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This lesson covers project selection and depreciation. When selecting a project; consider the following:
- Return on Investment (ROI)
- Internal Rate of Return (IRR)
- Net Present Value (NPV)
- Benefit Cost Ratio (BCR)
It is also important to consider opportunity cost as well as sunk cost, which is money that has already been spent. Also consider depreciation, which can be straight line and simply lose value over time or accelerated, which happens at a much faster rate. [toggle_content title="Transcript"] Another thing to know is how to select the project within the cost knowledge area. You have return on investments, internal rate of return, net present value and benefit cost ratio. The rule of thumb is the larger the number, the better and the faster the better. Return on investments; here's an example of $4000 versus $2000. Remember higher is better, so you want to take a project that has four thousand dollars for a return on investment. IR; You also want to take the largest number, so 15 percent versus four percent. You are going to take 15 percent for an internal rate of return. Net present value, so basically you're trying to figure out what the value of the project is going to be currently looking into the future. You want to go the higher number. $200 versus $400 you are going to go with $400. Benefit cost ratio, once again go on the higher number, 2 to 1 versus 3 to 1, you're going to go with 3 to 1. Remember higher number and faster is better. A couple of more terms you need to know under cost knowledge area is opportunity cost. Opportunity cost is the project that you didn't take. If you had two projects one was $9 million the other one was 8.5 million dollars, the opportunity cost of taking the $9000000 one is you do not take the 8.5 million dollar one. PMI costs $8.5 million, your opportunity cost. Sunk cost is money that has been already spent. You do not consider sunk costs when considering to continue a project or not. Sunk costs is money that is lost and cannot be recovered. The only thing you need to know is how to use depreciation. Example you buy laptops, they depreciate pretty fast. An example I am giving is a straight line, Straight line as it depreciates over a period of time that has been determined. I have given four years for a laptop worth $9500. Every year I want depreciate $2500 until I reach zero. This straight line, every year I can figure out what that depreciation is. There is also an accelerated one. Accelerated uses formulas to speed up the deceleration...the depreciation of that item. [/toggle_content]