economic evaluation and investment decision methods pdf

Economic Evaluation And Investment Decision Methods Pdf

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The hardback textbook is available from the following retailers. The textbook has been written to compliment the presentation of material in the short course described in this site.

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Thank you for interesting in our services. We are a non-profit group that run this website to share documents. We need your help to maintenance this website. Please help us to share our service with your friends. Share Embed Donate. Frank also serves as Chairman of Investment Evaluations Corporation. He has taught economic evaluation techniques for over 30 years tri undergraduate and graduate students and has done economic evaluation consulting for numerous mineral and non-mineral companies.

Since when the first short course was prcsented, Frank has taught more than "Economic Evaluation" short courses to over 16, persons from mineral and nonmineral industry companies and govemment agencies.

This domestic and foreign industrial consulting and teaching experience has had a direct eft'ect on the applications-oriented content and organization of the text. Stermole, B. John has presented more than "Economic Evaluation" short courses for mineral, petroleum and non-mineral companies and govemment agencies.

Prior to joining Investment Evaluations Corporation on a full tirne basis, John gained three years of industry experience with Loq,dermilk Construction of Englewood, Colorado, applying economic evaluation techniques to heavy construction projects related to mine site development and highwiiy construction, and in replacement analysis.

I I L This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Trademarks: Microsoft Excel is a registered trademark of Microsoft Corporation. Tax Lau, Regarding Interest Deductions 1. The original versions of this text were the sole efforts of Frank Stermole.

John began making some contributions as early as the Fourth Edition, but more significant contributions began with the Sixth Edition. While some might view writing a book as a difficult task, we have truly enjoyed the opportunity to work together and try to improve our understanding of economic evaluation concepts through the textbook and its examples and problems.

This text is an introduction to the concepts of the time value of money and the application of time value of mbney decision criteria to the beforetax and after-tax evaluation of virtually all types of investment situations.

We would like to emphasize that the concepts to be developed throughout the text are used by investors in all investment situations. Other than the obvious engineering differences, whether you are considering development or expansion of an existing ore body, coal deposit, oil and gas field, or considering refining projects or a real estate investment, the same economic evaluation tools are utilized.

From an economic evaluation viewpoint, the primary difference between oil and gas, refining, mining and real estate evalnations will relate to the relevant tax considerations which are addressed in this textbook beginning in Chapter Seven. Chapters Seven through Eleven address the same issues on an after-tax basis. This involves developing an understanding of cash flow, and other subtle aspects of proper after-tax evaluations. Chapter Twelve addresses personal investment considerations which can also be tied directly to any other type of project evaluation.

For example, investing in futures is discussed in the final chapter. The use of futures, options, options on futures, etc. First, it SrriYcS as a university textbook for unilergraduate or graduaie students. In a quarterry s1,stem. Second, we make extensive use of the text in continuing education courses for industry and government personnel with interests and backgrounds in the aforemen- tioned categories.

The examples and problems throughout the text are designed with this in mind as they address specific e'aluation consideratiols ibr a variety of industry applications.

Third, the text may also be used for self-study to teach one's self economic evaluation techniques and their proper application. To suppiement this later use, we have also written a "Self reaching Manual" for this textbook which specifically addresses in a more step-by-step process, the material in chapters one through Four of the textbook. As you go through the textbook, you'll find we have a common theme centered on "consistency" throughout the evaluation process.

Expanding on this simply implies that evaluators must compare projects and alternatives on the same basis. This means making a proper analysis for the evaluation situation and being consistent in terms of discount rates, timing, the type of doliars irvolved, whether borrowed money is being consiJered and of course, properly considering the relevant tax issues.

You'll also find that evaluation work is onlv as good as the information provided for the analysis. The old saying "garbage in, garbage out,' could not be more accurate than for economic evaluation work. This helps immeasurably in establishing the most sensitive criteria which then can be emphasized through the engineering or cost esrimating process. Finally, we would like to offer our thanks to Pattie Stermole John's wife for her eftbrts in research and editing for this latest edition of the textbook.

I Introduction to Inyestment Analysis Economic evaruation of investment alternatives rerates to systematicaily e,aluating the rerative profit potenrial of i,r,estment utt. For example, in thJanalysis of investment alternatives for a given investment situation, the artematives under consideration may have differences with respec.

Differences may also exisi in project lives, tax considerations, and the effects of escalation and inflation on projected costs and revenues. This text presents the development and applicatiofl of economic"evaluation techniques that can be used to enhance your ability to make correct investment decisions from an economic viewpoint. Note thafit is not purported that the use of these techniques will enable you to make correct economic decisions all the time.

Because of the effects of risk and uncertainty, including escalation and inflation of costs and revenues, it is not possible to develop evaluation techniques that guarantee investment decision making ,u.. However, by using one or more of the economic evaluation techniques presented and recommended in this text, you should be able to do a consistintly better job of economic decision making than you can do without using these techniques. Obviously a given analysis is only as good as the inpui cost and revenue data that go into it.

Risk and uncertainty effects make it impossible to know for certain that a given set of data for a proposed investment situation is correct. This, of course, means we cannot be rertain of the economic analysis results based on the data. Even when probirhilities c'rf success and failure are incorporated into the analyses, aS is introduced in Chapter 6, we clo not have analysis results that aIe certain for any given investment situation.

This information together with the numerical economic evaluation results usually will put the decision maker in a better position to make a correct decision than he would be in if systematic evaluation procedures were not used. Evaluation of investment alternatives to select project investments that per dollar invested is a key goal of every successful corporate manager or individual investor.

To fully achieve this goal, manageis or individuals should be familiar with the principles of economic evaluation and investment decision methods which provide the basis for quar'tified economic evaluation of alternative engineering projects and general will maximize profit investment opportunities. Most business decisions are made by choosing what is believed to be the best alternative out of several courses of action. Problems in this area are therefore called alternative choice problems.

In many business situations, decisions are made intuitively because systematic, quantified decision making methods are not available to weigh the alternatives. This should not be the case for weighing the economic consideratiom related to most invest- Chaoter 1: lnvestment Decision Makin.

The "u,hims of management" should not be the basis for reaching decisions concerning economic dift'erenceg between inr. In this age of increasingll, complex iinestmeill situatii::rs, to be successful over the long run it is imperative that a primary economil evaluirtion criterion be selected and applied to compare alternative inr,cstmont choices.

This text presents economic evaluation criteria which are brrsed tt;: the premise that profit maximization is the investment objective; that is, maximization of the future worth of available investment dollars. In general, this involves answering the question, "Is it better to invest cash in a given investment situation or will the cash earn more if it is invested in an alternative situ ation?

Even the economic desirability of investrnents in land often relates to engineering technology that may make the Iand more valuable several years fiom now for apartrnents, a park or some in,Justrial plant utilization. In a capitalistic society it is imperative that engineering proposals as well as all other types of investment proposals be evaluated in terms of worth and cost before they are undertaken.

Even in public activitres, benefits must be greater than costs before expenditures normally are approved. Thus, the term "engineering economy" which is used widely in literature and texts applies in general to the economic evaluation of all types of investment situations. The terms "economic ev? A perscln does not need to be an engineer to be proficient in the application of engineering economy principres to evaluate investment alternatives.

The well known prerequisite of successful engineering ventures is economic feasibility. This prerequisite applies to both engineering and non-engineering investment situations, so the terms "economic evaluation" and "engineering economy" have valid meaning and importance not only to engineers, but also to bankers, accountants, business managers and other personnel in a wide variety of job descriptions where ,mli' :ltitilj!

This text is written for peop[with th3s-1krnd; of backqrounds or in1e1est, , 1. Defining the problem the problem 3. Developing alternate solutions 4. Deciding upon the best solution 5. Converting the decision into effective action 2.

Analyzing : These decision making phases apply to economic evaluation decision making as well as general managerial decision making. Defining economic evaluation problems clearly is as important in economic analysis as any other situation that requires a decision. In any situation requiring decision making it is necessary to ask the right questions before one can expect to get the answers that are needed.

Analysis of the problem or questions is the next step in the decision making process for economic analysis as well as general managerial decisions.

This leads to the third phase of decision making concerning whether alternative approaches or investments might not be better. Analysis of these alternative investments then leaves us in a position to decide upon thti best economic choice and to take action to implement the best choice.

This text, and the concept of economic decision making, is primarily con- cerned with the three middle phases defined by Drucker. Again, this includes presenting and illustrating methods that can be used to analyze correctly various investment situations, develop alternative solutions and the economic analysis of these solutions. Emphasis is directed toward the fact that econornic analysis always involves comparison of alternatives, and determining the best way to invest available capital.

From an economic viewpoint this means we want to maximize the future profit that can be accumulated from the available investment dollars. Economic evaluation decision making relates to two basic classifications of projects or investments: 1. Revenue producing investments 2. Service producing investments ii;'f ir. Et Chapter 1: lnvestment Decision Making Sometimes people think a third investment classification might be "savings producing projects," but it will be illustrated in Chapter 3 that looking at differences between the costs of providing a service by alternative methods gives the savrngs that incremental investments in the more costly iniriai investment alternatir.

Analvsis of thes6 savings and incremental costs is just one of severai valid ways oi evaluating generai service producing projects.

Ir4anv analvsis techniques are presented and iliustrated in this text. However, emphasis is placed on compound interest rarc of return analysis and net present value analysis, properly applied on an after tax basis. A large rnajority of individuals, companies and government organizations that use tormal evaluation techniques use rate of return analysis as their primary decision making criterion with net present value the second most used technique.

There are other correct techniques for evaluating various investment situations including future and annual value, and several ratios. These techniques are presented in the text.

It is necessary in economic evaluation work to be familiar with many dift'erent approaches to economic analysis because eventually you will interact with people that have a wide variety of evaluation backgrounds who use or advocate widely varying economic evaluation techniques. Familiarity with different evaluation techniques enhances communication with these people. Also, it will be shown in Chapter 4 that in ceriain evaluation situations, methods such as net present value have significant advantages over rate of return analysis.

Economic Evaluation And Investment Decision Methods

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. Stermole and John M. Stermole , John M. Stermole Published Economics. Save to Library. Create Alert.

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Download link: Download Book. This text provides solutions to the problems presented at the end of Chapters 2 — 11 of the textbook Economic Evaluation and Investment Decision Methods, 13th Edition…. A freelance writer of more than 30 non-fiction titles for children and young adults, Melanie brings a perspective and energy to this book that could only come from a Lincoln Park native. With an abundance of facts and pictures, Pittsburgh Film History becomes the ultimate book for Pittsburgh film and an easy, fun read. Disclosure statementI receive complimentary books for review from publishers, publicists, andor authors, including Netgalley. The book was entirely too long.

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Organized for managers, engineers, geologists, landmen, scientists, accountants, and others concerned with evaluating investments, this course relates to the economic analysis of income producing and service producing investments using discounted cash flow analysis criteria and procedures. The course covers economic analysis techniques used to optimize the development and operation of mining, petroleum and non-natural resource production and processing operations. Stermole, John M.


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Economic Evaluation and Investment Decision Methods

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