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Seatwork
Present Worth Analysis
Formulating Alternatives
Single and equal-life alternatives
Different-life alternatives
FORMULATING ALTERNATIVES
Types of alternatives
Mutually exclusive (ME) - only
PW OF A SINGLE ALTERNATIVE
Single Project
Analysis
Calculate PW at stated MARR
Criterion: If PW 0,
project is economically justified
PW > 0; project is
economically justified
period
PW = - 10,000(0.95)
+ 10,000(P/F,3.5%,20)
+ 300(P/A,3.5%,20)
= Php-210.62
0 1
19 20
EQUAL-LIFE ME ALTERNATIVES
Calculate PW of each alternative at MARR
Equal-service of alternatives is assumed
Selection criterion: Select alternative with most
favorable PW value, that is, numerically largest
PW value
PW1
Php -1,500
-2,500
2,500
PW2
Php -500
500
1,500
Select
Example 3:
Two ME cost alternatives for traffic analysis.
Revenues are equal. MARR is 10% per year.
Select one.
Estimate
P, Php /unit
Electricpowered
Solarpowered
-2,500
-6,000
-900
-50
S, Php
200
100
n, years
Example 3:
Determine PWE and PWS; select larger PW
PWE = -2500-900(P/A,10%,5)+200(P/F,10%,5)
= Php -5788
PWS = -6000-50(P/A,10%,5)+100(P/F,10%,5)
= Php -6127
Conclusion: PWE > PWS; select electricpowered
DIFFERENT-LIFE ALTERNATIVES
DIFFERENT-LIFE ALTERNATIVES
DIFFERENT-LIFE ALTERNATIVES
LCM Method
Assumptions (may be unrealistic at times)
Same service needed for LCM years (e.g., LCM of 5
and 9 is 45 years!)
Alternatives available for multiple life cycles
Estimates are correct over all life cycles (true only if
cash flow estimate changes match
inflation/deflation rate)
Evaluation approach: obtain LCM, repeat purchase
and life cycle for LCM years; calculate PW over LCM;
select alternative with most favorable PW
DIFFERENT-LIFE ALTERNATIVES
Example 4:
DIFFERENT-LIFE ALTERNATIVES
F = 1,000
PWA = ?
Location A
P = -15,000
A = -3,500
F = 2,000
PWB = ?
P = -18,000
A = -3,100
Location B
DIFFERENT-LIFE ALTERNATIVES
LCM evaluation
LCM is 18 years
Repurchase A twice (years 6 and 12)
Repurchase B once (year 9)
Assume all cash flow estimates (including first cost
end-of-lease deposit return) are correct for
repeated life cycles to total 18 years
Select location B
Note: Selection changed from 5-year study period
TRY THIS!
1. The manager of a canned food processing
plant (Corny Corned Beef) must decide
between two different labeling machines.
Machine A will have a first cost of P5,200,000,
an annual operating cost of P 380,000, and a
service life of 4 years. Machine B will cost
P6,100,000 to buy and will have an annual
operating cost of P150,000 during its 4-year
life. At an interest rate of 10% per year, which
should be selected on the basis of a present
worth analysis?
TRY THIS!
2. A chemical processing corporation (Kemika) is
considering three methods to dispose of a nonhazardous chemical sludge: land application, fluidizedbed incineration, and private disposal contract. The
estimates for each method are shown. Determine which
has the least cost on the basis of a present worth
comparison at 10% per year for the following scenarios:
(a) The estimates as shown
(b) The contract award cost increases by 20% every 2year renewal.
(c) Do you have any other comments for the options
given?
TRY THIS!
Land
Application
-6,500,000
Incineration
-45,000,000
-4,750,000
-3,000,000
-6,000,000
130,000
3
15,000,000
6
0
2
Contract
0
TRY THIS!
3. A mechanical engineer is considering two
robots for purchase by a laptop-assembly
company. Robot X will have a first cost of
P8,000,000, an annual maintenance and
operation (M&O) cost of P3,000,000, and a
P400,000 salvage value. Robot Y will have a
first cost of P9,700,000, an annual M&O cost of
P2,700,000, and a P500,000 salvage value.
Which should be selected on the basis of a
present worth comparison at an interest rate of
15% per year? Use a 5-year study period.
REFERENCES:
Blank, Leland & Anthony Tarquin. Engineering
Economy (7th Edition). New York: The
McGraw-Hill Companies, Inc., 2012.
METU Open Courseware (Engineering
Economy and Cost Analysis)
http://ocw.metu.edu.tr/course/view.php?id=80