In order to compare the costs of different alternatives, the input cash flow for the alternatives must be represented in equivalent values. The equivalent value of a cash flow accounts for the time-value of money. That is, it is preferable to pay the same amount of money later than to pay it now, since the money can earn interest while you keep it. The MARR (minimum attractive rate of return) reflects the cost of capital or the opportunity cost of money—that is, the interest that would have been earned on the savings that is foregone by making the investment. The MARR is used to discount the cash flow of alternatives into equivalent values at a fixed point in time. The MARR can vary for each investor and for each investment. Therefore, the MARR= option must be specified in the COMPARE statement if present worth of cost (PWOFCOST option) comparison is specified.
Present worth of cost reflects the equivalent amount at loan initialization of the loan cash flow discounted at MARR, not accounting for inflation. Present worth of cost accounts for the down payment, initialization costs, discount points, periodic payments, and the principal balance at the end of the report period. Therefore, it reflects the present worth of cost of the asset, not the loan. It is meaningful to use minimization of present worth of cost as a selection criterion only if the assets (down payment plus loan amount) are of the same value.
Another economic selection criterion is the rate of return (internal rate of return) of the alternatives. If interest is being earned by an alternative, the objective is to maximize the rate of return. If interest is being paid, as in loan alternatives, the best alternative is the one that minimizes the rate of return. The true interest rate reflects the effective annual rate charged on the loan based on the cash flow, including the initialization cost and the discount points.
The effects of taxes on different alternatives must be accounted for when these vary among different alternatives. Since interest costs on certain loans are tax-deductible, the comparisons for those loans are made based on the after-tax cash flows. The cost of the loan is reduced by the tax benefits it offers through the loan life if the TAXRATE= option is specified. The present worth of cost and true interest rate are calculated based on the after-tax cash flow of the loan. The down payment on the loan and initialization costs are assumed to be not tax-deductible in after-tax analysis. Discount points and the interest paid in each periodic payment are assumed to be tax-deductible if the TAXRATE= option is specified. If the TAXRATE= option is not specified, the present worth of cost and the true interest rate are based on before-tax cash flow, assuming that the interest paid on the specified loan does not qualify for tax benefits.
The other two selection criteria are breakeven analysis of periodic payment and interest paid. If the objective is to minimize the periodic payment, the best alternative is the one with the minimum periodic payment. If the objective is to minimize the interest paid on the principal, then the best alternative is the one with the least interest paid.
Another criterion might be the minimization of the outstanding balance of the loan at a particular point in time. For example, if you plan to sell a house before the end of the loan life (which is often the case), you might want to select the loan with the minimum principal balance at the time of the sale, since this balance must be paid at that time. The outstanding balance of the alternative loans is calculated for each loan comparison period by default.
If you specified the START= option in the PROC LOAN statement, the present worth of cost reflects the equivalent amount for each loan at that point in time. Any loan that has a START= specification different from the one in the PROC LOAN statement is not processed in the loan comparison.
The loan comparison report for each comparison period contains for each loan the loan label, outstanding balance, and any of the following measures if requested in the COMPARE statement: periodic payment (BREAKPAYMENT option), total interest paid to date (BREAKINTEREST option), present worth of cost (PWOFCOST option), and true interest rate (TRUEINTEREST option). The best loan is selected on the basis of present worth of cost or true interest rate. If both PWOFCOST and TRUEINTEREST options are specified, present worth of cost is the basis for the selection of the best loan.
You can use the OUTCOMP= option in the COMPARE statement to write the loan comparison report to a data set. The NOCOMPRINT option suppresses the printing of a loan comparison report.