Livestock Economics, Marketing and Business Management

DISCOUNTED MEASURES

• Here the cash flows which are accrued in the project over the project period  are discounted with an appropriate discount rate.
• Generally the exiting interest rate is taken as discount rate for this purpose.
• The discount rate cash flows are the best estimates to measure the worth of the projects.
• The following are  three important discounted  measures followed in project feasibility  studies
• Net Present Worth (NPW)
  • Benefit Cost Ratio (BCR)
  • Internal rate of Returns (IRR)

Net Present worth (NPW)

• The Net Present worth which is also called as Net Present Value (NPV) is nothing but the present value / worth of the cash flow stream in the project.
• The cash flow in the project is the different between cash inflow and cash outflow.
• The investments made in the projects are generally called costs or cash outflows or gross returns.
• The cash flow discounted with an appropriate discount rate will give the net present worth of the project.

• B_t is cash flows in t^th year,
• C_t is cash outflows in t^th year, t is 1 to 10 years that is life span of the project and r is the rate of interest.
• The choice criterion using NPW is that the project with positive NPW is accepted for implementation and the project with negative NPW is rejected.
• If the NPW is NPW is zero, the entrepreneur is left in indifference. If he is to choose among different projects, the project with highest NPW has to be chosen.

Benefit Cost Ratio (BCR)

• The Benefit Cost Ratio is worked out by dividing the present value of cash inflows by the present value of cash outflows.
• If the BCR is more than one, that project is accepted and if BCR is less than one the project is rejected.
• Among the different projects, the project with highest BCR is to be selected.