Graduate Thesis Or Dissertation
 

Improved justifications and sensitivity analysis for capital expenditures

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https://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/tb09j8073

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  • In this study, three main issues are discussed: possible bias arising when inflation effects are neglected in engineering economy studies, capital projects authorization forms which are not designed to include inflation effects in the calculations,'and the introduction of a new graphical technique for capital expenditure sensitivity analysis. Approaches are described which include inflation in economic studies by the use of current and constant dollars. The partitioning of cost into individual components is proposed in order to include differential price trends. Numerical examples are presented. A current dollar analysis using partitioned -Factors is recommended. Capital authorization forms were obtained from industries in order to analyze the characteristics of in-:'ormation actually used in these organizations. By extracting the more relevant elements from them and adding improvements, a new s.,.!t of forms is developed. The set included worksheets for the calculation of the cash flow in current and constant dollars that are analyzed to determine the present worth, rate of return, and payback period. Space for a graphical sensitivity analysis display is also provided. A graphical technique, the trilinear chart, is adapted to represent the different elements in economic studies. Its characteristics are discussed with numerical examples which focus on capital projects. A sequence of charts is constructed to analyze the sensitivity of investment proposals with respect to possible deviations from expected values. SENSOR, a computer program, is developed to assist in the plotting of the charts on a flatbed plotter or in a time sharing terminal. It is concluded that the cost partitioning gives a more realistic measurement of the inflation effects for the evaluating of investment proposals. The forms presented can be implemented in most industries with minor changes and will be helpful in minimizing calculation errors. Trilinear charts have considerable potential for use in customized sensitivity analysis in standard situations and for presentation of recommendations.
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