L10-ECONOM

• Uncertainty


  Variations in actual values due to errors in estimating, inability to make accurate estimates because of insufficient information, or failure to consider all factors
• Decision making under Uncertainty


  When a decision involves conditions about which the manager has no information, either about the outcome or the relative chances of any single outcome
• Evaluation of Mutually Exclusive Alternatives

  • The purpose is to select the one with the highest benefits for implementation
  • Alternatives can be funded under different policy objectives
• Mutually exclusive projects


  • Projects X and Y where only one can be selected
• Mutually exclusive events


  • Running forwards and running backwards
• Mutually Exclusive Alternatives


  Only one can be selected because only one is needed
• Independent Projects


  Acceptance (or rejection) does not prevent the acceptance of other projects under consideration
• Cost Alternatives


  Mutually exclusive projects that only have costs (because they are part of a larger project that has already been economically justified)
• Revenue Alternatives


  Mutually exclusive projects that have both costs and revenues
• For cost alternatives, the one with the lowest cost (i.e. least negative) is selected
• For revenue alternatives, the one with the largest PW is selected if one or more had a PW≥0
• For independent projects, all alternatives which yield a return of at least the MARR are accepted
• Inflation


  Depreciation in purchasing power of a currency, often resulting in rising prices
• Effects of Inflation


  • Affects the distribution of real income
  • Encourages current consumption and discourages savings
  • Reduces business confidence and investment
  • Reduces exports and increases imports
  • Reduces economic growth and increases unemployment
  • Distorts price signals and causes inefficient allocation of resources
• Bracket Creep


  Phenomenon where income growth causes individuals to pay higher average income tax rates each year due to a tax system with a series of tax brackets that increase with income but do not change over time
• Replacement Studies


  Examining whether to continue using (economically) an existing process or product (equipment)
• Opportunity Cost


  Foregone returns of an investment not pursued, or what you will lose by not doing anything
• Salvage


  Estimate of future value
• Economic Life


  When the cost to keep an asset (OM) exceeds the value (revenue) it can produce
• Replacement decisions occur all around us for reasons like deficiencies in the current asset, advantages of potential replacement assets, and changing external environment
• Many firms fail to subject existing equipment to scrutiny on a periodic basis to ensure capital is being used effectively, due to reasons like currently making a profit, equipment being operational, risks associated with change, limited investment capital, uncertainty regarding future, and psychological impact of sunk costs