Net Benefit Analysis

Net benefit analysis simply involves subtracting total costs from total benefits. ,It ,is easy to calculate, easy to interpret and easy to present. The main drawback is that it does not account for time value of money and doe~ not discount future cash flow. Cash flow amounts are shown for three time periods: Period 0 is the present period, followed by two succeeding periods. The negative numbers represent cash outlays. A cursory I the numbers show that the net benefit is $550.

The time value of money is extremely important in evaluation processes. Let us explain what it means. If you were faced with an opportunity that generates $3,000 a year, how much would you be willing to in Obviously, you'd like to invest less than the\$3,000. To earn the same ill five years from now, the amount of investment would 'be even less. Suggested here is that money has a time value. Today's dollar and to row's dollar are not the same. The time lag accounts for the time Val money.

The time value of money is usually expressed in the form of into the funds invested to realize the future value. Assuming compounded interest, the formula is:

where

F = Future value of an investment. 

P = Present value of the investment.

i = Interest rate per compounding period.

n = Number of years.

For example, $3,000 invested in Treasury notes for three years at 10 percent interest would have a value at maturity of:

                                  

F =. $3,000(1 + 0.10)

=1 = 3,000(1.33) 

=$3,993