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Old 09-01-2018, 01:27 PM
broleline broleline is offline
Join Date: May 2014
Posts: 12
Default EOM 1 20 years vs 21 years

This might be pedantic, but everywhere I see the range that we should consider is 20 years.

But on the 2006 budget tab , it is showing 21 full years. 2006 thru 2026 inclusive.

This throws of the PV of the totals on that 2006 budget tab so we get different values than on the Present Value of Add'l Costs tab where they're all using inputs of 20 years.

Was anyone else bothered by this? I was thinking of deleting the last year maybe on the budget so it's consistent
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Old 09-07-2018, 12:05 PM
NchooseK NchooseK is offline
SOA Non-Actuary
Join Date: Nov 2012
Location: Philly area
College: Swarthmore College (BA Mathematics), Villanova University (MS Applied Stat)
Posts: 353

Don't delete the last year.

Yes, the budget spans 21 years. So, for example, some expenses are on the budget for all 21 years.

Purchasing the mine will save you 1.5M each year for only 20 years. So for all years except the last (2026), the benefits of owning the mine shave 1.5M off the budget.

Think of 20 years of 1.5M annual savings as a 20-year annuity. Expenses are paid at the beginning of the year. I also assumed the 1.5M annual savings are credited at the beginning of the year because savings are simply would-be expenses you do not have to pay. Therefore, your savings are a 1.5M 20-year annuity-due. In other words, your first savings "payment" is 1.5M at the beginning of 2006 and your last savings "payment" is at the beginning of 2025.

I am not sure if you have realized this, but the 20-year 1.5M annual savings are SEPARATE from the items listed on the budget.

Step 1) Determine the expenses you will be paying.
Step 2) Compute the PV of the expenses you are paying.
Step 3) Subtract the PV of the 20-year savings annuity. The result may be interpreted as the EPV of the cost of acquiring the south fart mine. HOWEVER, perform sensitivity testing to determine if being willing to pay the EPV is prudent. You need to consider risk when determining an appropriate walk-away point.

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Last edited by NchooseK; 09-07-2018 at 12:09 PM..
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