1、Unit Six Basic Concepts of Economic Evaluation,A systematic approach for economic evaluation of facilities consists of the following major steps:1. Generate a set of projects or purchases for investment consideration.2. Establish the planning horizon for economic analysis.3.Estimate the cash flow pr
2、ofile for each project.,4.Specify the minimum attractive rate of return. 5. Establish the criterion for accepting or rejecting a proposal, or for selecting the best among a group of mutually exclusive proposals, on the basic of objective of the investment. 6. Perform sensitivity or uncertainty analy
3、sis. 7. Accept or reject a proposal on the basic of the established criterion.,The period of time to which the management of a firm or agency wishes to look ahead is referred to as the planning horizon. Since the future is uncertain, the period of time selected is limited by the ability to forecast
4、with some degree of accuracy. For capital investment, the selection of the planning horizon is often influenced by the useful life of facilities, since the disposal of useable assets, once acquired, generally involves suffering financial losses.,In economic evaluations, project alternatives are repr
5、esented by their cash flow profiles over the n years or periods in the planning horizon. Thus, the interest periods are normally assumed to be in years (t=0, 1, 2. n), t=0 representing the present time. Let Bt,x be the annual benefit at the end of year t for a investment project x where x=1, 2.refer
6、 to projects No.1, No.2, etc., respectively.,Let Ct,x be the annual cost at the end of year t for the same investment project x. The net annual cash flow is defined as the annual benefit in excess of the annual cost, and is denoted by At,x at the end of year t for an investment project x. Then, for
7、t = 0, 1. n：At,x = Bt,x - Ct,x Where A is positive, negative or zero depends on the values of Bt,x and Ct,x ,both of which are defined as positive quantities.,Once the management has committed funds to a specific project, it must forego other investment opportunities which might have been undertaken
8、 by using the same funds. The opportunities cost reflects the return that can be earned from the best alternative investment opportunity foregone.,The foregone opportunities may include not only capital projects but also financial investments or other socially desirable programs. Management should i
9、nvest in a proposed project only if it will yield a return at least equal to the minimum attractive rate of return (MARR) from foregone opportunities as envisioned by the organization.,In general, the MARR specified by the top management in a private firm reflects the opportunity cost of capital of
10、the firm, the market interest rates for lending and borrowing, and the risks associated with investment opportunities.,For public projects, the MARR is specified by a government agency, such as the Office of Management and Budget or the Congress of the United States. The public MARR thus specified r
11、eflects social and economic welfare considerations, and is referred to as the social rate of discount.,Regardless of how the MARR is determined by an organization, the MARR specified for the economic evaluation of investment proposals is critically important in determining whether any investment pro
12、posal is worthwhile from the standpoint of the organization. Since the MARR of an organization often cannot be determined accurately, it is advisable to use several values of the MARR to assess the sensitivity of the potential of the project to variations of the MARR value.,1、抄写单词并翻译,economic evalua
13、tion, opportunity cost , financial investment, investment consideration,decision maker, net annual cash flow, Capital project, socially desirable programs, The Office of Management and Budget, Government agency,作业：,2、翻译段落,It is important to emphasize that many assumptions and policies, some implicit and some explicit, are introduced in economic evaluation by the decision maker .The decision making process will be influenced by the subjective judgment of the management as much as by the result of systematic analysis.,
