Class # 10
Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 6th Edition, 2005
6-1
© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved
Developed By:
Dr. Don Smith, P.E.
Department of Industrial
Engineering
Texas A&M University
College Station, Texas
Executive Summary Version
Chapter 6 Part -2
Annual Worth
Analysis
Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 6th Edition, 2005
6-2
© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved
AW-based Evaluation
Single project analysis
 Calculate AW at stated
MARR
 Acceptance criterion:
If AW ≥ 0, project is
economically justified
Multiple alternatives
 Calculate AW of each
alternative at Minimum
Attractive Rate of Return
(MARR) over respective
life or study period
 Selection criterion:
Select alternative with
most favorable AW value,
that is,
numerically largest AW value
Slide to accompany Blank and Tarquin Basics of
Engineering Economy, 2008
5-3
© 2008, McGraw-Hill
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AW Evaluation – Example 1
To select the more economic alternative at i = 12%, compare
AWX over 4 years with AW Y over 6 years
AWX = -40,000(A/P,12%,4) + 10,000(A/F,12%,4) – 25,000
= $-36,077
AWY = -75,000(A/P,12%,6) + 7,000(A/F,12%,6) – 15,000
= $-32,380
Select Y
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Engineering Economy, 2008
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AW Evaluation – Example 2
In the previous example, assume the selected
equipment will be retained for a total of 8 years.
Additionally, assume after 8 years S = 0 for X and Y;
and AOCX continues at $25,000, but AOCY doubles
starting in year 7
0
8
1
2
6
7
0
8
AOC = $25,000
1
2
AOC = $15,000
P = $40,000
P = $75,000
Alternative X
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Engineering Economy, 2008
Alternative Y
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6
7
AOC = $30,000
AW Evaluation – Example 2
Study period is n = 8 years
In class practice
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AW-based Evaluation
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AW-based Evaluation
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AW-based Evaluation
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AW-based Evaluation
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AW-based Evaluation
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Engineering Economy, 2008
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AW of Permanent Investment
 AW of alternative that will last ‘forever’
 This is the annual worth equivalent of
capitalized cost (CC)
 Solve for AW in relation PW = AW(1/i) from
chapter 4 AW = PW(i) = CC(i)
Procedure:
 Cash flows that occur at regular intervals are
converted to AW values over one life cycle of their
occurrence.
 All other non-regular cash flows are first converted to
a P value and then multiplied by i to obtain the AW
value
over
infinity.
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to accompany
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Basics of
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Engineering Economy, 2008
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AW of Permanent Investment
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Engineering Economy, 2008
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AW of Permanent Investment
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Engineering Economy, 2008
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AW of Permanent Investment
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Engineering Economy, 2008
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Chapter 6 Part -2
End of Slide Set
Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 6th Edition, 2005
6-16
© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved