Comparing Cash-flow Streams
7.1 Equivalence
comparing two different cash flows makes sense only when they are expressed in the same time frame.
7.2 Basis for Comparison
A common frame of reference for comparing two or more
cash-flow streams in a consistent way:
- Present Worth (PW)
- Future Worth (FW)
- Annual equivalent (AE)
- Internal Rate of Return (IRR)
- Discounted Payback Period (DPP)
- Capitalized equivalent amount
7.3 Present Worth, PW(i)
How much is the cash-flow stream worth (equivalent to) right now at interest rate, i?
Generally, as i increases PW(i) decreases.
7.4 Internal Rate of Return (IRR)
To compute IRR, the cash-flow stream must have these properties:
- First non-zero cash-flow is negative.
- Followed by 0…n, further expenses with incomes from there on.
- Only one sign change in the cash-flow stream.
- The net cash-flow stream is profitable, PW(0%)>$0.
7.5 Discounted Payback Period, DPP(i)
How long to recover the investment?
7.6 Replacement Decisions
Reasons for replacement
- Deterioration(磨损)
- Obsolescence(过时)