Mg6863 Engineering Economics Unit Iii

MG6863 ENGINEERING ECONOMICS

UNIT III
PRESENT WORTH METHOD OF COMPARISON
FUTURE WORTH METHOD
ANNUAL EQUIVALENT METHOD
RATE OF RETURN METHOD

PRESENT WORTH METHOD OF
COMPARISON METHODS
TYPES:
• REVENUE DOMINATED
Positive sign- Cash flow diagram, the profit, revenue,
salvage value
Negative sign – Initial Expenditure
• COST DOMINATED
Positive sign- Principal Amount – Initial Expenditure
Negative sign – Cash flow diagram, the profit, revenue,
salvage value
REVENUE DOMINATED
PW (i%) = -P+ A(P/A,i,n) + S(P/A,i,n)

Best alternative - Maximum present worth amount
PW – PRESENT WORTH AMOUNT
P – PRINCIPAL AMOUNT/CAPITAL/INITIAL OUTLAY
A – ANNUAL REVENUE (R1 , R2….. Rn)
S – SALVAGE VALUE/SCRAP VALUE
(P/A, i, n) - equal-payment series present worth factor
COST DOMINATED:
PW (i%) = P+ A(P/A,i,n) - S(P/A,i,n)

Best alternative - Minimum present worth amount
PW – PRESENT WORTH AMOUNT
P – PRINCIPAL AMOUNT/CAPITAL/INITIAL OUTLAY
A – ANNUAL COST (C1 , C2….. Cn)
S – SALVAGE VALUE/SCRAP VALUE
(P/F, i, n) - single-payment present worth factor.
• Novel Investment Ltd. accepts Rs. 10,000 at the end of
every year for 20 years and pays the investor Rs.
8,00,000 at the end of the 20th year. Innovative
Investment Ltd. accepts Rs. 10,000 at the end of every
year for 20 years and pays the investor Rs. 15,00,000 at
the end of the 25th year. Which is the best investment
alternative? Use present worth base with i = 12%.
• A small business with an initial outlay of Rs. 12,000

yields Rs. 10,000 during the first year of its operation
and the yield increases by Rs. 1,000 from its second
year of operation up to its 10th year of operation. At the
end of the life of the business, the salvage value is zero.
Find the present worth of the business by assuming an
interest rate of 18%, compounded annually.
FUTURE WORTH METHOD
FW (i%) = -P(F/P,i,n)+ A(F/A,i,n) + S
• COST DOMINATED
FW (i%) = P(F/P,i,n)+ A(F/A,i,n) – S
(F/P, i, n) - single-payment compound amount factor

(F/A, i, n) - equal-payment series compound amount
factor
• Consider the following two mutually exclusive
alternatives at i=18%. Select the best alternative
based on future worth method of comparison
Initial Value of A & B (for year 0) is in negative because P must be –ve for Revenue
generated problems.
Revenue generated for the forthcoming years are mentioned in +ve for these problems
• A man owns a comer plot. He must decide
which of the several alternatives, to select in
trying to obtain a desirable return on his
investment. After much study and calculation,
he decides that the two best alternatives are as
given in the following table. Evaluate the
alternatives based on the future worth method
at i=12%.
• M/S Krishna Castings Ltd. is planning to replace its
annealing furnace. It has received tenders from
three different original manufacturers of annealing
furnace. The details are as follows. Which is the best
alternative based on future worth method at i=20%.
ANNUAL EQUIVALENT METHOD
AW (i%) = -P(A/P,i,n)+ A + S or F (A/F,i,n)
• COST DOMINATED
FW (i%) = P(A/P,i,n)+ A – S or F (A/F,i,n)
(A/P, i, n) - Equal-payment series capital recovery

factor
(A/F, i, n) - Equal-payment series sinking fund factor
• A company is planning to purchase an advanced
machine centre. Three original manufacturers have
responded to its tender whose particulars are
tabulated as follows: Determine the best alternative
based on the annual equivalent method by
assuming i=20% compounded annually.
• A transport company has been looking for a new
tyre for its truck and has located the following
alternatives: If the company feels that the warranty
period is a good estimate of the tyre life and that a
nominal interest rate (compounded annually) of
12% is appropriate, which tyre should it buy?
• RATE OF RETURN METHOD
Then the alternative which has the highest rate of
return is selected as the best alternative.
PW (i%) = -P+ A(P/A,i,n) + S(P/A,i,n)
i% = i%POS + [(PW(I%)-0)/(PW(I%)POS-PW(I%)NEG)]
(P/A, i, n) - equal-payment series present worth factor

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Mg6863 Engineering Economics Unit Iii

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MG6863 ENGINEERING ECONOMICS

PRESENT WORTH METHOD OF COMPARISON

FUTURE WORTH METHOD

ANNUAL EQUIVALENT METHOD

RATE OF RETURN METHOD

PW (i%) = -P+ A(P/A,i,n) + S(P/A,i,n)

PW (i%) = P+ A(P/A,i,n) - S(P/A,i,n)

• A small business with an initial outlay of Rs. 12,000

(F/P, i, n) - single-payment compound amount factor

AW (i%) = -P(A/P,i,n)+ A + S or F (A/F,i,n)

FW (i%) = P(A/P,i,n)+ A – S or F (A/F,i,n)

(A/P, i, n) - Equal-payment series capital recovery

(P/A, i, n) - equal-payment series present worth factor

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