Beruflich Dokumente
Kultur Dokumente
Budhijanto
REFERENCES:
a. Sullivan, W.G., Wicks, E.M., and Luxhoj,
J.T., 2003, Engineering Economy, 12 ed.,
Pearson Education, Inc., New Jersey.
b. Garrett, D.E, 1989, Chemical Engineering
Economics, Van Nostrand Reinhold, New
York.
c. Peters, M.S. and Timmerhaus, K.D., 2003,
Plant Design and Economics for Chemical
Engineers, 5 ed., McGraw-Hill, Inc., New
York.
d. Turton, R., Bailie, R.C., Whiting, W.B., and
Shaeiwitz, 2003, Analysis, Synthesis, and
Design of Chemical Processes, 2 ed, Pearson
Education, Inc. Publishing as Prentice Hall
PTR.
Budhijanto,TeknikKimiaUGM,2012
Page1
45 %
45 %
10 %
Page2
A 75
75 > B 60
60 > C 45
45 > D 30
30 > E
Policy:
Closed book exams
No exam remedy
Questions regarding exam/homework/project
grades/scores must be submitted in a week after
students received their grades/scores
No late-homework
A minimum of 75% class attendance to get a
final grade
Budhijanto,TeknikKimiaUGM,2012
Page3
Page4
Page5
4. CH 3OH + H 2 S CH 3 SH + H 2 O
(catalytic, 200 500oC, 1 25 atm)
All these methods are different one from the
others in:
1. Raw Materials
2. Side products
3. Process equipments
4. Energy consumption
5. New/old process
6. etc.
Which one? the most economical one.
How? economic evaluation.
Engineering Economics : a tool to assist in
decision making
a. Is an investment plan economically
attractive?
b. Among several investment alternatives,
which one is the most economically
attractive?
Economics is one of the Chemical Engineering
Tools.
Chemical Engineering Tools:
1. Mass balance
Budhijanto,TeknikKimiaUGM,2012
Page6
2.
3.
4.
5.
6.
Energy balance
Equilibria
Rate processes
Economics
Humanity
Page7
Page8
HOMEWORK # 1:
Explain the following cost terminologies
(References : 1. Sullivan, et. al. (2003); 2.
Aries and Newton (1955)). Compare your
Budhijanto,TeknikKimiaUGM,2012
Page9
Page10
Page11
where
p = the selling price per unit
D = the demand
a
0 D , and a > 0, b > 0.
b
The price of luxuries is greatly increased the
demand can readily decrease.
The price of true necessities is greatly increased
the consumers find it difficult to reduce their
consumption the money saved from not
buying luxuries is used to pay the increased cost
of necessities.
Budhijanto,TeknikKimiaUGM,2012
Page12
4. Competition
Perfect competition : a situation in which any
given product is supplied by a large number of
vendors and there is no restriction on additional
suppliers entering the market there is
assurance of complete freedom on the part of
buyer and seller.
Perfect monopoly : a unique product or service
is available from only a single supplier and the
vendor can prevent the entry of all others into
the market. The buyer is at the complete mercy
of the supplier in terms of the availability and
price of the product.
Perfect monopolies rarely occur in practice,
because: (i) any product can usually be
substituted by other products with satisfactory
performance; (ii) governmental regulations
prohibit monopolies.
5. Total Revenue (TR) Function
Total revenue = TR = (selling price per unit)
(the number of units sold) = pD
If: p = a bD, then:
Budhijanto,TeknikKimiaUGM,2012
Page13
a
, and
b
a > 0, b > 0.
)
) a
dTR
where:
= a 2 bD = 0 D =
2b
)dD
D = the demand that will produce maximum TR.
Page14
a
for 0 D , dan a > 0, b > 0.
b
In order for a profit to occur, two conditions
must be met:
a. (a cV) > 0;
b. TR > CT
The relationship is shown in the following
figure.
Page15
D1' , D '2 =
(a c V ) (a c V ) 4( b )( C F )
2( b )
2
12
CF
Profit/loss = (p cV)D CF = 0 D ' =
p cV
Budhijanto,TeknikKimiaUGM,2012
Page16
Case study:
Data of an engineering consulting firm: Variable
cost (cV) = $62 per standard service hour;
Charge-out rate (p) = $85.56 per hour;
Maximum output of the firm = 160,000 hours
per year; Fixed cost (CF) = $2,024,000 per year.
Calculate:
a) Breakeven point (BEP)
b) Sensitivity analysis by calculating the
percentage reduction of BEP if CF is reduced
10%; if cV is reduced 10%; if CF and cV are
reduced 10% each; and if p is increased 10%.
Answer:
a) At breakeven point:
Total revenue = total cost
CF
pD' = C F + c V D' D ' =
p cV
$2,024,000
D' =
= 85,908 hours per year
$85.56 $62
85,908
D' =
= 0,537 or 53,7% of maximum
160,000
capacity.
D ' = $85,56(85,908 ) = $7,350,288
Budhijanto,TeknikKimiaUGM,2012
Page17
Page18
10% reduction in cV
10% reduction in CF,
10% reduction in cV
10% increase in p
20,8
28,7
26,6
Conclusion:
1. BEP is very sensitive to the change in p.
2. BEP is more sensitive to the change in cV
than to the change in CF, but reduction in
both CF and cV should be sought.
Lower BEP is desired because:
1. The lower BEP, the less likely that a loss
will occur during market fluctuations.
2. If the selling price remains constant (or
increases), at any level of operation, the
lower BEP, the larger profit.
Page19
Case study:
Without insulation, heat loss through the roof of
a single-story home (2400 ft2) is:
Q = 99,9 10 6 Btu / year
The cost of several insulation alternatives and
associated space heating loads (Q) for the house
are:
Investment cost,
$
Annual heating
load (Btu/year)
Insulation
R19
R30
900
1,300
R11
600
74106
69,8106
67,2106
R38
1,600
66,2106
R11
Insulation
R19
R30
R38
600
900
1,300
1,600
74106
69,8106
67,2106
66,2106
1,604.45
1,513.39
1,457.02
1,435.34
Budhijanto,TeknikKimiaUGM,2012
Page20
Without insulation:
Annual heating load = 99,9106 Btu/year
The cost of heat loss over 25 years
= (99,9106)(21.681810-6)(25) = $54,150.30
Total life cycle costs = $54,150.30 + 0 =
$54,150.30
R38 has the minimum total life cycle cost
choose R38 insulation.
Another Solution: examine the incremental ()
differences among the alternatives (The 2nd
Principle of Engineering Economics: Focus on
the differences)
a. R19 vs R11:
(R19 R11)
investment = $(900 600) = $300
savings/year = $[1,513.39 ( 1,604.45)] =
$91.06
Remark: negative because these are costs.
Budhijanto,TeknikKimiaUGM,2012
Page21
Page22
Case study:
Two machines are being considered for the
production of a part. The capital investment
associated with the machines is about the same.
The important differences between the machines
are their: 1) production capacity (= production
Budhijanto,TeknikKimiaUGM,2012
Page23
(1 3% ) = $8148
7
100
hr day part
Page24
= $4340
Analogous Machine B = $4800
Profit per day
Machine A: $8148 $4340 = $3808
Machine B: $8424 $4800 = $3624
Select machine A.
b. Let X = % parts rejected for machine B.
Profitability machine B = machine A. Thus:
parts hours $12
130
(1 X ) $4800
6
hour day part
= $3808
(3808 + 4800)
X = 1
= 0.08
(130)(6)(12)
Thus, percent of parts rejected for Machine B
can be no higher than 8%.
Homework: Study Sullivan et. al, 2003, pp. 56
61.
Budhijanto,TeknikKimiaUGM,2012
Page25
: Principal/Present Value
: Future Value
: Years between F and P
Page26
Page27
Page28
Types of Interest
1. Simple interest
the amount of interest paid is based solely on
the initial investment. Thus,
I = Pin
where
P : principal or Present Value
i : interest rate based on length of one period
Pi : interest earned during one period
n : the number of interest periods
I : total simple interest earned during n
periods
The total amount of money after n periods is Fn.
Fn = P + I = P(1 + in )
Example:
Someone puts his money as much as $1000 in a
bank. After 2 years, his investment will become
$1150. The length of one interest period is 1
year. What are the values of P, Fn, i, and n?
Answer:
P = $1000; Fn = $1150; n = 2.
Fn = P(1 + in )
Page29
2. Compound interest
Budhijanto,TeknikKimiaUGM,2012
Page30
Interest
earned
per
period (i =
interest rate
based on the
length of one
period)
Investment
value at the
end of a
period
P+Pi = P(1+i)
P(1+i) + P(1+i)i
= P(1+i)2
P(1+i)2+ P(1+i)2i
= P(1+i)3
Fn = P(1+i)n
1
2
P
P(1+i)
Pi
P(1+i)i
P(1+i)2
P(1+i)2i
P(1+i)n
P(1+i)n-1i
Page31
P=
Fn
(1 + i )
$5,000
(1 + 0.06)
= $3,736.29
Remark:
- If interest rate changes each period:
n
Thus:
Budhijanto,TeknikKimiaUGM,2012
Page32
i eff = 1 + nom 1
m
1
= lim 1 + nom
m
m
From calculus:
mi
i nom nom
lim 1 +
= e = 2,71828...
m
m
Hence:
i eff = ei nom 1
Budhijanto,TeknikKimiaUGM,2012
Page33
Case study:
Money as much as $100 will be invested with
nominal annual interest rate 20%. Calculate the
total amount of money after 1 year and the
effective annual interest rate if the length of
interest period =
a. 1 year (20% compounded annually)
b. 0,5 year (20% compounded semiannually)
c. 1 day if 1 year = 365 days (20%
compounded daily)
d. 0 (20% compounded continuously)
Answer:
P = $100, inom = 0,2
a. m = 1/1 = 1;
m
1
i nom
0,2
i eff = 1 +
1 = 1 +
1 = 0,2
1
m
i eff = 1 + nom 1 = 1 +
1 = 0,21
m
2
Budhijanto,TeknikKimiaUGM,2012
Page34
365
0,2
i eff = 1 + nom 1 = 1 +
1 = 0,2213
m
365
Page35
(2)
Amount
Owed at
Year Beginning
of Year
(3) =
10% x
(2)
Interest
Accrued
for Year
(4) = (2)
(5)
(6) = (3) + (5)
+ (3)
Principal Total End-ofTotal
Payment
Year
Money
Payment
Owed at
(Cash flow)
End of
Year
$8,000
$6,000
$4,000
$2,000
_______
20,000$yr
$800
$600
$400
$200
_______
$2,000
(total
interest)
$8,800
$6,600
$4,400
$2,200
$2,000
$2,800
$2,000
$2,600
$2,000
$2,400
$2,000
$2,200
_______ ___________
$8,000
$10,000
(total amount
repaid)
$8,000
$8,000
$8,000
$8,000
_______
32,000$yr
$800
$800
$800
$800
_______
$3,200
(total
interest)
Budhijanto,TeknikKimiaUGM,2012
$8,800
$8,800
$8,800
$8,800
0
$800
0
$800
0
$800
$8,000
$8,800
_______ ___________
$8,000
$11,200
(total amount
repaid)
Page36
$8,000
$6,276
$4,380
$2,294
_______
20,960$-yr
$800
$628
$438
$230
_______
$2,096
(total
interest)
$8,800
$6,904
$4,818
$2,524
$1,724
$2,524
$1,896
$2,524
$2,086
$2,524
$2,294
$2,524
_______ ___________
$8,000
$10,096
(total amount
repaid)
$8,000
$8,800
$9,680
$10,648
_______
$800
$880
$968
$1,065
_______
37,130 $yr
$3,713
(total
interest)
$8,800
$9,680
$10,648
$11,713
0
0
0
0
0
0
$8,000
$11,713
_______ ___________
$8,000
Summary
Plan Total dollar- Total interest
years (sum paid (sum of
of column column (3) in
the above
(2) in the
table)
above table)
1
$20,000
$2,000
2
$32,000
$3,200
Budhijanto,TeknikKimiaUGM,2012
$11,713
(total amount
repaid)
Total
interest /
total
dollaryears
0.10
0.10
Page37
3
4
$20,960
$37,130
$2,096
$3,713
0.10
0.10
Page38
Budhijanto,TeknikKimiaUGM,2012
Page39
Page40
b. Discount
c. The effective annual interest rate, if the
present price of the bond is $700.
d. Repeat question a) for continuous interest in
which the nominal annual interest rate is 3%.
Answer:
F
$1,000
a. P =
=
= $888
n
4
(1 + i eff ) (1 + 0.03)
b. Discount = F P = $1,000 - $888 = $112
1n
14
F
1000
c. i eff = 1 =
1 = 0,0935
P
700
F
F
$1,000
d. P =
=
=
= $869
(
n
i nom n
0,03 )(4 )
e
(1 + i eff ) e
ANNUITIES
Annuity: a series of equal payments occurring at
equal time intervals.
Types of annuity:
1. Ordinary annuity: payments occur at the end
of each interest period.
2. Annuity due: payments are made at the
beginning of each interest period
Budhijanto,TeknikKimiaUGM,2012
Page41
A(1 + i ) + A
where
i : the interest rate based on the payment period
n : the number of discrete periods
F(1 + i ) F = Fi = A(1 + i )n A
(1 + i )n 1
F = A
Budhijanto,TeknikKimiaUGM,2012
Page42
(1 + i )n 1
= (F/A,i,n) : the discrete uniform
Let,
m : the number of interest periods per year;
n : annuity term (years);
A : the total of all ordinary annuity payments
occurring regularly and uniformly throughout a
year
Then,
Annuity = A / m
Total number of annuity payment periods over n
years = mn
A [1 + (i nom m )]mn 1
F=
(i nom m )
m
Page43
(i nom m )
m m
e(i nom n ) 1
= A
i
nom
F = A i
e nom 1
Proof:
If we compare the equations for continuous
compounding to the equations for discrete
compounding, we may conclude that
e
1 i i e
1
1
1
1 i
e
F A
A
i
1
e
The present worth of an annuity : the principal
(P) which would have to be invested at the
present time at compound interest rate i to yield
Budhijanto,TeknikKimiaUGM,2012
Page44
(1 + i )n 1
P = A
i(1 + i )n
(1 + i )n 1
= (P/A,i,n) : the discrete uniform
n
i(1 + i )
series present-worth factor (= the series presentworth factor = present worth of annuity).
i(1 + i )n
i
nom
e(i nom n ) 1
P = A
i ei nom n
nom
If cash flows occcur at discrete intervals, but
compounding is continuous throughout the
interval, the equation is:
Budhijanto,TeknikKimiaUGM,2012
Page45
e
e
1 e
uniform
series
compoundBudhijanto,TeknikKimiaUGM,2012
Page46
F to A
P to A
A to P
amount
factor, future
worth of
annuity
(A/F, i, n) sinking fund
factor
(1 + i )n 1
(A/P, i, n) capital
i(1 + i )n
recovery
(1 + i )n 1
factor
(P/A, i, n) discrete
(1 + i )n 1
uniform i(1 + i )n
series
presentworth factor,
present
worth of
annuity
Page47
Conversion
Symbol
P to F
(F/P,inom, n)
F to P
(P/F, inom, n)
A to F
(F/A, inom, n)
F to A
(A/F, inom, n)
P to A
(A/P, inom, n)
Budhijanto,TeknikKimiaUGM,2012
Common
Formula
Name
Continuous
e
compounding
compoundamount
factor (single
cash flow)
Continuous
e
compounding
present
equivalent
factor (single
cash flow)
Continuous
e
1
compounding e
1
compound
amount
(uniform
series)
Continuous
e
1
compounding e
1
sinking fund
factor
e
1 e
Continuous
e
1
compounding
capital
recovery
Page48
A to P
factor
(P/A, inom, n) Continuous
compounding
present
equivalent
(uniform
series)
e
e
1
1 e
A to F
F to A
Symbol
Common
Formula
Name
(F/, inom, n) Continuous
e
1
compounding
i
compound
amount
factor
(continuous,
uniform cash
flows)
i
(/F, inom, n) Continuous
compounding e
1
sinking fund
Budhijanto,TeknikKimiaUGM,2012
Page49
P to A
A to P
factor
(continuous,
uniform cash
flows)
(/P, inom, n) Continuous
compounding
capital
recovery
factor
(continuous,
uniform cash
flows)
(P/, inom, n) Continuous
compounding
present
equivalent
(continuous,
uniform cash
flows)
i
e
e
i
e
1
1
e
Case Study:
A saving account pays a nominal interest rate of
6% per year compounded monthly. Someone
opens an account with a deposit of $1000 and
then deposits $50 at the end of each month for a
period of two years followed by a monthly
deposit of $100 for the following three years.
Budhijanto,TeknikKimiaUGM,2012
Page50
Page51
F = ($1000)(F/P,0.005,60) +
{($50)(F/A,0.005,24)}(F/P,0.005,60-24) +
($100)(F/A,0.005,36)
F = ($1000 )(1 + 0.005 )60 +
(1 + 0.005 )24 1
36
(
)
(
)
1
0
.
005
$
50
+
+
0.005
(1 + 0.005 )36 1
($100 )
0
.
005
F = $6,804.16
Budhijanto,TeknikKimiaUGM,2012
Page52
0
.
005
(1 + 0.005)36 1
= $6,804.16
($50)
0.005
F = P(1 + i )n
Here, n is the number of interest periods during
service-life of the asset.
Budhijanto,TeknikKimiaUGM,2012
Page53
Case Study:
A new piece of completely installed equipment
costs $12,000, and will have a scrap value of
$2,000 at the end of its useful life. If the usefullife period is 10 years and the interest is
compounded at 6% per year, what is the
capitalized cost of the equipment?
Budhijanto,TeknikKimiaUGM,2012
Page54
Answer:
CV = $12,000; SV = $2,000
Assuming no inflation or deflation, the
replacement cost of the equipment at the end of
its useful life is CR = CV SV = $12,000 $2,000 = $10,000
Other data,
i = 0.06
n = 10
Then,
$10,000
K = $12,000 +
= $12,000 + $12,650
10
(1 + 0.06) 1
= $24,650
Hence, if the equipment is to perpetuate itself,
the amount of total capital necessary at the start
would be $24,650, which consists of $12,000 for
the equipment plus $12,650 for the replacement
fund. After 10 years, the $12,650 replacement
fund becomes $12,650(1.06)10 = $22,650. The
scrap value of the equipment is $2,000. Thus,
the total amount of money available at the end of
the 10th year is $24,650 (= K, capitalized cost).
Budhijanto,TeknikKimiaUGM,2012
Page55
Budhijanto,TeknikKimiaUGM,2012
Page56
Page57
1
F
G 1
i
G 1
i
1
i
i
1
1 i
i
i
1
1 i
1
i
1
1 i
nG
i
G
i
Budhijanto,TeknikKimiaUGM,2012
1
1
i
1
n
i
1
1
i
i
i
i
i
i
1
1
i
1
i
1
1
i
i
i
nG
i
Page58
1
1
1
F
1
1
i
1
G
FA , i, n
i
i
i
nG
i
FA , i, n
F AF , i, n
G
F A, i, n
nG
i
1
A G
i
AG , i, n
nG
i
AF , i, n
n
1 in 1
AF , i, n
G
i
nG
i
i
1 in 1
G AG , i, n
Gradient to uniform
F PF , i, n
Budhijanto,TeknikKimiaUGM,2012
Page59
F A, i, n
G
1 in
i 1 i
i
PG , i, n
nG
i
1
1 in
1
i 1 i n
G PG , i, n
n
Gradient to
PG , i, n
1
i
PA , i, n
n PF , i, n
Budhijanto,TeknikKimiaUGM,2012
Page60
A 1
A 1
A 1
A 1
A PF , i, 1
A PF , i, 2
Budhijanto,TeknikKimiaUGM,2012
A PF , i, n
Page61
A PF , i, k
A 1
1
A
1
f
i
A
1 f
1
1
f
i
i
1
f
f
Let:
1 i
1 i
i R
1
1 f
1
= convenience rate
1 i
i R 1
1 f
Thus,
A
1
P
1 i R
1 f
1
1 i
i
1
1
1 i
1
1 i
1
1 i
1
i R
1
1 i
1
1 i
Budhijanto,TeknikKimiaUGM,2012
1 i
i R 1
1
f
Page62
When f
,i R
when n is finite.
P
P
PF, i
R, k
A
1 f
1
1 i
PF , i
A
1 f
1
1
R, k
1 i
A
1 f i R 1
A
1
1 i R
1 f
A
PA , i R , n
1 f
We know that
f, i
nA
1 f
Page63
A
P AP , i R , n = the year zero base of
annuity, which increases at a constant rate of f
per period.
Thus,
A
A1
PA , iCR , n
A 1
A 1
AP , i
A 1
R, n
A1
Budhijanto,TeknikKimiaUGM,2012
Page64
Page65
Page66
Budhijanto,TeknikKimiaUGM,2012
Page67
PW
F 1
where
i = effective interest rate, or MARR, per
compounding period
k = index for each compounding period (0kN)
Fk = future cash flow at the end of period k
Budhijanto,TeknikKimiaUGM,2012
Page68
Example 4.2:
An investment of $10,000 in a project will
produce a uniform annual revenue of $5,310 for
five years. At the end of the fifth year, the
salvage value of the project is $2,000. If the
annual expenses are $3,000 each year and
MARR is 10% per year, show whether this is a
desirable investment by using the PW method.
Answer:
Budhijanto,TeknikKimiaUGM,2012
Page69
PW
PW
10,000
5,310 3,000 PA , 0.1,5
2,000 PF , 0.1,5
1
1.1
2,000
10,000 2,310
0
0.1 1.1
1.1
FW
P 1
Example 4.5:
To increase the productivity of a certain manual
welding operation, a piece of new equipment
will be installed. The investment cost is $25,000.
At the end of the fifth year, the market value of
the equipment is $5,000. Using the new
equipment, the annual saving is $8,000. If the
firms MARR is 20% per year, is this proposal a
sound one? Use the FW and PW methods.
Answer:
Budhijanto,TeknikKimiaUGM,2012
Page70
$8,000
$8,000
$8,000
2
3
i = 20% per year
$8,000
$5,000
$8,000
$25,000
The Annual-Worth
Method)
Budhijanto,TeknikKimiaUGM,2012
Method
(The
AW
Page71
Budhijanto,TeknikKimiaUGM,2012
Page72
Example 4.6:
Use the AW method to solve example 4.5.
Answer:
R E = the annual saving = $8,000
I = $25,000
S = $5,000
AW = R E CR
Budhijanto,TeknikKimiaUGM,2012
Page73
where
Rk = net revenues or savings for the kth year
Ek = net expenditures including any investment
costs for the kth year
N = project life (or study period)
i'% = the IRR
Budhijanto,TeknikKimiaUGM,2012
Page74
Example 4.7:
A capital investment of $10,000 in a project will
produce a uniform annual revenue of $5,310 for
five years. The salvage value of the project is
$2,000. Annual expenses will be $3,000. The
company is willing to accept any project that
will earn at least 10% per year on all invested
capital. Determine using the IRR method
whether it is acceptable.
Answer:
Check:
The sum of cash inflows = 5($5,310) + $2,000 =
$28,550 > the sum of cash outflows = 5($3,000)
+ $10,000 = $25,000. Thus, i% is positive.
Budhijanto,TeknikKimiaUGM,2012
Page75
Page76
Budhijanto,TeknikKimiaUGM,2012
Page77
Mathematically:
The ERR is the i% at which
where
Rk = excess of receipts over expenses in period k
Ek = excess of expenditures over receipts in
period k
N = project life or number of periods for the
study
= external reinvestment rate per period
A project is acceptable when ERR MARR.
Example 4.8:
The following diagram shows a total cash flow
diagram of a project. When = 15% and MARR
Budhijanto,TeknikKimiaUGM,2012
Page78
$6,000
$6,000
$6,000
$6,000
$1,000
$1,000
$1,000
$1,000
$1,000
$5,000
$10,000
Answer:
E0 = $10,000
E1 = $5,000
Rk = $5,000
Thus,
(k = 0)
(k = 1)
for k = 2,3,4,5,6
Page79
where
= the simple payback period, the smallest
value of for which this relationship is satisfied.
Here, the time value of money and all cash flows
that occur after is ignored.
Only when = N (the last time period of the
projects life) is the salvage value included in
the determination of a payback period.
This method is recommended as supplemental
information only in conjunction with one or
more of the five methods previously discussed.
In the discounted payback period method, the
time value of money is considered.
Budhijanto,TeknikKimiaUGM,2012
Page80
where
i% = MARR
I = the capital investment made at the present
time (k = 0)
' = the discounted payback period, the smallest
value of for which this relationship is
satisfied.
Payback periods of three years or less are often
desired in U.S. industry.
Using the payback period methods to make
investment decisions should be generally be
avoided except as a measure of how quickly
invested capital will be recovered, which is an
indicator of project risk.
Budhijanto,TeknikKimiaUGM,2012
Page81
$8,000
$8,000
$8,000
$8,000
2
3
4
MARR = 20% per year
$5,000
$8,000
$25,000
Page82
Answer:
The investment balance diagram:
Comparing Alternatives
Rule:
Budhijanto,TeknikKimiaUGM,2012
Page83
Page84
Alternative
A
-$60,000
22,000
B
-$73,000
26,225
Capital investment
Annual revenues less
expenses
The useful life of each alternative is 4 years.
The cash flow diagram of alternative A:
4=N
$73,000
Page85
Page86
Budhijanto,TeknikKimiaUGM,2012
Page87
Page88
Page89
Page90
PW(i%)A
< PW(i%)B
FW(i%)A < FW(i%)B
Among the alternatives:
a. For investment alternatives, the one with the
greatest positive equivalent worth is selected.
b. For cost alternatives, the one with the least
negative equivalent worth is selected.
Example 5.1.
There are 3 mutually exclusive alternatives. The
differences that exist among them are in the
capital investments and the benefits (cost
savings).
Alternative
A
B
C
Capital
$390,000 $920,000 $660,000
investment
Annual cost
69,000 167,000 133,500
savings
The study period is 10 years, and the useful lives
of all 3 alternatives are also 10 years. Market
values of all alternatives at the end of their
useful lives are assumed to be zero. If the firms
Budhijanto,TeknikKimiaUGM,2012
Page91
Page92
Page93
Page94
OK
Thus: alternative B is preferred to A.
Note: it is always true that if PW 0, then IRR
MARR.
The Incremental Investment Analysis Procedure
The incremental investment analysis procedure
is recommended to avoid incorrect ranking of
mutually exclusive alternatives when using rate
of return methods.
1. Arrange (rank order) the feasible alternatives
based on increasing capital investment.
2. Establish a base alternative.
a. Cost alternatives the least capital
investment (LCI) is the base.
b. Investment alternatives if the LCI is
acceptable (IRR MARR; PW, FW, or AW
at MARR 0), select the LCI as the base. If
Budhijanto,TeknikKimiaUGM,2012
Page95
Page96
Alternative Capital
Annual revenues
investment
less expenses
A
$900
$150
B
$1,500
$276
C
$2,500
$400
D
$4,000
$925
E
$5,000
$1,125
F
$7,000
$1,425
Useful life of each alternative = 10 years
MARR = 10% per year
Study period = 10 years
Market values = 0
Using the IRR method, determine which
alternative should be chosen.
Answer:
A:
Page97
IRR
10.6%
16.4%
22.6%
15.1%
8.1%
Is increment
justified?
Yes
Yes
Yes
Yes
No
Page98
Page99
Page100
12 years
Page101
B1
0
B2
6
12 years
Page102
4
6 years
Assumed reinvestment of
cash flows at the MARR
for 2 years
B
6 years
Budhijanto,TeknikKimiaUGM,2012
Page103
Budhijanto,TeknikKimiaUGM,2012
Page104
Page105
Example 5-14:
A selection is to be made between two structural
designs, M and N. Revenues do not exist (or can
be assumed to be equal). Estimation:
Structure M Structure N
Capital investment
$12,000
$40,000
Market value
0
$10,000
Annual expenses
$2,200
$1,000
Useful life (years)
10
25
Using the repeatability assumption and the CW
method of analysis, determine which structure is
better if the MARR is 15% per year.
Answer:
Budhijanto,TeknikKimiaUGM,2012
Page106
Budhijanto,TeknikKimiaUGM,2012
Page107
A
0
1
0
0
Project
B
0
0
1
0
Explanation
C
0
0
0
1
Accept none
Accept A
Accept B
Accept C
Page108
1
2
3
4
5
6
7
8
0
1
0
0
1
1
0
1
0
0
1
0
1
0
1
1
0
0
0
1
0
1
1
1
Accept none
Accept A
Accept B
Accept C
Accept A and B
Accept A and C
Accept B and C
Accept A, B and C
Project
A B C
0 0 0
0 1 0
0 1 1
1 1 1
Explanation
Accept none
Accept B
Accept B and C
Accept A, B and C
Budhijanto,TeknikKimiaUGM,2012
Page109
Project
Explanation
A1 A2 B1 B2
0
1
0
0
0
1
1
0
0
0
0
1
0
0
0
0
1
1
0
0
0
1
0
1
0
1
0
0
0
0
0
1
0
1
0
1
Accept none
Accept A1
Accept A2
Accept B1
Accept B2
Accept A1 and B1
Accept A1 and B2
Accept A2 and B1
Accept A2 and B2
Example 5-16:
The following are five proposed projects.
Cash Flow ($000s) for End of Year
Project
0
1
2
3
4
B1
$50
$20
$20
$20
$20
B2
30
12
12
12
12
C1
14
4
4
4
4
C2
15
5
5
5
5
D
10
6
6
6
6
Budhijanto,TeknikKimiaUGM,2012
Page110
Budhijanto,TeknikKimiaUGM,2012
CI*)
PW**)
Page111
Exclusive
Combination
1
2
3
4
5
6
0
$0
50
30
44
45
54
End of Year
1
2
3
$0 $0 $0
20 20 20
12 12 12
16 16 16
17 17 17
22 22 22
($000s)
($000s)
$0
50
30
44
45
54
$0
13.4
8.0
6.7
8.9
15.7
4
$0
20
12
16
17
22
*) CI = Capital Investment
**) PW at MARR = 10% per year
For example:
Budhijanto,TeknikKimiaUGM,2012
Page112
Page113
Page114
for 1 k N
Example 6.1:
A new electric saw has a cost basis of $4,000
and a 10-year depreciable life. SV10 = 0.
Tabulate the annual depreciation amounts and
the book value at the end of each year using SL
method.
Answer:
N = 10; B = $4,000; SV10 = 0;
for 1 k N
EOY, k
dk
BVk
0
$4,000
1
$400
3,600
2
400
3,200
3
400
2,800
4
400
2,400
5
400
2,000
6
400
1,600
Budhijanto,TeknikKimiaUGM,2012
Page115
7
8
9
10
400
400
400
400
1,200
800
400
0
Page116
EOY, k
0
1
2
3
4
5
6*)
7
8
9
10
dk
$800
640
512
409.60
327.68
262.14
209.72
167.77
134.22
107.37
BVk
$4,000
3,200
2,560
2,048
1,638.40
1,310.72
1,048.58
838.86
671.09
536.87
429.50
*)
Budhijanto,TeknikKimiaUGM,2012
Page117
Example 6.3
Rework Example 6.1 with SYD method.
Answer:
BVk
EOY, k
dk
0
$4,000
1
$727.27
3,272.73
2
654.55
2,618.18
3
581.82
2,036.36
*)
4
509.09
1,527.27
5
436.36
1,090.91
6
363.64
727.27
7
290.91
436.36
8
218.18
218.18
9
145.45
72.73
10
72.73
0
*)
Budhijanto,TeknikKimiaUGM,2012
Page118
d. DB with Switchover to SL
DB method never reaches BV = SVN. It is
permissible to switch from DB to SL method, so
that BVN = SVN. The switchover occurs in the
year in which a larger depreciation amount is
obtained from the SL method.
Illustration: Rework Example 6.1
Year,
(1)
k
Beginning-ofYear BVa
Depreciation Method
(2)
(3)
200% DB
SL Methodc
Methodb
1 $4,000.00 $800.00
2
3,200.00
640.00
3
2,560.00
512.00
4
2,048.00
409.60
5
1,638.40
327.68
6
1,310.72
262.14
7
1,048.58
209.72
8
786.44
167.77
9
524.30
134.22
10
262.16
107.37
Total
$3,570.50
a
Column (1) year k + 1 =
column (4) year k.
b
2/10 of column (1)
Budhijanto,TeknikKimiaUGM,2012
(4)
Depreciation
Amount
Selectedd
>$400.00
> 355.56
> 320.00
> 292.57
> 273.07
= 262.14
< 262.14
< 262.14
< 262.14
< 262.14
$800.00
640.00
512.00
409.60
327.68
262.14
262.14
262.14
262.14
262.14
$4,000.00
column (1) year k
Page119
c
d
Depletion
the decrease in value of natural resources
because they are being consumed in producing
products or services.
In the case of depreciation, the property
involved usually may be replaced with similar
property when it has become fully depreciated.
In the case of depletion of mineral or other
natural resources, such replacement usually is
not possible. The depletion funds may be used to
acquire new properties, such as new mines and
oil-producing properties, etc.
Methods to compute depletion allowances
Read p. 276 and 277, Sullivan.
Uncertainty
Both risk and uncertainty in decision-making
activities are caused by lack of precise
knowledge regarding future business conditions,
technological developments, synergies among
funded projects, and so on.
Budhijanto,TeknikKimiaUGM,2012
Page120
Page121
Capital Investment, $
Efficiency, %
Useful life, years
Maintenance
expense, $/year
Taxes and insurance
expenses, % of the
investment
12,500
74
10
500
16,000
92
10
250
1.5
1.5
0.05
0.05
Market Value, $
0
0
Assume that revenues are equal for both motors.
MARR = 15% per year. If the best estimate of
hours of operation per year is 600 hours, which
motor is preferred?
Answer:
Let: X = number of hours of operation per year
The equivalent annual worth of Alpha motor
= the equivalent uniform annual cost
(
Budhijanto,TeknikKimiaUGM,2012
Page122
Beta motor:
Budhijanto,TeknikKimiaUGM,2012
Page123
Page124
(d)
Budhijanto,TeknikKimiaUGM,2012
Page125
Page126
Budhijanto,TeknikKimiaUGM,2012
Page127