Financial Decision Criteria

This week’s storms have put a real dent in our progress. I just wanted to summarize what your should be able to do at this point:

Using the formula tree you should be able to choose the correct financial analysis formula to make values equivalent at any point in time during the life of a project while taking into account the time value of money. You should be able to determine if the value desired is a

  • present or future value
  • single sum or series
  • terminating or perpetual series
  • interest rate or time period

Once you have the formulas you should be able to use the financial decision criteria to evaluate if a project is financial viable. These include:

  • Net Present Value; the sum of the discounted revenues minus the sum of the discounted costs.
  • Benefit Cost Ratio; the sum of the discounted revenues divided by the sum of the discounted costs.
  • Equivalent Annual Income; the NPV multiplied by the annual payments capital recovery formula for the life of the project.
  • Rate of Return or Internal Rate of Return; the discount rate that makes the NPV = 0. If there is more than a single cost and benefit must be solved by iteration. Care must be taken to interpret the results.
  • Land Expectation Value; the present value of perpetual series of forest rotations. Solve by compounding all the costs and benefits to the end of the first rotation and solving for the NPV with the present value of a perpetual periodic series formula. 

You should also know the decision rules, when to accept or reject a project, for each criterion.

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