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which method to analyse an investment

Dimitris_bro
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3/30/2015 11:00:45 AM
Posted: 1 year ago
Good afternoon to everybody!
I am a newbie concerning economics so I would like to ask a few questions. The problem is the following:
Consider you are having a plant and it gives you every year a positive cash flow of 1.000 euros. The plant is already installed. Then, you have the chance to install an extra system that will increase the revenue. Of course the extra system has a cost to implement and a cost to operate. Which is the most suitable method to evaluate the feasibility of the project?
From a small search I found many methods like "simple return", "net present value" etc. but I am not sure which one is suitable.
If I use the net present value then which rate of return should I use?
Imagine we know in advance how much would be the revenue with and without the extra system, and its initial cost and operational cost.

Thank you
Dazz
Posts: 1,163
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3/31/2015 2:16:55 AM
Posted: 1 year ago
At 3/30/2015 11:00:45 AM, Dimitris_bro wrote:
Good afternoon to everybody!
I am a newbie concerning economics so I would like to ask a few questions. The problem is the following:
Consider you are having a plant and it gives you every year a positive cash flow of 1.000 euros. The plant is already installed. Then, you have the chance to install an extra system that will increase the revenue. Of course the extra system has a cost to implement and a cost to operate. Which is the most suitable method to evaluate the feasibility of the project?
From a small search I found many methods like "simple return", "net present value" etc. but I am not sure which one is suitable.
If I use the net present value then which rate of return should I use?
Imagine we know in advance how much would be the revenue with and without the extra system, and its initial cost and operational cost.

Thank you

Revenue (old + new plant)
Less: Initial Cost +Operational Cost (per year)= Total Cost (in 1st year)
=Operational Profit
Less: Financial Cost (i)
=Net profit

Use Breakeven analysis and for New Investment determine the source of finance, based on that you'd calculate the cost of financing. For NPV, rate of return (that is basically cost-rate of your financing) is average financing cost i.e. current market rate. That means, the profit you'd get from your investment after 1 year would be equal to what present value of investment, discounted on market rate. In case if we've invested at general market rate in bank, how much initial investment was required to get the stated profit equivalent to the profit by plant. Thus NPV= PV of Profit by investment- initial investment.

Also check out the IRR by equating NPV=0. This would give you the criteria to accept ot reject the project. Also the rate of return for the project. Payback period is another way to check the feasibility.
Remove the "I want", remainder is the "peace". ~Al-Ghazali~
"This time will also pass", a dose to cure both; the excitement & the grievance. ~Ayaz~