Class Lead_IME 403 - 01 Teams 1_attempt_2015-10-23-08-23-08_Chapter 5_Class Lead Presentation.ppt

7/24/2019 Class Lead_IME 403 - 01 Teams 1_attempt_2015-10-23-08-23-08_Chapter 5_Class Lead Presentation.ppt

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Chapter 5

PRESENT WORTH

ANALYSIS


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Where we are going in this chapter: Understanding economic criteria

Applying present worth techniques

Assumptions in solving economic analysis

problems

Where we have been:

Equivalence concept Cash lows Compound interest actors


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!

Economic Criteria

Situation Criterion

"i#ed input $a#imi%e output

"i#ed output $inimi%e input

&either i#ed $a#imi%e dierence'output(input)

*ro+ects are +udged against an economic criterion,


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Economic Criteria RestatedPresent Worth Techniques

Situation Criterion

"i#ed input Amount ocapital available

i#ed

$a#imi%epresent worth o

beneits

"i#ed output . amount obeneit is i#ed

$inimi%epresent worth ocosts

&either i#ed &either capitalnor . beneitsare i#ed

$a#imi%e netpresent worth'&*/)


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Economic Criteria E!amp"ePurchasin# $ui"din# Space

Alt Situation Example Criterion

A "i#edinput

.10 ma# $a#imum square eet obuilding or the price

3 "i#edoutput

2 t2buildingavailable

&egotiate or minimumcost4t2

C &eitheri#ed

.10ma#10(2 t2

required

5imultaneously negotiateor ma#imum buildingsi%e 6 minimum cost4t2


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Equi%a"ence

7wo cash low streams are said to beequivalent at 89 interest i and only i theirpresent worths are equal at 89 interest,


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Equi%a"ence E!amp"e

What uniorm series over periods ;1End o& Period Cash '"o(

) *)++

, *-++

. *)++

5 *,++

?


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Equi%a"ence E!amp"e

What uniorm series over periods ;1

5olution:

;1'"@* 109?)2'"@* 1090)1'"@* 109-)

!'"@* 109!)='A@" 109


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E!amp"e ,/-5

"or what interest rate are the two cash low diagrams

equivalent>


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E!amp"e ,/-5 0Continued1"or what interest rate are the two cash low diagramsequivalent>

(.-'A@* i90) .10 B

(.?'A@* i90) .10 .0'A@D i90)

i 1!,


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S2stematic Economic Ana"2sis Technique)/ Identi&2 the in%estment a"ternati%es

-/ 3e&ine the p"annin# hori4on ,/ Speci&2 the discount rate ./ Estimate the cash &"o(s 5/ Compare the a"ternati%es / Per&orm supp"ementar2 ana"2ses

6/ Se"ect the pre&erred in%estment

11


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3eterminin# the P"annin# Hori4on

Feast common multiple o lives

Fongest lie

5hortest lie5tandard hori%on

Grgani%ational need

Hninitely long

12


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E!amp"e ./)

7hree production machines are being considered,

7he pertinent data are as ollows:

3ased on the least common multiple o the lives theplanning hori%on is yearsI based on the shortestlie the planning hori%on is - yearsI based on thelongest lie the planning hori%on is yearsI andbased on the irmJs KstandardL the planning hori%on

is 1 years, 1!


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C'3 &or Least Common 7u"tip"e o& Li%es

1-


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7easures o& Economic Worth

*resent Worth 'M .)

"uture Worth 'M .)

Annual Worth 'M .)

Capitali%ed Worth 'M .)

Niscounted *aybac8 *eriod 'O /alue e,g, 2 yrs) *aybac8 *eriod 'O /alue)

Hnternal Pate o Peturn 'M $APP)

E#ternal Pate o Peturn 'M $APP) $odiied Hnternal Pate o Peturn 'M $APP)

3eneit4Cost Patio 'M 1,)

10


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7easures o& Economic Worth

Pan8ing $ethods or Hncremental $ethods

*resent Worth

"uture Worth

Annual Worth

Capitali%ed Worth Niscounted *aybac8 *eriod

*aybac8 *eriod

Hncremental $ethods

Hnternal Pate o Peturn E#ternal Pate o Peturn

$odiied Hnternal Pate o Peturn

3eneit4Cost Patio1


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App"2in#

Present Worth Techniques

Analysis period must be considered Useul lie o the alternative equals the analysis

period Alternatives have useul lives dierent rom the

analysis period

7he analysis period is ininite n B


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Present Worth Ana"2sis

5ingle Alternative

1

*W B (.0R .2,0R'*@A 191) .0R'*@" 191)

B .


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7u"tip"e A"ternati%es

Choose the alternative with the greatest presentworth

=

+=

n

i

t

jtj iAiPWMaximize0

)1(%)(j

21


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E!amp"e 5/,7wo design alternatives 'A 6 3) are being considered or a newride '7he 5cream $achine) at a theme par8 in "lorida,

Alternative A requires a .! investment and will producenet annual revenue o .004yr, Alternative 3 requires a.-0 investment and will produce net annual revenue o. '7he Kdo nothingL alternativeis easible and assumed to have a *W o .,)

*WA'19) B (.! .00'P|A191) B .!?01,!0

B*/'191(00)(! B .!?01,1M .

'A is better than doing nothing)*W3'19) B (.-0 .


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E!amp"e 5/,7wo design alternatives 'A 6 3) are being considered or a newride '7he 5cream $achine) at a theme par8 in "lorida,

Alternative A requires a .! investment and will producenet annual revenue o .004yr, Alternative 3 requires a.-0 investment and will produce net annual revenue o. '7he Kdo nothingL alternativeis easible and assumed to have a *W o .,)

*WA'19) B (.! .00'P|A191) B .!?01,!0

B*/'191(00)(! B .!?01,1M .

'A is better than doing nothing)*W3'19) B (.-0 .


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2-


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KGne 5hotL Hnvestments

20

E "


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E!amp"e 5/57wo investment alternatives '1 6 2) are available withthe C"Ns shown below, 7hey are Kone shotL

investments, Using a 109 $APP which should bechosen>

*W1'109) B (.- .!0'*@A 109-) .1'*@" 109-)

*W1'109) B .0-,1

CCB .?0 .?0'*@" 091) .?0'*@" 092) S

or

CCB .?0'A@* 091)4,0 B .?0',120)4,0 B .1-20CCB*$7'091(?0)4,0 B .1-20orCCB .?0 .?0'A@" 091)4,0CCB .?0 .?0',?0)4,0 B .1-20

CCB?0*$7'091(?0)4,0 B .1-20

Pecall(A|P i%,n) = (A|F i%,n) + i

!!

E " 5 )-


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E!amp"e 5/)-

A new highway is to be constructed, Asphalt paving will beused, 7he asphalt will cost .104t including the material and

paving operation, Nue to heavy usage the asphalt ise#pected to last 0 yrs beore requiring resuracing, 7he costo resuracing will be the same4t, *aved ditches must beinstalled on each side o the highway and will cost .?,?04t to

installI ditches will have to be re(paved in 10 yrs at a costequal to the initial cost, "our pipe culverts are required4mileIeach costs .


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*aving Tighway and Nitches4mileCC B 02


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E!amp"e 5/),

Tow much will it cost to endow a .120

scholarship i the endowment earns -,09interest>

CW B .1204,-0 B .2?????,?


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--

so"ution

*W'A)B(1!'*4A?90)B(1!'-,1)B2!

*W'3)B (1-'*4A?90) ( 0'*4D?90)

B (1 - -,1( 0 ?,-? B 20?,0


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E!amp"e

Wayne County will build an aqueduct to bring water inrom the upper part o the state, Ht can be built at areduced si%e now or .! million and be enlarged 20

years hence or an additional .!0 million, Analternative is to construct the ull(si%ed aqueduct nowor .- million, 3oth alternatives would provide theneeded capacity or the 0(years analysis period,

$aintenance costs are small and may be ignored, At9 interest which alternative should be selected>


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So"ution

"or two stage:

*W G" CG57B !$ !0$'*4"920)

!$


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E!amp"e &or

A *urchasing agent is considering the purchase osome new equipment or the mailroom,

7wo dierent manuacturers have providedquotations, An analysis o the quotations indicates the

ollowing:

$anuacturer Cost Useul lie 5alvage value

5peedy .10 0 .2

Allied 1 0 .!20

"or a ive(year period which manuacturer should be selected> Assume?9 interest and equal maintenance cost,

H Allied has a ten(year useul lie then which

one do you select,


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