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NPV - Losses Only

 
 
Reply Mon 27 Sep, 2010 04:17 pm
Hi All,

In my textbook, I have the following:

.............
If during each year i from the beginning of the system lifetime, the system economical losses are V_i, the

total losses during the entire lifecycle (m years) in the present values can be obtained as:
L = sum(i=1 to m) (V_i / (1+r)^i )

The net present value of the profit from the investments into the system reliability improvement is:
C = L - C_(investment)
............

Usually in the texts I see that V_i is (cash inflow - outflow). But in this particular textbook problem, V_i is

only econoimcal losses.


(1) Is it valid to have V_i as only losses in the NPV formula?

(2) Does it mean that finally L is a negative amount ? Like
In 2001 (since 2000), V_1 = -100
In 2002 (since 2000), V_2 = -40
In 2003 (since 2000), V_3 = -120

(3) What does "NPV of the profit from the investments" C mean in this case?
Does C mean total loss in say 10 years? If so, why the word "Profit" in the above sentence? Is C

negative?

(4) When comparing multiple alternatives (multiple values of C, assuming C is negative), how can the best

alternative be chosen? Least absolute value of C?


Thanks,
Tims
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