Lecture 9
Lecture 9
Lecture 9
1-1
Revision Ch 3
• An engineer has tracked the average inspection cost
for 8 years. The cost average was steady at $100 for
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the first four years but have increased consistently by
$50 for each of the last 4 years
• Draw Cash Flow Diagram
2
Revision Ch 3
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P = PA + PG
Uniform series
cash flow diagram
PA = 100(P/A,i,8)
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2. Simple vs Compound
3. Nominal vs Real
4. Fixed vs Floating
5. Nominal vs Effective
4
Using MARR as a Discount Rate
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Why ?
ROR ≥ MARR > WACC
5
Chapter 5
Present Worth
Analysis
Lecture slides to accompany
Engineering Economy
7th edition
Leland Blank
Anthony Tarquin
1-6
LEARNING OUTCOMES
1. Formulate Alternatives
2. PW of equal-life alternatives
3. PW of different-life alternatives
4. Future Worth analysis
5. Capitalized Cost analysis
1-7
Formulating Alternatives
Two types of economic proposals
1-8
Formulating Alternatives
Two types of cash flow estimates
1-9
PW Analysis of Alternatives
Convert all cash flows to PW using MARR
Precede costs by minus sign; receipts
by plus sign
EVALUATI
ON
For one project, if PW > 0, it is justified
For mutually exclusive alternatives, select
one with numerically largest PW
For independent projects,
1-10 select all with PW > 0
Selection of Alternatives by PW
For the alternatives shown below, which should be
selected
if selected
they are (a) selected(b) independent?
mutually exclusive;
Alternative X has a first cost of $20,000, an operating cost of $9,000 per year,
and a $5,000 salvage value after 5 years. Alternative Y will cost $35,000
with an operating cost of $4,000 per year and a salvage value of $7,000
after 5 years. At an MARR of 12% per year, which should be selected?
Select alternative Y
1-12
PW of Different-Life Alternatives
Must compare alternatives for equal service
(i.e., alternatives must end at the same time)
• Cash flow estimates are the same for each life cycle (i.e.,
change in exact accord with the inflation or
deflation rate)
1-14
Example: Different-Life Alternatives
Compare the machines below using present worth analysis at i = 10% per year
Machine A Machine B
First cost, $ 20,000 30,000
Annual cost, $/year 9000 7000
Salvage value, $ 4000 6000
Life, years 3 6
Select alternative1-15
B
PW Evaluation Using a Study Period
Once a study period is specified, all cash flows after
this time are ignored
Machine A Machine B
First cost, $ -20,000 -30,000
Annual cost, $/year -9000 -7000
Salvage value, $ 4000 6000
Life, years 3 6