This textbook is an introduction to the concepts of the time value of money and related decision criteria used to evaluate investments. Application of the criteria in before-tax and after-tax investment situations provides better understanding of the three steps of economic evaluations which include: 1) defining the options unique to an investment decision, 2) analyzing the economically equivalent measure of profit or cost potential for each option and, 3) properly interpreting the results. Measuring the economic equivalence of different investment opportunities means properly addressing the relevant time value of money considerations and other factors such as inflation and taxes to name a few. A person may have a good understanding of the alternatives, make a proper setup and analysis of the evaluation model, and then improperly interpret results. The text examples and problems in each chapter are designed to provide the reader with a comprehensive approach to evaluating the economic equivalence of both income-producing and service-producing alternatives. This is what led to the text title, Economic Evaluation and Investment Decision Methods.
Other than the obvious engineering or geological differences, whether you are considering development or expansion of an existing ore body, oil and gas lease, refinery or chemical plant, pipeline or real estate, the economic principals are equally applicable. Terminology is probably the biggest single difference among authors, industries and analysts using these concepts. For example, a compound interest rate is a common way to measure project profitability. However, the measure might be defined as a project rate of return, internal rate of return, discounted cash flow rate of return, or yield to maturity. These measures are not to be confused with measures such as return on investment, return on capital, or return on assets. These are common financial measures looking more frequently at historical data focused on earnings, rather than expected future performance placing an emphasis on cash flow. Both have relevance but are not interchangeable. Each chapter introduces new concepts that are illustrated by examples. At the end of each chapter are problems designed to provide the reader with an opportunity to explore similar calculations on their own.