Investment Decisions: Annuities and Discounting Costs

This lecture discusses the financial principles of investment decisions, focusing on the conversion of one-off costs into equivalent annual costs through annuity calculations. The instructor explains the concept of present value and how to determine the annuity that equates to a one-time investment, using examples such as the purchase of electric vehicles. The lecture covers the capital recovery factor and its role in calculating annual costs, emphasizing the importance of discounting future cash flows to present value. The instructor illustrates how to assess the profitability of investments by comparing net present values (NPV) and internal rates of return (IRR). The discussion includes practical applications, such as evaluating the cost-effectiveness of battery electric vehicles versus internal combustion engine vehicles, and the impact of different discount rates on investment decisions. The lecture concludes with insights on ranking investment projects based on their IRR and the significance of hurdle rates in determining project viability.