Responsi

Ekonomi
Transportasi
P E RT E M UA N K E DUA
NP
V
Selection of
Alternatives
Decision criteria in an economic
analysis can be done comparing
mutually exclusive alternatives:
The differences between alternatives
highest inflow or lowest outflow
The minimum attractive rate of return
highest rate of return
Payback period
shortest payback period
Do nothing
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 4-
3
Selection of
Alternatives
Selection of two or more (investment)
alternatives by comparing their economic
values.
Method for comparison of alternatives:
present values,
future worth,
capitalized cost,
annual values,
rate of returns, or
payback period
Conditions of comparison:
equal lives
different lives
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 4-
4
Rate of
Return
Expected
Rate of
Return
on New
Proposal

Range for
ROR On
accepted
proposals

MAR
R

ROR
on
Safe
investment

5
MARR
Minimum Acceptable Rate of Return
Minimum amount the investor is willing to accept for the use
of money
Different from lending rates
More akin to Opportunity Cost of
the money Determined by
Company Policy

All proposals
must offer at
Least MARR
to be
considered
Muhamad Abduh, Ph.D. SI-4251 EKONOMI
TEKNIK
 Present-worth
comparison
The comparison of alternatives is made
by transforming all future receipts and
expenditures into equivalent todays
rupiah
Example:
Two types of production systems are being considered based on
MARR of 12% per year andsystemhe followingA
characteristics:system B
Initial cost Rp. 625.000.000,- Rp.
570.000.000,-
Monthly Rp. 45.750.000,- Rp.
expenses 55.750.000,-
Receipts Rp. 152.000.000,- / Rp.
quarter 140.000.000,- /
4
months
Salvage value Rp. 225.000.000,- Rp.
190.000.000,-
Life 3 tahun 3 tahun
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 4-
6
 Present-worth
comparison
S
System V
A:
R R R R R R R R R R R R
I
E

0 1 2 3

? Effective monthly interest rate, iA = ?

PA = -I - E(P/A, iA, 36) + R(P/F, iA, 3) + R(P/F, iA, 6) + + R(P/F, iA,

36) + SV(P/F, iA, 36)
 4-7
Muhamad Abduh, Ph.D. SI-4251 EKONOMI
TEKNIK
 Present-worth
comparison
S
System V
B:
R R R R R R R R
R
I
E

0 1 2 3
PB = -I - E(P/A, iB, 36) + R(P/F, iB, 4) + R(P/F, iB, 8) + + R(P/F, iB,
36) + SV(P/F, iB, 36)
Select System A if PA > PB

4-8
Muhamad Abduh, Ph.D. SI-4251 EKONOMI
TEKNIK
Present-worth
comparison
To have a fair comparison of alternatives
with different lives, the time span over
must made equal:
a) The time period of comparison is made
equal to the least common multiple
(LCM) for their lives.
Cash flows of the shorter period will be
extended up to the remaining time period of
comparison
b)At any time span to be considered
(the study period approach or
planning horizon approach), when
LCM is impossible to perform.
 Only cash flows up to the time span is to be
considered;

Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 4-

9
 Present-worth
comparison
Example:
Two types of production systems are being considered based on MARR of 12% per
year and the following characteristics:

system A system B
Initial cost Rp. 625.000.000,- Rp.
770.000.000,-
Monthly Rp. 45.750.000 Rp. 55.750.00
expenses ,- 0,-
Monthly receipts Rp. 32.000.000 Rp. 40.000.00
,- 0,-
Salvage value Rp. 225.000.000,- Rp.
110.000.000,-
Life 2 tahun 4 tahun
 4-10
Muhamad Abduh, Ph.D. SI-4251 EKONOMI
TEKNIK
 wor
P
r
th System A:
R

eco
smp
earis
non
t
-
 mad Abduh, Ph.D. SI
- 4251 EKONOMI
TEKNIK

Mu
ha
 Present-worth
comparison (LCM)
System R1 SV R2
A:
SV
2
I E1 I2 E2

0 1 2 3 4

System B: R

S
I V
E

0 1 2 3 4
 4-12

Muhamad Abduh, Ph.D. SI-4251 EKONOMI

TEKNIK
 Present-worth
comparison (Study
Periods: 2 years)
System A: R
SV
I
E

0 1 2

System B:
R Estimated S
V
I
E

0 1 2 3 4
 4-13

Muhamad Abduh, Ph.D. SI-4251 EKONOMI

TEKNIK
BC
R
The Benefit Cost
Analysis
The most commonly used method for
comparing economic alternatives.
This method is often considered as
supplementary to present worth analysis.
The objective is to determine whether
the benefit (gained) in return to any cost
(spent) is favorable.
Basically it is desired that we will gain
more than we have spent.
Benefit Cost > 0 B/C > 1.0
SI-4251 EKONOMI TEKNIK 8-

15
Classification
Benefit (B) all favorable return/gain or
advantages
Disbenefit (D) negative benefit, any
negative (loss) result
Cost (C) all things that one
pays/expends in order to have return

Benefit income from an investment, e.g., interest

Disbenefit loss of value or (initial) income due to
an investment
Cost expenditure
SI-4251 EKONOMI TEKNIK 8-

16
B/C Analysis for A Single
Project
Conventional B/C
BD
B/ C
C
Modified B/C
- includes operation & maintenance
cost
- initial investment replaces cost as
denominator

B/ C BD O&M
 I
Calculation can be made in present worth, future worth or annuity

SI-4251 EKONOMI TEKNIK 8-

17
B - C Analysis for A Single
Project
Conventional B-C

BC (BD)C

Modified B-C
- includes operation & maintenance
cost
BC (BDO&M)I
Calculation can be made in present worth, future worth or annuity

SI-4251 EKONOMI TEKNIK 8-

18
IR
R
Finding Internal Rate of
Return
1. Draw cash flow diagram
2. Convert all receipts into present, future or EUAW
3. Convert all payments into present, future or EUAW
4. Subtract (3) from (2) and set it equal to zero find i*
5. Find i* that satisfies (4) by trial and error interpolation

P O1 I1 S
V

A1
0
1 2 3
PR= I1(P/F, i*, 22) + SV(P/F, i*,
36)
PP= P + A1(P/A, i*, 36) + O1(P/F,
i*, 8)
PR - PP = I1(P/F, i*, 22) + SV(P/F, i*, 36) [P + A1(P/A, i*, 36) + O1(P/F, i*, 8)] = 0

Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 6-20

Rate of Return
The relationship between Rate of Return and the Present Worth
Amount can be graphically describe as follows:
Present worth,
PW

i*
0
interest rate, i

PW (i) > 0 for i < i*

Cash flow shown above assures a single rate of return that:
PW (i) = 0 for i = i*
PW (i) < 0 for i > i*
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 6-

21
Cash Flow with Single
Rate of
Return
For a cash flow will have a single rate of return, if
satisfies the following conditions:
Test # 1:
1. F0 < 0
(the first non-zero cash is a disbursement)
2. One change in sign in the sequence F0, F1, F2, Fn
(the cash flow has an initial disbursement or a series of disbursement followed by a series of receipts)

3. PW(0) > 0
(the sum of all the receipts is greater than the sum of all the disbursements)

Test # 2:
1. F0 < 0
(the first non-zero cash is a disbursement)
2. Find rate of return, i*, for the cash flow;
for unknown i*, total unrecovered balance, Ut < 0 for t = 0, 1, 2, 3, n-1
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 6-

22
TUGAS
1
1
Comparing two alternatives
using B/C analysis
Overpass A Tunnel B
Initial cost 1,250 million 3,500 millions
Yearly maintenance cost 27.50 million 55 million
Road user cost per year 425 million 350 million
Useful life 20 years 20 years
Interest rate 10%

FIND BC RATIO FOR THESE ALTERNATIVES!

SI-4251 EKONOMI TEKNIK 8-

24
2
Example : Three
Alternatives
Assume i = 10% per year

A1 A2 A3
Electric Power Gas Power Solar Power
First -2500 First -3500 First -6000
Cost: Cost: Cost:
Ann. Op. Cost: Ann. Op. Cost: -700 Ann. Op. Cost:
-900 -50
Sal. +200 Sal. +350 Sal. +100
Value: Value: Value:
Life: 5 Life: 5 Life: 5
years years years
Which Alternative if any, should be
selected based upon a
present worth analysis?

Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 4-

25
 3
Exerci
se
A student borrowed Rp. 8.5M from a bank buy a computer with an
agreement to repay Rp 250K at the end of the month of each of the
first 2 years and Rp. 3.5M at the end of the second year. Determine
the rate of interest that makes the receipts and disbursement equal?
Muhamad Abduh, Ph.D. SI-4251 EKONOMI TEKNIK 3-

26