ASUFSE102017-V017400

Summary

This video explains essential measures for evaluating project feasibility, focusing on Lifetime Worth (LTW) and Return on Investment (ROI). LTW calculates the net present value of all costs and benefits over a project's lifetime, while ROI compares net benefits to initial costs. The video also highlights additional metrics like payback period and Rate of Return (ROR), emphasizing that a successful project requires positive and sufficiently high LTW and ROI. Understanding these metrics helps in selecting the best investment opportunities and assessing overall project profitability.

Takeaways

• 😀 LTW (Lifetime Worth) is the net present value of all costs and benefits over the lifetime of a project.
• 😀 For a project to be feasible, LTW should be positive, indicating profit.
• 😀 ROI (Return on Investment) is calculated as LTW divided by the initial cost.
• 😀 A positive ROI indicates that the net benefits of a project exceed its initial costs.
• 😀 Cash flow includes initial costs, yearly benefits, and OMR (Operation, Maintenance, Repair) costs.
• 😀 The present value (PV) of all cash flows must be computed to calculate LTW and ROI.
• 😀 Payback period measures the time it takes for benefits to cover initial and periodic costs.
• 😀 ROR (Rate of Return) compares project returns to standard interest rates and accounts for project duration.
• 😀 ROR should be higher than the interest rate for a project to be considered beneficial.
• 😀 IRR (Internal Rate of Return) is used to calculate ROR and is typically easier with software like Excel.

Q & A

What is the purpose of calculating lifetime worth (LTW)?

Lifetime worth (LTW) helps determine the net present value of all costs and benefits over the lifetime of a project, indicating whether the project is feasible and profitable.

How is return on investment (ROI) calculated?

ROI is calculated by dividing the lifetime worth (LTW) by the initial cost of the project, providing a measure of the net benefit relative to the initial investment.

What factors should be considered when evaluating LTW and ROI?

Both LTW and ROI should be positive and high enough to indicate project feasibility. Additionally, market norms and risk factors should be considered.

What are OMR costs, and what do they include?

OMR stands for operation, maintenance, and repair or replacement costs. These costs typically include expenses for operating the project, maintaining equipment, and repairing or replacing personnel or parts.

What does a positive LTW indicate about a project?

A positive LTW indicates that a project is expected to generate more benefits than costs over its lifetime, making it a potentially profitable venture.

Why is the payback period an important measure?

The payback period measures the time required for the benefits of a project to cover its initial and periodic costs, indicating when the project becomes profitable.

What is the significance of the rate of return (ROR)?

ROR compares the profitability of a project to the interest rates available from alternative investments, helping determine if the project is a worthwhile investment.

How does ROR differ from ROI and LTW?

While ROI and LTW do not account for the time taken to achieve returns, ROR incorporates the time aspect by evaluating how the project's returns compare to market interest rates over its duration.

What is IRR, and how is it related to ROR?

IRR, or internal rate of return, is a calculation used to determine the ROR of a project, indicating the interest rate at which the project would break even in terms of net benefits.

What are some common pitfalls when using LTW and ROI?

Common pitfalls include overlooking the time factor in project evaluation and failing to consider external risk factors that could impact the project's feasibility and profitability.