Variations of Present Worth Analysis Lecture No.17 Chapter 5 Contemporary Engineering Economics Copyright © 2006 Contemporary Engineering Economics, 4th edition, © 2007 Future Worth Criterion Given: Cash flows and MARR (i) Find: The net equivalent worth at a specified period other than “present”, commonly the end of project life 0 Decision Rule: Accept the project if the equivalent worth is positive. $24,400 1 $55,760 $27,340 2 3 $75,000 Contemporary Engineering Economics, 4th edition, © 2007 Project life Example 5.6 Net Future Worth at the End of the Project Contemporary Engineering Economics, 4th edition, © 2007 Alternate Way of Computing the NFW FW (15%)inflow $24,400( F / P,15%,2) $27,340( F / P,15%,1) $55,760( F / P,15%,0) $119,470 FW (15%)outflow $75,000( F / P,15%,3) $114,066 FW (15%) $119,470 $114,066 $5,404 0, Accept Contemporary Engineering Economics, 4th edition, © 2007 Excel Solution: A B C 1 Period Cash Flow 2 0 ($75,000) 3 1 $24,400 4 2 $27,340 5 3 $55,760 6 PW(15%) $3553.46 7 FW(15%) $5,404.38 =FV(15%,3,0,-B6) Contemporary Engineering Economics, 4th edition, © 2007 Solving Example 5.6 with Cash Flow Analyzer Payback period Project Cash Flows Net Present Worth Net Future Worth Contemporary Engineering Economics, 4th edition, © 2007 Example 5.7 Future Equivalent at an Intermediate Time Contemporary Engineering Economics, 4th edition, © 2007 Example 5.9 Project’s Service Life is Extremely Long • Built a hydroelectric plant using his personal savings of $800,000 • Power generating capacity of 6 million kwhs • Estimated annual power sales after taxes - $120,000 • Expected service life of 50 years • Was Bracewell's $800,000 investment a wise one? • How long does he have to wait to recover his initial investment, and will he ever make a profit? Contemporary Engineering Economics, 4th edition, © 2007 Mr. Bracewell’s Hydroelectric Project V1 V2 $1,101K $1, 468K $367 K 0 V2 120 K ( P / A,8%,50) $1, 468K V1 $50 K ( F / P,8%,9) $50 K ( F / P,8%,8) $100 K ( F / P,8%,1) 60 K $1,101K Contemporary Engineering Economics, 4th edition, © 2007 How Would You Find P for a Perpetual Cash Flow Series, A? Contemporary Engineering Economics, 4th edition, © 2007 Capitalized Equivalent Worth Principle: PW for a project with an annual receipt of A over infinite service life Equation: CE(i) = A(P/A, i, ) = A/i A 0 P = CE(i) Contemporary Engineering Economics, 4th edition, © 2007 Practice Problem Given: i = 10%, N = ∞ Find: P or CE (10%) $2,000 $1,000 0 10 P = CE (10%) = ? Contemporary Engineering Economics, 4th edition, © 2007 ∞ Solution $2,000 $1,000 0 10 P = CE (10%) = ? $1,000 $1,000 ( P / F,10%,10) 0.10 0.10 $10,000(1 0.3855) CE(10%) $13,855 Contemporary Engineering Economics, 4th edition, © 2007 ∞ A Bridge Construction Project Construction cost = $2,000,000 Annual Maintenance cost = $50,000 Renovation cost = $500,000 every 15 years Planning horizon = infinite period Interest rate = 5% Contemporary Engineering Economics, 4th edition, © 2007 Cash Flow Diagram for the Bridge Construction Project Years 15 30 45 60 $500,000 $500,000 $500,000 $500,000 0 $50,000 $2,000,000 Contemporary Engineering Economics, 4th edition, © 2007 Solution: Construction Cost P1 = $2,000,000 Maintenance Costs P2 = $50,000/0.05 = $1,000,000 Renovation Costs P3 = $500,000(P/F, 5%, 15) + $500,000(P/F, 5%, 30) + $500,000(P/F, 5%, 45) + $500,000(P/F, 5%, 60) . = {$500,000(A/F, 5%, 15)}/0.05 = $463,423 Total Present Worth P = P1 + P2 + P3 = $3,463,423 Contemporary Engineering Economics, 4th edition, © 2007 Alternate way to calculate P3 Concept: Find the effective interest rate per payment period 0 15 $500,000 30 $500,000 45 60 $500,000 $500,000 Effective interest rate for a 15-year cycle i = (1 + 0.05)15 - 1 = 107.893% Capitalized equivalent worth P3 = $500,000/1.07893 = $463,423 Contemporary Engineering Economics, 4th edition, © 2007