows.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 35

    EQUIVALENCE OF ALTERNATIVES

    inom
    ieff = { (1 + )m – 1} x 100
    𝒎 𝒙 𝟏𝟎𝟎
    𝟏𝟎
    = { (1 + )2– 1} x 100
    𝟐𝒙 𝟏𝟎𝟎
    = 10.25%
    A1 = 1,000 x (1 + 0.1025)5 = 1,628.89

    A2 = 400 x (1 + 0.1025)4 + 400 x (1 + 0.1025)3 + 400 x (1 + 0.1025)2 + 400 x (1 + 0.1025)


    = 2,054.22

    Hence, option 2 is preferable.


    FORMULATION FOR INTEREST COMPUTATION

    Three categories addressing eight commonly used interest formulations are presented here.
    Example 7:

    Example 8:
    Example 10:
    Fig. 3.20 Cash-flow diagram for arithmetic gradient series.

    Fig. Equivalent uniform series cash-flow diagram of arithmetic gradient series.


    Geometric gradient Factor (GGF): In this case, the increase/decrease in
    installments, whether it is payments or disbursements, follows a geometric pattern,
    as shown in Figure 3.2.1. This factor GGF, is sometimes denoted as (P/c, g, i, n) and
    read as ‘P given c at an increase/decrease rate g, an interest rate of i for a period of
    n’. Mathematically, the factor is equal to

    (P/c, g, i, n) (3.14)
    Example 11:

    Solution:
    Capital Asset Pricing Model

    The capital asset pricing model - or CAPM - is a financial model that


    calculates the expected rate of return for an asset or investment.
    CAPM does this by using the expected return on both the market and a risk-
    free asset, and the asset's correlation or sensitivity to the market

    Project Cost of Capital


    The cost of capital for a project is a weighted sum of the cost of debt and the cost of
    equity. The cost of capital is often used as the discount rate, the rate at which projected cash
    flow is discounted to find the present value or net present value of a project.
    The interest rate a company experiences is really a weighted average rate resulting from the
    combined cost associated with all external and internal sources of capital funds – debt
    (borrowing) equity (sale of stock), and internally generated (retained earnings).

    The cost-of-capital interest rate a company experiences is also affected by the risk associated
    with its business type. The market perceives the risks of the business and applies an after-tax
    discount rate to the future wealth it expects to derive from the firm. Therefore, the rate that
    banks charge for borrowed funds can not be taken alone as the company’s cost-of-capital
    interest rate when making discounted present worth analysis.

    EVALUATING ALTERNATIVES BY EQUIVALENCE


    Example 12:

    Solution

    = 500,000 + 250,000 { }
    .
    . .
    = 500,000 + 250,000 (6.1446)
    = 2,036,150
    (6.1446)
    = 1,978,920

    Since the present cost for alternative B is less than that of alternative A, it is preferable
    to choose alternative B.
    Example 13:
    Example 14:
    Example 1.4:
    Example 1.5:

    You might also like