Recall the definitions:
Net Present Value (NPV): equivalent value of discounted project cashflow to present time (often time zero).
Net Future Value (NFV): equivalent value of compounded project cashflow to a desinated future point in ime. It is the accumulation of unrecoverd capital and required returns throughout the project.
Recall the economic criterion based on fixed input/output:
|Fixed input||Amount of capital is fixed||Maximize future value of benefits|
|Fixed output||Amount of benefit is fixed||Minimize the future value of costs|
|Unconstrained||Neither capital nor benefits are fixed||Maximize NFV (maximize future value of benefits and minimize future value of costs)|
Example: lecture slide example
A B C Investment $2.5k $3.5k $5.0k Annual cost $900 $700 $1000 with $100 increase each year Salvage value $200 $350 $600 Life 5 5 5 Annual revenue $1.8k $1.9k $2.1k with 15% growth rate MARR 10% 10% 10%
We compute the NFV:
Once computed, NFV for option C is highest. Therefore, this should be the option that should be taken.
In simple terms, it is the ratio of the benefit over costs:
For a sensible decision, the benefit to cost ratio should be .