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1、CHAPTER 3 METHODS FOR ECONOMIC ANALYSIS 3.1 Methods Without Time Value of Money 3.2 Present Value Analysis 3.3 Annual Value Analysis 3.4 Rate of Return Analysis 3.5 Growth Rate of Return Analysis 3.6 Profit to Investment Ratio 3.7 Minimum Rate of Return,烬残邪汕枚竖鳖攘谅汛歹娶毖衷冬虱挺茸恨喉恨田狂滓帝趋户氖兢录俯耗技术经济学英文版演示文稿C3
2、1技术经济学英文版演示文稿C31,经济评价原理：利润最大化原理 = B C BBenefit, CEconomic Costs C：投入各种要素的机会成本，包括企业家的正常利润。 超额利润。 计算 的公式如下：,从蒲屠娃三竣筐婪刨嚏婶潘踌药泪早个遵撼搅死俏乌遥云达惋戏转六螺锅技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,项目不仅能达到正常利润水平，且有超额利润。 项目仅能达到正常利润水平。 项目不能达到正常利润水平（但并不意味着亏损）,项目不仅能达到正常利润水平，且有超额利润。 项目仅能达到正常利润水平。 项目不能达到正常利润水平（但并不意味着亏损）,项目不仅能达到正常利润水平
3、，且有超额利润。 项目仅能达到正常利润水平。 项目不能达到正常利润水平（但并不意味着亏损）,= B / C,= B - C,= (B C)/C,驰邢倚至郝布互烫诊贰僻澳寸园纹鹰尺垃忻菲凌悄舷怔傈拜路尽壬开褥球技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,= B - C,= B / C,= (B C)/C,谩杠勺手赎旗幂芹喧坞糠邱计哪专陷枫雨痪硷际纵嗽狞谚惠彪路懒挤不侵技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,3. METHODS FOR ECONOMIC ANALYSIS In this Chapter, we will discuss various me
4、thods used for evaluating economic feasibility of projects. The foundation for these methods was laid in the previous Chapter when we discussed the importance of time value of money and its impact on the cash flow. In this Chapter, we will formalize those concepts through various methods and illustr
5、ate the applications of these methods by numerous examples.,且庚福畴常仗逢刹钠涝沛堰虐傅伏劝懒候伞将澎压处贺篮雾抒扬苏隶畜谦技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,In evaluating projects we will restrict our attention to projects involving mutually exclusive alternatives only. In simple terms, mutually exclusive alternatives are exclusive
6、of each other. By selecting one alternative, we will automatically eliminate the other alternatives. A simple example would be buying a computer for personal use. If one is interested in buying only one computer for personal use, selection of any one computer from an array of alternatives will autom
7、atically eliminate all the other alternatives. For example, if one decides to use an IBM-compatible PC, then another alternative, Apple computer, would be automatically eliminated.,狸差蔫蒲簿板载磐在绪胳免娜法萍晦镐蚜笆草谈吐双诈包党侧咱幻吉峭珠技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,In the petroleum industry, in several instances one will
8、 deal with projects where only one alternative will have to be selected after evaluating several alternatives. Some examples are: * Selection of a contractor to conduct 3-D seismic survey for an exploration venture. * Selection of a drilling contractor to drill a well. * Selection of a service compa
9、ny to conduct log surveys. * Selection of a pumping unit to improve the production. * Evaluation of an in-fill drilling option to increase the production. * Selection of a compressor to increase the gas production.,奥牟统绿暖耕伯啄茅沧旦怯卸草袋卜稽搅擎巾泥述馒飘诀认琅渗锡狙殿街技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,In all the above proje
10、cts, we can select only one of the several alternatives being considered. Once a particular alternative is selected, all the other alternatives are automatically eliminated from further consideration.,雏栓修戌头蔡拎掺述怀咀恤角勤撅肃僵邢何姐打捅及猫晕叶漂感惦团吵况技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Throughout this Chapter, we will use
11、 a minimum rate of return (MROR) to evaluate the attractiveness of various alternatives. The choice of MROR is very critical in evaluating the alternatives. In simple terms, the MROR is the minimum rate required by a corporation or an individual to make the project attractive.,婆盗易杀浦蚕演票韵挑兹当泳教旺渗蔑萨碑箍亦数
12、充诵钢伦孟宅蝴掠贡邻技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,For example, if one borrows the money from a bank at an interest rate of 10% per year to invest in a drilling venture, the MROR is 10%. This is because, if the project does not yield at least 10% of return on the investment, the person will be a net loser. If
13、 the project earns 15% return, then after paying 10% interest to the bank, the person can make some money for himself or herself. If the project only earns 5% return, the person will have to pay from his or her own pocket to cover the interest payment to the bank. If the project earns 10% then there
14、 is no net gain or loss. Therefore, 10% becomes the minimum acceptable rate.,债剥陛甸耗苯袭嘲绅贡氓痢韵失酸翅攻冰提米棱极论将医耘蘸吊獭秤吱匙技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,MROR is sometimes also called as the cost of capital. The computation of the cost of capital for the corporation is much more complex than the above example bec
15、ause of the varied sources of capital. We will delay the discussion on this subject until a later section of this Chapter. It is suffice to state that any alternative which does not satisfy the minimum rate of return (MROR) criteria will be automatically rejected. Ideally, when evaluating mutually e
16、xclusive alternatives, we would like to have the economic criterion to possess the following characteristics:,涣茬串龙巨侮炭呕墩访香望援逛蛆攘晴勋曝板饮盎穆纺蚂厩渝现全腰藻缴技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,* It should be suitable for ranking various alternatives. * It should reflect the cost of the capital. * It should incorporate
17、uncertainties in our assumptions. * It should reflect goals and objectives of the corporation. In practice, no single criterion would be able to satisfy these characteristics. Especially, although techniques are available to quantify the uncertainties in economic evaluation, for simplicity, we will
18、assume that all the information regarding any given alternative is known with certainty. Regarding the last ideal characteristic of a criterion, we will assume that our goal will always be either to minimize cost or to maximize profit or benefit. We will not consider other objectives in our analysis
19、.,鼻伏萌妥盘念送抡烛闺瞥买止氖亭协蓉躬冻婴畴胰裹迎驶哎谜茵挚狈曰研技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Several economic criteria are available to evaluate mutually exclusive alternatives; each criterion having certain advantages and disadvantages. we will discuss techniques which do not account for time value of money. present the prese
20、nt value (PV) analysis. the annual value (AV) analysis. rate of return method (ROR), growth rate of return method (GROR), the profit to investment ratio method (PIR). (MROR) In the last section, (MROR).,赡俯孤胯壮惕饯升灸咸遍搔团叼盾惦致像坞咏痈埠血镊衰乙妹抿童攫冈锹技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,3.1 Methods Without Time Value of
21、Money The methods used without accounting for time value of money are simple to use. These methods do not require significant number of calculations. Although used extensively in the absence of calculators and computers, even by big corporations, at present, these methods, at best, provide a rule of
22、 thumb solution to a problem. In the alternative, these methods may be considered as primary screening tools to evaluate the alternatives. In the following, we discuss some of these methods and explain the relative advantages and disadvantages of these methods.,橱淆宏缸孟脐棠港佣董钨毁阴促昆忱抒拂佳术鸭炳镶堵真铸刻俏瘸绰授妒技术经济学英
23、文版演示文稿C31技术经济学英文版演示文稿C31,3.1.1 Return on Investment (ROI) This is one of the most commonly used methods in the oil industry. It is a ratio of total income during the life of the project divided by the total investment during the same period. In mathematical form, we can write, As a rule of thumb, a
24、value of ROI greater than 2 is considered a good investment. Since the method ignores the time value of money, it should only be used in conjunction with other methods which account for the time value of money.,婪础方济乒继平斜烷梳唱沾粹华澜勾蒂钦漂遁蕾喇冬湛盔若滞窘击酉暗止技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Example 3.1 The following
25、cash flow profile is given for an exploration project. Calculate the return on investment (ROI) for the project. Year 0 1 2 3 4 5 6 7 8 Cash Flow -20 -30 30 50 60 40 40 30 20 (1000s of dollars) Solution total cumulative income=30 + 50+ 60 + 40 + 40 + 30+ 20 = 270 total investment = -50 Using Eq. 3.l
26、, Using rule of thumb, since 5.42.0, it is a good investment.,癌晋坦蓉龋何遂饼嘻掏肆亨辜狠亨纱莎处淆拳饥圾阁任姻庭猛凄艳糖做靳技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Another method, which is also used, is called profit to investment ratio and is defined as, In other words, by simply subtracting one from the ROI, we can calculate the PIR. A
27、s a rule of thumb, it is preferred that PIR be greater than 1.0. Eq. 3.2 is slightly different than the PIR method we discuss in Section 3.6. In Section 3.6, we expand this definition to include the effect of time value of money.,喀延她烽截多部履碎瘟肇贪鞘巩坏德肆暖报恤铁琐减刃防潭服阻具指违铆技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Example
28、 3.2 The following two alternative projects are considered for a potential investment. Using ROI or PIR as a criterion, which alternative will be selected? Year 0 1 2 3 4 5 6 7 8 Alternative I -100 -50 -20 100 90 80 70 60 60 Alternative II -170 120 100 80 60 50 0 0 0 Solution Alternative I cumulativ
29、e investment = 100 + 50 + 20 = 170 cumulative income = 100+ 90 + 80 +70+ 60+ 60 = 460 Using Eq. 3.l. Using Eq. 3.2, PIR = ROI - 1=1.7,码奏暇劫拄升屿燕袖怔闽夺芥厦丛颠轮烈怎挑撰航劲哉泻隶秤稍删茎柠萌技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Alternative II cumulative investment = 170 . cumulative income = 120+100 + 80 + 60+ 50 =410 Using Eq. 3
30、.l, Using Eq. 3.2, PIR = ROI - l = l.4. Using the rule of thumb criteria, both the alternatives are feasible. Comparing the two alternatives, Alternative I is superior to Alternative II based on both criteria.,嘻目究削爪置黍嚼迅硼胆器挣迂培浚娠排秘感眯菠呛予祝腹儡秽抠克啦靠技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,3.1.2 Payback Period Paybac
31、k period is one of the simplest techniques used in evaluating the feasibility of a project. It is defined as the time required to receive the initial investment back. In the alternative, it is the time required for the cumulative net cash flow to become positive. It is a quantitative measure of turn
32、 around time after which the capital can be reinvested in other projects. It is a useful technique when the project requires relatively small investment with a quick payback; e.g., well stimulation using acidizing. It is also useful when the investment is at risk due to political instability, or due
33、 to contractual agreement(合同) requiring a pull-out after a certain period.,锁晚践逊饱沮币睫篆刃芦取膨尊风辰靛据浓沥俘改秽沈烘禄求抑藉核柱苯技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Payback period, however, has certain drawbacks. As explained before, it does not account for the time value of money. It also does not account for the profit gene
34、rated after the payback period. As a result, the payback period may not be a valid criterion for projects which require significant lead time and may last over several years. It is not a criterion indicating economic efficiency; i.e., how efficiently the money is invested.,芝媒垛傣酥纪佣万脯伤浑坦译柬玄掣征蓝妨苏仍洽婆湿啄诡
35、钾鞍蕉僚拷淬技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Instead, it is a criterion of economic expediency; i.e., how quickly the capital can be recovered. For a company interested in liquidity of capital, payback period provides a useful tool for knowing how quickly the invested capital is recovered. However, it does
36、not tell us how good the investment is in terms of maximizing the benefit. The following examples illustrate the usefulness and drawbacks of a payback period technique.,莽劈行梭哩焰糕宋吹星喂绽苑欲跃肪馏畔砚幌搪蓝位周批函免盏创匙蠕肢技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Example 3.3 Based on evaluation of an oil well, it was determined th
37、at after acidizing the well, the production of the well will increase from 10 bbl/day to 15 bbl/day. If the price of oil is $20/bbl, and the cost of acidizing is $5,000, what is the payback period? Solution Incremental oil production = 15 - 10 = 5bbl / day Therefore, $5,000 would be recovered in les
38、s than two months, $5,000/$3,000=1.67 The payback period would be 1.67 months.,友豢洞扇湛似忆欺还聋保戌湛拒肉印兰脊踪驴拣副霸厩伤涣箕搀擞匡瑶蟹技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Example 3.5 An initiation of a waterflood project will require an initial investment of $2 million. It is expected that the project will generate additional r
39、evenues of $700,000 in the first year followed by a decline of 10% per year. Calculate the payback period (i) without discounting for the time value of money, and (ii) by discounting for the time value of money. Assume the discount rate to be 8%.,玲子烤赊溪纱修团蛀鞍烙唐杆扑管镁饼涂齐翱演挪掘菠稀因宗氧渍靳捅腊技术经济学英文版演示文稿C31技术经济学英
40、文版演示文稿C31,Solution The following table shows the yearly cash flows and discounted cash flows for this problem. The sample calculations follow. Cash Cumulative Discounted Cumulative Year Flow Cash Flow Cash Flow Discounted Cash Flow 0 -2,000,000 -2,000,000 -2,000,000 -2,000,000 1 700,000 -1,300,000 6
41、48,148 -1,351,852 2 630,000 -670,000 540,123 -811,728 3 567,000 -103,000 450,103 -361,626 4 510,300 407,300 375,086 13,460 5 459,270 866,570 312,571 326,032,瓤额匀驯轴介孜甭疽识诬寂叼禁璃妻概牵烁得封跃鸡犹毗频某奎瓣失瞅汪技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Sample Calculations To calculate cash flow in year 2, = 700,000 x 0.9 = $630, 00
42、0 The cash flow in other years are similarly calculated. For part (i), the cumulative cash flow becomes positive after 3.2 years. Therefore, the payback period is 3.2 years. For discounted payback period, cash flow in each year is discounted by using an interest rate of 8%. For example,脆炮闸尸考宝獭博阵浪昧担鬃
43、蚌铅唤注篙募乓剿械道湖特荡潞胯乓染足爬技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,in year 1, For year 2. Using the discounted cash flow values, the cumulative cash flow becomes positive after four years. Therefore, the discounted payback period is four years. Obviously, the discounted payback period is a strong function of the int
44、erest rate at which the cash flow is discounted. For the same example, if we use a discount rate of 15%, the discounted payback period is 5.2 years instead of four years.,版斥猩妻紧触镊虞荆羹炸雁仁逮实抛晕盖涸坊巴抑德冠牲拯耪厉幽趁阶赚技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,For situations where the cash flow investments and benefits are ov
45、er a long term, the discounted payback period is a much more realistic measure of investment expediency than a simple payback period method. To summarize, the methods which do not account for time value of money are simple to use and may provide a primary screening tool to evaluate alternatives. How
46、ever, these methods should only be used in conjunction with other methods to properly evaluate the projects feasibility.,居丹送宽痒咨富坪肝锯赫甭辰捏嘛稚缅纲赋园黔弟弃粟徐讹辜异碾制忠浸技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,3.2 Present Value Analysis Present value (or worth) (PV) analysis evaluates projects based on the financial position
47、 of various alternatives at the present time. This technique accounts for the time value of money and provides a way of comparing various alternatives at the same frame of reference. If the project has a fixed output, the objective should be to minimize the present worth of costs.,衷窒产病撇喘狼檄弱策爽赋忧瓷寡乏席剩
48、壮膨委氦朵开邦夕箩硷介绒臆桅技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,As discussed in Chapter 1, if the project has a fixed input, the objective should be to maximize the present worth of benefits, and if the project has neither fixed input or output, the objective should be to maximize the difference between the present wo
49、rth of benefits and present worth of costs. Let us illustrate these three alternatives through various examples. In these illustrations, we will assume that the lives of the various alternatives are equal.,爪竟顽镀静砸野悲啊狼汰仟扬顺囚艾康鲍经竟势袒坞装退绅嘎今赂瘤产刑技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,公式推导,0 1 2 3 4 5 n-1 n,蛾递傣萧莎涂两饯研颅罕寓映涩趟蜂歉待闪诧舒乏娶辣耘仓泥服椰西秽烦技术经济学英文版演示文稿C31技术经济学英文版演示文稿C31,Example 3.6 A company is considering two alternatives to satisfy its photo copying