Engineering Economic Analysis
9th Edition
Chapter 6
ANNUAL CASH FLOW ANALYSIS
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
1
Annual Cash Flow Calculations
Resolving a Present Cost
to an Annual Cost
• Simplest case is to convert the PV to a series
of EUAW (equivalent uniform annual worth)
cash flows – [previously A].
• A=p(a/p,i,n)
• A is -PMT in Excel®
• Where there is salvage value
• A will be reduced
• A = F(A/F,i,n)
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
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Annual Cash Flow
Four Essential Points
1. EUAW = PW(A/P,i,n)
2. EUAW is
1. Decreased by a cost
2. Increased by a benefit
3. In Excel® use “-PMT” to calculate EUAW
1. (remember the minus sign)
4. For an irregular cash flow over the analysis
period, first determine the PW then convert to
EUAW
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
3
Annual Cash Flow Analysis
Fixed input
Situation
Criterion
Amount of
Maximize
capital available EUAW
fixed
Fixed output
$ amount of
benefit is fixed
Maximize
EUAW
Neither fixed
Neither capital
nor $ benefits
are fixed
Maximize
EUAW
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
4
Analysis Period Considerations
1. Analysis period equal to alternative lives
2. Analysis period a common multiple of
alternative lives
3. Analysis period for a continuing requirement
4. Some other period such as project life
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
5
Analysis Period
Equal to Alternative Lives
• Base the comparison on the life of the
alternatives
• This is the case we have most often considered in
our examples
• This is rarely the case in “real-life” organizations
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
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Analysis Period a Common Multiple
of Alternative Lives
• When the lives of the equipment in the two
alternatives varies, use a common multiple of
the two lives.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
7
Analysis Period for a
Continuing Requirement
• Where the project will last forever (nothing
does) use an infinite time period.
• In most analyses, organizations often use a
representatively long time period to get a
reasonable estimate.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
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Some Other Period Such As
Project Life
• Physical equipment usually has a useful life
that is different from the project life.
• In this case, use the project life as the
analysis period.
• This is the most common case in “real-life”
organizations.
Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.
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