Significance Of Present Worth Analysis (Economics).pptx

College Assignment to Build a PowerPoint Presentation .
Subject : Economics
Topic : Present Worth Analysis ; Cash Flow Diagram ; Net Present Value Calculation ; Calculation Of Present Worth ; Advantages and Limitations

1. GOVERNMENT COLLEGE OF ENGINEERING AND TEXTILE TECHNOLOGY, SERAMPORE Continuous Assessment : 1 Name Of The Topic : Significance of Present Worth analysis Name : Atirath Pal University Registration No : 231100110042(2023-24) University Roll No : 11000123007 Department : Computer Science and Engineering Year : 2 nd Year Semester : 3 rd S em Paper Name : Economics for Engineers Paper Code : HSMC-301

2. Topics Discussed Introduction of present worth analysis Key components in present worth analysis Formula of Present Worth (PW) Net Present Value (NPV) Steps in Conducting Present Worth Analysis An Example of PW calculation Advantages of P resent Worth Analysis Limitations Of Present Worth Analysis Conclusion

3. Introduction Present Worth Analysis Present Worth Analysis (PWA), also known as Net Present Value (NPV) analysis . It is a fundamental technique used in economics and finance to evaluate the profitability or economic viability of an investment or project. The objective is to determine whether the present worth of inflows (benefits) exceeds the present worth of outflows (costs), thereby assessing the overall financial impact of the investment. Slide Number 1

4. Key Concepts in Present Worth Analysis: 1 .Cash Flows : Inflows : Money that comes into the project, such as revenues or savings. Outflows : Money that goes out, such as initial investment costs, operational expenses, and maintenance costs . 2. Discount Rate : The discount rate reflects the time value of money, which means a dollar today is worth more than a dollar in the future. It can be determined by the required rate of return, the cost of capital, or other relevant factors. Slide Number 2

5. Present Worth (PW ) : Present Worth is the value today of a series of future cash flows, discounted at the appropriate rate. It is calculated using the formula where: CF t ​ is the cash flow at time t, r is the discount rate, t is the time period. PW=∑ CF t (1+r) t Slide Number 3

6. Net Present Value (NPV ) : NPV is the difference between the present worth of cash inflows and the present worth of cash outflows. It is calculated as: NPV= PW inflows − PW outflows If NPV is positive, the project is generally considered profitable or worth pursuing. If NPV is negative, the project may not be economically viable . Slide Number 4

7. Identify Cash Flows : List all expected cash inflows and outflows associated with the project over its life span . Select an Appropriate Discount Rate : The rate should reflect the opportunity cost of capital or the minimum acceptable rate of return . Calculate Present Values : Discount each cash flow to its present value using the chosen discount rate . Determine NPV : Sum the present values of inflows and outflows to determine the NPV . Make a Decision : If NPV > 0, accept the project. If NPV < 0, reject the project. Steps in Conducting Present Worth Analysis: Slide Number 5

8. Example : Consider a project that requires an initial investment of $10,000 and is expected to generate cash inflows of $3,000 per year for 5 years. If the discount rate is 8%, the NPV can be calculated as follows : 3. Calculate NPV : NPV = 11978.81− 10000=1978.81 1. Calculate the Present Value of Each Cash Flow: 2. Sum the Present Values : Total Present Value of Inflows: 2777.78+2571.28+2381.37 +2205.89+2042.49 =11978.81 Slide Number 6

9. Time Value of Money : It accounts for the time value of money, making it a realistic measure of profitability. Comprehensive : It considers all cash flows over the project’s life. Decision Making : It provides a clear metric (NPV) for decision-making Advantages of Present Worth Analysis: Discount Rate Sensitivity : The choice of discount rate significantly affects the outcome. Estimation Challenges : Accurate estimation of future cash flows can be difficult. Ignoring Non-Financial Factors : NPV focuses purely on financial aspects and may ignore other important factors like environmental impact or strategic benefits. Limitations: Slide Number 7

10. Conclusion Effective Financial Assessment : Present Worth Analysis is a reliable method for evaluating the financial viability of projects, considering the time value of money and providing a clear decision-making criterion through NPV. Objective Decision-Making : By focusing on cash flows and discount rates, it allows for an objective comparison of different projects, helping to identify the most profitable options. Comprehensive Evaluation : It accounts for all future cash flows over the project’s life, offering a complete picture of the potential financial returns. Decision Clarity : The NPV provides a straightforward metric—positive NPV indicates profitability, while negative NPV suggests a project may not be worth pursuing. Slide Number 8