Chapter 5 Present-Worth Analysis: Identifying Cash Inflows and Outflows

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park.
ISBN: 0-13-611848-8
2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
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Chapter 5 Present-Worth Analysis

Identifying Cash Inflows and Outflows
5.1
Revenue = 45 2,000 5 = 450,000 (No. of engineer:5)
n
0
1
2
Inflow
$450,000
$450,000
$450,000
Outflow
$300,000
175,000
175,000
175,000
Net flow
-$300,000
275,000
275,000
275,000
5.2
(a) Cash inflows: (1) savings in labor, $45,000 per year, (2) salvage value,
$3,000 at year 5.
(b) Cash outflows: (1) capital expenditure = $30,000 at year 0, (2) operating
costs = $5,000 per year.
(c) Estimating project cash flows:
n
0
1
2
3
4
5
Inflow
$45,000
45,000
45,000
45,000
45,000+3,000
Outflow
$30,000
5,000
5,000
5,000
5,000
5,000
Net flow
-$30,000
40,000
40,000
40,000
40,000
43,000
Payback Period
5.3
(a) Conventional payback period: $100,000/$25,000 = 4 years
(b) Discounted payback period at i = 15%:
n
0
1
Net Cash Flow
Cost of Funds (15%)
-$100,000
$25,000 -$100,000(0.15) =-$15,000
2
3
4
5
$25,000
$25,000
$25,000
$25,000
6
7
$25,000
$25,000
-$90,000(0.15) =-$13,500
-$11,775
-$9,791
-$7,510
-$4,886
-$1,869
Cumulative Cash
Flow
-$100,000
-$90,000
-$78,500
-$65,275
-$50,066
-$32,576
-$12,463
$10,668
Page | 1
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

Payback period = 6.54 years

5.4
(a) Conventional payback period: 0.75 years
(b) Discounted payback period = 0.85 years, assuming continuous payments:
Net Cash Flow
0
1
-$30,000
+$40,000
Cost of Funds (15%)
Cumulative Cash Flow
-$30,000(0.15) = -$4,500
-$30,000
+$5,500
5.5
(a) Conventional payback period
Project
Payback period
A
4.38 years
B
3 years
C
3.38 years
D
0.8 years
(b) It maybe viewed as a combination of two separate projects, where the first
investment is recovered at the end of year 1 and the investment that made
in year 3 and 4 will be recovered at the end of year 7.
(c) Discount payback period
Project
Payback period
A
6.55 years
B
5.43 years
C
4.05 years
D
0.88 years
5.6
(a) Conventional payback period: 4.38 years
(b) Discounted payback period at i = 15%: No payback
NPW Criterion
5.7
5.8
PW (12%) = $100, 000 + $30, 000( P / A,12%,5) = $8,143.3
PW (12%) = $250, 000 $20, 000 + $90, 000( P / A,12%,5) + $75, 000( P / F ,12%,5)
= $96,986.87
Since PW(12%) > 0, this purchase should be justified.
5.9
(a)
PW (10%) A = $3,500 + $4, 200( P / F ,10%, 4) = $631.34

Page | 2

PW (10%) B = $6,500 + $1,600(P / F,10%,1) + $1,800(P / F,10%,2)

+$1,500(P / F,10%,3) + $2,200(P / F,10%,4) = $928.25
PW (10%)C = $2,800 $1,800(P / F,10%,1) $900( P / F,10%,2)
+ $2,500(P / F,10%,3) +$3,500(P / F,10%,4) = $911.33
PW (10%) D = $4,300 $1,000(P / F,10%,1) + $1,900(P / F,10%,2)

+$2,300(P / F,10%,3) +$1,500(P / F,10%,4) = $886.30
(b) Draw the graphs using Excel or other software.
5.10
(a)
PW(15%) = $250, 000 + $40, 000( P / A,15%,35) + $50, 000( P / F ,15%,35)

= $15, 040 < 0
(b)
PW(20%) = $250, 000 + $40, 000( P / A, 20%,35) + $50, 000( P / F , 20%,35)

= $50, 254
(c)
PW(i ) = $250, 000 + $40, 000( P / A, i,35) + $50, 000( P / F , i,35) = 0

i = 15.93%
Correct answer is (d) as all of the statements are correct.
5.11 Given: Estimated remaining service life = 25 years, current rental income =
$250,000 per year, O&M costs = $85,000 for the first year increasing by
$5,000 thereafter, salvage value = $50,000, and MARR = 12% .
Let A0 be the maximum investment required to break even.
PW (12%) = A0 + [$250, 000( F / A,12%, 25) + $25, 000( F / A,12%, 20)
+$27,500( F / A,12%,15) + $30, 250( F / A,12%,10)
+$33, 275( F / A,12%,5) + $50, 000]( P / F ,12%, 25)
$85, 000( P / A,12%, 25) $5, 000( P / G,12%, 25)
=0
Solving for A0 = yields

A0 = $1, 241, 461
Page | 3

5.12
n = 4 : P4 = $32,500 + $33,000( P / F ,12%,1) = $61,964.29
n = 3 : P3 = $32,500 + $61,964.29( P / F ,15%,1) = $86,381.99
n = 2 : P2 = $33,400 + $86,381.99( P / F ,13%,1) = $109,844.24
n = 1: P1 = $32,400 + $109,844.2( P / F ,11%,1) = $131,358.77
n = 0 : P0 = $42,000 + $131,358.8( P / F ,10%,1) = $77,417.07
The investment has a net present worth of $77,417.07 and would be

acceptable at any price less than equal to that amount.
5.13
PW (15%) = $500,000 2,200,00( P / F ,15%,1) + $2,700,000( P / A,15%,8)
+ $1,500,000( P / F ,15%,8)
= $10,193,077
5.14
PW (18%) = $3,500, 000 + [$1,550, 000 $350, 000 $150, 000]( P / A,18%,10)
+ $200, 000( P / F ,18%,10)
= $1, 257, 004
Since PW is positive, the project is justified.
5.15 PW (15%) = A0 + $60, 000( P / A,15%,10) =0
A0 = $301,126
Future Worth and Project Balance

5.16 US: $1,000(F/P, 4%, 5) = $1,216.65
Euro: [$1,000(0.735)(F/P, 5%, 5)]/0.88 = $1,065.99
Japan: [$1,000(97.5)(F/P, 6%, 5)]/110 = $1,186.15
Therefore, A. Investing in the United States

5.17
(a)
PW (15%) A = $10,500 + $4,300( P / F ,15%,1) + $4,800( P / F ,15%, 2)
+ $5,500( P / F ,15%,3) = $485
PW (15%) B = $16, 000 $3, 000( P / F ,15%,1) + $21, 000( P / F ,15%, 2)
+ $13, 000( P / F ,15%,3) = $5,818
PW (15%)C = $15, 000 $7, 000( P / F ,15%,1) $4, 000( P / F ,15%, 2)
+ $6, 000( P / F ,15%,3) = $9,834

PW (15%) d = $20, 000 + $7,500( P / F ,15%,1) + $7,500( P / F ,15%, 2)
+ $8,500( P / F ,15%,3) = $2, 218
Page | 4

(b)
FW (15%) A = $485( F / P,15%,3) = $738
FW (15%) B = $5,818( F / P,15%,3) = $8,849
FW (15%)C = $9,834( F / P,15%,3) = $14,956
FW (15%) D = $2, 218( F / P,15%,3) = $3,374
Except for Project D, all the projects are acceptable.
5.18
(a)
(b)
(c)
(d)
ia = 12.68% : $5,000(F / P,12.68%,20) = $54,438.58

i = 1% : $80(P / A,1%,120)(F / P,1%,240) = $60,737.33
i = 1% : $50(F / A,1%,240) = $49,462.77
ia = 12.68% : $15,000( F / P,12.68%,10) = $49,494.81
Option B is the best choice.
5.19
(a) The original cash flows of the project are as follows.
n
An
-$1,000
($100)
($520)
$460
($600)
0
1
2
3
4
Project Balance
-$1,000
-$1,100
-$800
-$500
0
(b)
PB(i ) 3 = $800(1 + i) + $460 = $500
i = 20%
(c) Yes, the project is acceptable. The project would be indifferent at i = 20%,
and therefore is attractive at i = 15%.
5.20
PW (15%) A = $1, 200, 000( P / F ,15%,1) + $900, 000( P / F ,15%, 2)

+ $675, 000( P / F ,15%,3) + $506, 250( P / F ,15%, 4)
= $2, 457, 281
5.21
(a) First find the interest rate that is used in calculating the project balances.
We can set up the following project balance equations:
Page | 5

PB(i )1 = $10, 000(1 + i ) + A1 = $11, 000

PB(i ) 2 = $11, 000(1 + i ) + A2 = $8, 200
PB(i )3 = $8, 200(1 + i) + $8, 000 = $1,840
PB(i ) 4 = $1,840(1 + i ) + A4 = $3, 792
PB(i )5 = $3, 792(1 + i ) + A5 = $7,550
From PB(i )3 , we can solve for i : i = 20%
Substituting i into other PB(i ) n yields
n
An
-$10,000
1,000
5,000
8,000
6,000
3,000
0
1
2
3
4
5
PB(i )n
-$10,000
-11,000
-8,200
-1,840
3,792
7,550
(b) Conventional payback period = 3years ( or 2.5 years with continuous cash
flows)
5.22
(a) From the project balance diagram, note that PW (24%)1 = 0 for project 1
and PW (23%) 2 = 0 for project 2.
PW (24%)1 = $1, 000 + $400( P / F , 24%,1) + $800( P / F , 24%, 2)
+ X ( P / F , 24%,3) = 0
PW (23%) 2 = $1, 000 + $300( P / F , 23%,1) + Y ( P / F , 23%, 2)
+ $800( P / F , 23%,3) = 0
X = $299.58,
Y = $493.49
(b) Since PW (24%)1 = 0 , FW (24%)1 = 0 .

(c) = $593.49,
= $499.58,
= 17.91%
5.23
(a) The original cash flows of the project are as follows
n
0
1
2
3
4
5
An
-$3,000
($600)
$1,470
($1,650)
(-$300)
$600
Project Balance
-$3,000
-$2,700
-$1,500
0
-$300
($270)
Page | 6

(b)
PB (i ) 2 = $2,700(1 + i ) + $1,470 = $1,500
i = 10%
PW (10%) = $270( P / F ,10%,5) = $167.65
5.24
(a)
PB 16000
14000
12000
10000
8000
6000
4000
2000
0
-2000
-4000
-6000
-8000
A
B
C
D
(b)
Project
PB2
A
-$2,555
B
-$2,350
C
-$4,875
D
$3,660
Project D because it has only a positive balance at the end of year 2.

Graphically you can easily verify the same results.
5.25
(a)
FW (12%) A = $2, 200( F / P,12%,5) $500( F / P,12%, 4)

+ " $700
= $1,366.12
FW (12%) B = $4,500( F / P,12%,5) + $1,500( F / P,12%, 4)
+ " + $3, 000
= $4,802.03
FW (12%)C = $3, 200( F / P,12%,5) + $1, 200( F / P,12%, 4)
+ " + $2, 000
= $11,106.33
Page | 7

FW (12%) D = $5, 400( F / P,12%,5) + $1,500( F / P,12%, 4)

+ " + $2, 400
= $3, 771.76
FW (12%) E = $7, 200( F / P,12%,5) + $2,500( F / P,12%, 4)
+ $2,800( P / F ,12%,3) + $3,500( F / P,12%, 2)
= $430.86
(b) Accept all projects except E.

5.26
(a) You may plot the future worth for each project as a function of interest
rate, using Excel software.
(b)
A
-$2,200.00
-$2,964.00
-$2,419.68
-$1,210.04
$1,844.75
$1,366.12
n
0
1
2
3
4
5
B
C
-$4,500.00 -$3,200.00
-$3,540.00 -$2,384.00
-$7,964.80 -$2,670.08
-$3,920.58 $1,009.51
$1,608.95 $8,130.65
$4,802.03 $11,106.33
D
-$5,400.00
-$4,548.00
-$4,093.76
-$1,585.01
$1,224.79
$3,771.76
E
-$7,200.00
-$5,564.00
-$3,431.68
-$343.48
-$384.70
-$430.86
(c) Note that PB(12%)5 = FW (12%).
5.27 From the annual cash flow and balance table, shown below, it will take 6.54
years approximately.
n
0
1
2
3
4
5
6
7
8
9
10
Cash flow
-$20,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
$5,000.00
Balance
-$20,000.00
-$18,000.00
-$15,700.00
-$13,055.00
-$10,013.25
-$6,515.24
-$2,492.52
$2,133.60
$7,453.64
$13,571.68
$20,607.44
Page | 8

5.28
z The present worth of the expenses already spent on the project:
PW (20%)expense = $10M(F / A,20%,5) = $74.416M
z The present worth of the expected revenue:

PW (20%) revenue = $100M( P / A, 20%,10) = $419.25M
Price of the project = -$74.416M + $419.25M - $30M = $314.83M
5.29
(a)
PW (12%) A = $61.89
PW (12%) B = $19.43
PW (12%)C = $16.80
(b)
FW (12%) A = $61.89(F / P,12%,6) = $122.17
FW (12%) B = $19.43( F / P,12%,5) = $34.24
FW (12%)C = $16.80(F / P,12%,3) = $23.61
(c)
FW (i) A = $150.36
FW (i) B = $9.78
FW (i)C = $17.95
5.30
(a) Since a projects terminal project balance is equivalent to its future worth,
we can easily find the equivalent present worth for each project by
PW (10%) A = $105(P / F,10%,5)

= $65.20
PW (20%)C = $1,000(P / F,20%,5)
= $401.88
Page | 9

(b)
PB (10%)0 = A0 = $1, 000
PB (10%)1 = PB(10%)0 (1 + 0.10) + A1 = $1, 000
PB (10%) 2 = PB(10%)1 (1 + 0.10) + A2 = $900
PB(10%)3 = PB(10%) 2 (1 + 0.10) + A3 = $690
PB (10%) 4 = PB(10%)3 (1 + 0.10) + A4 = $359
PB(10%)5 = PB (10%) 4 (1 + 0.10) + A5 = $105
From the project balance equations above, we derive
A0 = $1, 000, A1 = $100, A2 = $200, A3 = $300, A4 = $400, and A5 = $500 .
(c)
FW (20%) = PB (20%)5 = $1, 000
(Note that the ending project balance is the future worth of the project.)
(d)
PW (i ) B = FW (i ) B ( P / F , i, N )
= $198 /(1 + i )5
= $79.57
Solving for i yields i = 20%
5.31
(a)
PW (0%) A = 0
PW (18%) B = $575( P / F ,18%,5) = $251.34
PW (12%)C = 0
(b) Assume that A2 = $500.

PB(12%)0 = $1,000
PB(12%)1 = $1,000(1.12) + A1 = $530
PB(12%)2 = $530(1.12) + $500 = X
Solving for X yields X = -$93.60.
(c) The net cash flows for each project are as follows:
n
0
1
2
3
4
5
Net Cash Flow

A
B
-$1,000
-$1,000
$300
$500
$280
$500
$260
$299
$240
$300
$220
$300
C
-$1,000
$590
$500
-$106
$147
$100
Page | 10

(d)
FW (0%) A = 0
FW (18%) B = $575
FW (12%)C = 0
Capitalized Equivalent Worth

5.32
(a)
PW (13%) = $100, 000(P / A,13%, 5) + $130, 000(P / A,13%, 5)(P / F,13%, 5)

+ ($150, 000 / 0.13)(P / F,13%,10) = $939, 804.35
(b)
A = $939,804.35(0.13) = $122,174.57
5.33
z Capitalized equivalent amount:
$10, 000 $20, 000(A / F,10%, 4)

+
0.1
0.1
= $243, 094.16
CE(10%) = $100, 000 +
5.34
z Find the equivalent annual series for the first cycle:
A = [$100(P / A,15%, 2) + $40(P / A,15%, 2)(P / F,15%, 2)

+ $20(P / F,15%, 5)](A / P,15%, 5) = $66.13
z Capitalized equivalent amount:
CE =
$66.13
= $440.88
0.15
5.35 Given: r =5% compounded monthly, maintenance cost = $80,000 per year
ia = (1 +
0.05 12
) 1 = 5.116%
12
CE (5.116%) =
$80, 000
= $1,563, 663.65
0.05116
Page | 11

5.36 Given: Construction cost = $15,000,000, renovation cost = $3,000,000

every 15 years, annual O & M costs = $1,000,000 and i = 5% per year
(a)
P1 = $15,000,000
$3,000,000( A / F,5%,15)
0.05
= $2,780,537.26
P3 = $1,000,000 / 0.05
P2 =
= $20,000,000
CE(5%) = P1 + P2 + P3
= $37,780,537.26
(b)
P1 = $15,000,000
$3,000,000( A / F,5%,20)
0.05
= $1,814,555.23
P3 = $1,000,000 / 0.05
P2 =
= $20,000,000
CE(5%) = P1 + P2 + P3
= $36,814,555.23
(c)
15-year cycle with 10% of interest:
P1 = $15, 000, 000
$3, 000, 000( A / F ,10%,15)

0.1
= $944, 213.31
P2 =
P3 = $1, 000, 000 / 0.1

= $10, 000, 000
CE (10%) = P1 + P2 + P3
= $25,944, 213.31
20-year cycle with 10% of interest:
Page | 12

P1 = $15, 000, 000

$3, 000, 000( A / F ,10%, 20)
0.1
= $523, 788.74
P2 =
P3 = $1, 000, 000 / 0.1

= $10, 000, 000
CE (10%) = P1 + P2 + P3
= $25,523, 788.74
As interest rate increases, CE value decreases.
5.37 Given: Cost to design and build = $830,000 , rework cost = $120,000
every 10 years, new type of gear = $80,000 at the end of 5th year, annual
operating costs = $70,000 for the first 15 years and $100,000 thereafter
$120,000( A / F,7%,10)
0.07
+$80,000( P / F,7%,5)
CE(7%) = $830,000 +
+$70,000( P / A,7%,15)
$100,000
(P / F,7%,15)
0.07
= $2,166,448.62
+
Mutually Exclusive Alternatives

5.38
(a)
Option A
n
0
1
2
3
4
Net Cash Flow

-$5,000
$2,000
$2,000
$1,000
$2,000
Cumulative CF
-$5,000
-$3,000
-$1,000
$0
$2,000
Option B
n
0
1
2
3
4
Net Cash Flow

-$3,500
$500
$2,000
$1,000
$2,000
Cumulative CF
-$3,500
-$3,000
-$1,000
$0
$2,000
Cannot select.
Page | 13

(b)
PW (10%) A = $2, 000( P / A,10%, 4) $1, 000( P / F ,10%,3) $5, 000
= $588.42
PW (10%) B = $2, 000( P / A,10%, 4) $1, 000( P / F ,10%,3)
$1,500( P / F ,10%,1) $3,500
= $724.78
Select project B.
5.39
PW (12%) A = $1,000 $1,300( P / F,12%,1)
+
+ $660(P / F,12%,10)
= $1,333.31
PW (12%) B = $2,800 $660(P / F,12%,1)
+
+ $840(P / F,12%,10)
= $1,595.94
Select project B.
5.40
(a)
PW (15%) A = $1,800 + $1,150( P / F ,15%,1) +

+$200( P / F ,15%, 4)
= $24.85
PW (15%) B = $1,500 + $1, 200( P / F ,15%,1) +
+$100( P / F ,15%, 4)
= $590.22
Select Project B.
(b)
FW (15%) A = $1,800( F / P,15%, 4) + $1,150( F / P,15%,3) +

+$200
= $43.45
FW (15%) B = $1,500( F / P,15%, 4) + $1, 200( F / P,15%,3) +
+$100
= $1, 032.29
Select Project B.
Page | 14

(c)
PW (15%)C = $4,000 + $1,500( P / F,15%,1)
+ X (P / F,15%,2)
+$1,800(P / F,15%,3) + X (P / F,15%,4)
= 1.3279 X $1,512.12
To be acceptable, it must satisfy the following condition:
PW (15%)C > 0
1.3279 X $1,512.12 > 0
X > $1,138.74
(d)
PW (18%) D = $1,400 $450(P / A,18%,4)
= $189.47 > 0
Yes, project D is acceptable.
(e) If interest rate is higher than 11.76%, project D is better. Otherwise, project
E is better.
5.41
(a)
PW (12%) A = $17,500 + $13, 610( P / F ,12%,1) + $14,930( P / F ,12%, 2)
+ $14,300( P / F ,15%,3) = $16, 732.35
PW (12%) B = $15,900 + $13, 210( P / F ,12%,1) + $13, 720( P / F ,12%, 2)
+ $13,500( P / F ,12%,3) = $16, 441.18
Select project A.
(b)
FW (12%) A = $16, 732.35( F / P,12%,3) = $23,507.74

FW (12%) B = $16, 441.18( F / P,12%,3) = $23, 098.67
Select project A.
5.42
(a)
PW (15%) A = $6,000 + $800( P / F ,15%,1) + $14,000( P / F ,15%,2)
= $5,281.66
PW (15%) B = $8,000 + $11,500( P / F ,15%,1) + $400( P / F ,15%,2)
= $2,302.46
Select project A.
Page | 15

(b) Project A dominates project B at any interest rate between 0% and 50%.
5.43
Model A:
CE(12%)A = $60, 000 +
$25, 000(A / F,12%, 5)

= $92, 791.67
0.12
Model B:
CE(12%)B = $150,000 +
$180,000(A / F,12%, 50)

= $150, 625.5
0.12
Since CE(12%) values above represent cost, project A is preferred.
5.44
Standard Lease Option:
PW (0.5%)SL = $5,500 $1,150(P / A,0.5%,24)
+$1,000(P / F,0.5%,24)
= $30,560.10
Single Up-Front Option:
PW (0.5%)SU = $31,500 + $1,000(P / F,0.5%,24)

= $30,612.82
Select the standard lease option as you will save $52.72 in present worth.
5.45
Machine A:
PW (13%) = $75, 200 ($6,800 + $2, 400)( P / A,13%, 6)
+$21, 000( P / F ,13%, 6)
= $101,891
Machine B:
PW (13%) = $44,000 $11,500( P / A,13%,6)
= $89,972
Machine B is a better choice.
Page | 16

5.46
(a)
Required HP to produce 10 HP:
-Motor A: X 1 = 10 / 0.85 = 11.765 HP
-Motor B: X 2 = 10 / 0.90 = 11.111 HP
Annual energy cost:
-Motor A: 11.765(0.7457)(2,000)(0.09) = $1,579.17
-Motor B: 11.111(0.7457)(2,000)(0.09) = $1,491.39
Equivalent cost:
PW (8%) A = $1,200 $1,579.17(P / A,8%,15)
+$50(P / F,8%,15)
= $14,710.11
PW (8%) B = $1,600 $1,491.39(P / A,8%,15)
+$100(P / F,8%,15)
= $14,334
Motor B is preferred.
(b) With 1,000 operating hours:

Annual energy cost:
-Motor A: 11.765(0.7457)(1, 000)(0.09) = $789.58
-Motor B: 11.111(0.7457)(1, 000)(0.09) = $745.69
Equivalent cost:
PW (8%) A = $1, 200 $789.58( P / A,8%,15)
+$50( P / F ,8%,15)
= $7,942.62
PW (8%) B = $1, 600 $745.69( P / A,8%,15)
+$100( P / F ,8%,15)
= $7,951.19
Motor A is now preferred.
5.47 Given: Required service period = infinite, analysis period = least common
multiple service periods (6 years)
Page | 17

Model A:
PW (12%) cycle = $20,000 + $17,500( P / F ,12%,1) + $17,000( P / F ,12%,2)
PW (12%) total
+ $15,000( P / F ,12%,3) = $19,854.00

= $19,854[1 + ( P / F ,12%,3)]
= $33,985.69
Model B:
PW (12%) cycle = $25,000 + $25,500( P / F ,12%,1) + $18,000( P / F ,12%,2)
PW (12%) total
= $12,117.35
= $12,117.35[1 + ( P / F ,12%,2) + ( P / F ,12%,4)]
= $29,478.02
Model A is preferred.
5.48
(a) Without knowing the future replacement opportunities, we may assume
that both alternatives will be available in the future with the same
investment and expenses. We further assume that the required service
period is 24 years.
(b) With the common service period of 24 years,
Project A1:
PW (10%)cycle = $900 $400( P / A,10%,3)
PW (10%)total
+$200( P / F ,10%,3)
= $1, 744.48
= $1, 744.48[1 + ( P / A,33.10%, 7)]
= $6,302.63
Note that the effective interest rate for a 3-year cycle is

(1.10)3 1 = 33.10%
Project A2:
PW (10%)cycle = $1,800 $300( P / A,10%,8)
+$500( P / F ,10%,8)
= $3,167.22
PW (10%) total = $3,167.22[1 + ( P / F ,10%,8)
+( P / F ,10%,16)]
= $5,334.03
Project A2 is preferred.
Page | 18

(c)
PW (10%) A1 = $1,744.48
PW (10%) A 2 = $1,800 $300( P / A,10%,3) + S ( P / F ,10%,3)
= $2,546.06 + 0.7513S
Let PW (10%) A1 = PW (10%) A 2 , then S = $1, 067
5.49
(a) Assuming a common service period of 15 years
Project B1:
PW (12%)cycle = $20, 000 $2, 000(P / A,12%, 5) + $2, 000(P / F,12%, 5)

= $26, 074.7
PW (12%)total = $26, 074.7[1 + (P / A, 76.23%, 2)]
= $49, 266.29
Note: (1.12) 1 = 76.23%
5
Project B2:
PW (12%)cycle = $17, 000 $2, 500(P / A,12%, 3) + $3, 000(P / F,12%, 3)

= $20, 869.24
PW (12%)total = $20, 869.24[1 + (P / A, 40.49%, 4)]
= $59,180.43
Note: (1.12) 1 = 40.49%
3
Select project B1.
(b)
Project B1 with 2 replacement cycles:
PW (12%) = $26, 074.7 $26, 074.7(P / F,12%, 5)

= $40, 870.19
Project B2 with 4 replacement cycles where the 4th replacement ends at
the end of first operating year::
Page | 19

PW (12%) = $20, 869.24[1 + (P / F,12%, 3) + (P / F,12%, 6)]

[$17, 000 ($2, 500 $9, 000)(P / F,12%,1)](P / F,12%, 9)
= $54, 519.76
Project B1 is still a better choice.

5.50
PW (12%) K = $25,000 11,000( P / A,12%,10) + 3,000(P / F,12%,10)

= $86,186.53
PW (12%)T = $32,000 9,700( P / A,12%,10) + S( P / F,12%,10)
= $86,807.16 + S(0.3220)
PW (12%) K = PW (12%)T
$86,186.53 = $86,807.16 + S(0.3220)
S = $1,927.42
5.51 Since only Model B is repeated in the future, we may have the following
sequence of replacement cycles:
Option 1: Purchase Model A now and repeat Model A forever.
Option 2: Purchase Model B now and replace it at the end of year 2 by
Model A. Then repeat Model A forever.
PW (12%) A = $8, 000 + $3,500( P / A,12%,3)
= $406.41
AE (12%) A = $406.41( A / P,12%,3)
= $169.21
PW (12%) B = $15, 000 + $10, 000( P / A,12%, 2)
= $1,900.51
AE (12%) B = $1,900.51( A / P,12%, 2)
= $1,124.53
(a)
Option 1:
$169.21
0.12
= $1,410.08
PW (12%) AAA =
Option 2:
PW (12%) BAA = $1,900.51 +
$169.21
(P / F,12%,2)
0.12
= $3,024.62
Option 2 is a better choice.
Page | 20

(b) Let S be the salvage value of Model A at the end of year 2.

$8, 000 + $3,500( P / A,12%, 2) + S ( P / F ,12%, 2) = $1,900.51
$2, 084.82 + S (0.7972) = $1,900.51
Solving for S yields
S = $4,999.16
5.52
Since either tower will have zero salvage value after 20 years, we may
select the analysis period of 35 years:
PW (11%) Bid A = $137,000 $2,000( P / A,11%,35)
PW (11%) Bid B
= $154,710
= $128,000 $3,300( P / A,11%,35)
= $157,222
Bid A is a better choice.

If you assume an infinite analysis period, the present worth of each bid
will be:
[$137, 000 $2,000(P / A,11%, 40)](A / P,11%, 40)

0.11
= $157, 322
[$128, 000 $3, 300(P / A,11%, 35)](A / P,11%, 35)
PW (11%)Bid B =
0.11
= $161, 407
PW (11%)Bid A =
Bid A is still preferred.
5.53
(a)
PW (15%) A1 = $15,000 + $9,500( P / F,15%,1)
+$12,500(P / F,15%,2) + $7,500(P / F,15%,3)
= $7,644.04
(b)
PW (15%) A2 = $25,000 + X ( P / A,15%,2)( P / F,15%,1) = $9,300
X = $24,263
Page | 21

(c) Note that the net future worth of the project is equivalent to its terminal
project balance.
PB (15%)3 = $7, 644.04( F / P,15%,3)
= $11, 625.63
(d) Select A2. It has the greater present worth.
5.54
(a) Project balances as a function of time are as follows:
n
0
1
2
3
4
5
6
7
8
Project Balances
A
-$2,500
-2,100
-1,660
-1,176
-694
-163
421
763
1,139
D
-$5,000
-6,000
-7,100
-3,810
-1,191
1,690
3,859
7,245
All figures above are rounded to nearest dollars.

(b) Knowing the relationship FW (i ) = PB (i ) N ,
FW (10%) A = $1,139
FW (10%) D = $7, 245
(c) Assuming a required service period of 8 years
PW (10%) B = $7, 000 $1,500( P / A,10%,8)
$1, 000( P / F ,10%,1) $500( P / F ,10%, 2)
$1,500( P / F ,10%, 7) $1,500( P / F ,10%,8)
= $17, 794
PW (10%)C = $5, 000 $2, 000( P / A,10%, 7)
$3, 000( P / F ,10%,8)
= $16,136
Select Project C.
Page | 22

5.55
Option 1: Non-deferred plan
PW (12%) = $300, 000 $49, 000(P / A,12%, 8)
= $543, 414.35
Option 2: Deferred plan
PW (12%) = $140, 000(P / F,12%, 2) $14, 000(P / A,12%, 6)(P / F,12%, 2)
$160, 000(P / F,12%, 5) $21, 000(P / A,12%, 3)(P / F,12%, 5)

$180, 000(P / F,12%, 8)
= $349, 600.72

5.56
Alternative A: Once-for-all expansion
PW (15%) A = $30 M $0.40 M ( P / A,15%, 25)
+$0.85M ( P / F ,15%, 25)
= $32,559,839
Alternative B: Incremental expansion

PW (15%) B = $10 M $18M ( P / F ,15%,10)
$12 M ( P / F ,15%,15) + $1.5M ( P / F ,15%, 25)
$0.25M ( P / A,15%, 25)
$0.10 M ( P / A,15%,15)( P / F ,15%,10)
$0.10 M ( P / A,15%,10)( P / F ,15%,15)
= $17, 700, 745
Select alternative B.
5.57
Option 1: Tank/tower installation
PW (12%)1 = $164, 000
Option 2: Tank/hill installation with the pumping equipment replaced at the
end of 20 years at the same cost
PW (12%) = ($120, 000 + $12, 000)

($12, 000 $1, 000)( P / F ,12%, 20)
+$1, 000( P / F ,12%, 40) $1, 000( P / A,12%, 40)
= $141,373

Page | 23

Short Case Studies

ST 5.1
Option 1: Process device A lasts only 4 years. You have a required
service period of 6 years. If you take this option, you must consider how
you will satisfy the rest of the required service period at the end of the
project life. One option would subcontract the remaining work for the
duration of the required service period. If you select this subcontracting
option along with the device A, the equivalent net present worth would be
PW (12%)1 = $100, 000 $60, 000( P / A,12%, 4)

+$10, 000( P / F ,12%, 4)
$100, 000( P / A,12%, 2)( P / F ,12%, 4)
= $383, 292
Option 2: This option creates no problem because its service life
coincides with the required service period.
PW (12%) 2 = $150, 000 $50, 000( P / A,12%, 6)
+$30, 000( P / F ,12%, 6)
= $340,371
Option 3: With the assumption that the subcontracting option would be
available over the next 6 years at the same cost, the equivalent present
worth would be
PW (12%)3 = $100, 000( P / A,12%, 6)

= $411,141
With the restricted assumptions above, option 2 appears to be best alternative.
Notes to Instructors: This problem is deceptively simple. However, it can make
the problem interesting with the following embellishments.
If the required service period is changed to 5 years, what would be the best
course of action?
If there are price differentials in the subcontracting option (say, $55,000 a year
for a 6-year contract, $60,000 for a 5-year contract, $70,000 a year for a 4-year
contract and $75,000 a year for any contract lasting less than 4 years), what
would be the best option?
If both processes A and B would be available in the subsequent years, but the
required investment and salvage value would be increasing at the annual rate
of 10%, what would be the best course of action?
If both processes A and B will be available in the subsequent years, but the
required investment and salvage value (as well as the O & M costs) would be
decreasing at the annual rate of 10%, what would be the best course of action?
Page | 24

ST 5.2
PW (8%)1 = $680, 000 $680, 000( P / F ,8%, 7)

= $1, 076, 773.47
PW (8%) 2 = $920, 000
PW (8%)1 = $680, 000 $680, 000( P / F ,8%, 7)

= $1, 076, 773.47
PW (8%)2 = $920, 000 $920, 000( P / F ,8%,16)
= $1,188,539.23
ST 5.3 Note to Instructors: This case problem requires several pieces of

information. (1) No minimum attractive rate return figure is given for
Tampa Electrics. (2) What would be a typical number of accidents in line
construction work? (3) How does a typical electric utility handle the nesting
problems? If there is some cleaning cost, how much and how often?
First, we may calculate the equivalent present value (cost) for each
option without considering the accident costs and nesting problems.
Design Options
Factors
Investment:
Construction cost
Accident cost
Annual cost:
Flashover repair
Cleaning nest
Annual savings:
Inventory
Option 1
Cross Arm
Option 2
Triangular
Option 3
Horizontal
Line
Option 4
Stand Off
$495,243
$396,813
$402,016
$398,000
$6,000
$3,000
$3,000
$3,000
$4,521
$4,521
$4,521
Assuming that Tampa Electrics required rate of return would be 12%.

The equivalent present value cost for each option is as follows:
Page | 25

PW (12%)1 = $495,243 $6,000( P / A,12%,20)

= $540,060
PW (12%)2 = $396,813 $3,000( P / A,12%,20)
+$4,521( P / A,12%,20)
= $385,452
PW (12%)3 = $402,016 $3,000(P / A,12%,20)
+$4,521( P / A,12%,20)
= $390,655
PW (12%) 4 = $398,000 $3,000( P / A,12%,20)
+$4,521( P / A,12%,20)
= $386,639
It appears that the triangular design configuration appears to be the
most economical.
If we consider the potential accident costs ($65,000 per accident) during

line construction week, it can change the outcome. If we expect only a
couple of accidents, option 2 still appears to be the best. However, if you
expect more than three accidents, the conventional cross-arm design
appears to be economical. If the nest cleaning cost were factored into the
analysis, the accident cost would be reduced to the extent of the annual
cleaning cost, indicating the preference of the triangular design.
ST 5.4
Not provided
Page | 26

Chapter 5 Present-Worth Analysis: Identifying Cash Inflows and Outflows

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Chapter 5 Present-Worth Analysis: Identifying Cash Inflows and Outflows

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Contemporary Engineering Economics, Fifth Edition, by Chan S. Park.

Chapter 5 Present-Worth Analysis

Net Cash Flow

Cost of Funds (15%)

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

Payback period = 6.54 years

Net Cash Flow

Cost of Funds (15%)

Cumulative Cash Flow

PW (12%) = $100, 000 + $30, 000( P / A,12%,5) = $8,143.3

PW (10%) A = $3,500 + $4, 200( P / F ,10%, 4) = $631.34

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

PW (10%) B = $6,500 + $1,600(P / F,10%,1) + $1,800(P / F,10%,2)

PW (10%) D = $4,300 $1,000(P / F,10%,1) + $1,900(P / F,10%,2)

PW(15%) = $250, 000 + $40, 000( P / A,15%,35) + $50, 000( P / F ,15%,35)

PW(20%) = $250, 000 + $40, 000( P / A, 20%,35) + $50, 000( P / F , 20%,35)

PW(i ) = $250, 000 + $40, 000( P / A, i,35) + $50, 000( P / F , i,35) = 0

Correct answer is (d) as all of the statements are correct.

Solving for A0 = yields

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

The investment has a net present worth of $77,417.07 and would be

PW (15%) = $500,000 2,200,00( P / F ,15%,1) + $2,700,000( P / A,15%,8)

Future Worth and Project Balance

Therefore, A. Investing in the United States

+ $6, 000( P / F ,15%,3) = $9,834

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

ia = 12.68% : $5,000(F / P,12.68%,20) = $54,438.58

Option B is the best choice.

PW (15%) A = $1, 200, 000( P / F ,15%,1) + $900, 000( P / F ,15%, 2)

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

PB(i )1 = $10, 000(1 + i ) + A1 = $11, 000

(b) Since PW (24%)1 = 0 , FW (24%)1 = 0 .

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

Project D because it has only a positive balance at the end of year 2.

FW (12%) A = $2, 200( F / P,12%,5) $500( F / P,12%, 4)

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

FW (12%) D = $5, 400( F / P,12%,5) + $1,500( F / P,12%, 4)

(b) Accept all projects except E.

(c) Note that PB(12%)5 = FW (12%).

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

z The present worth of the expected revenue:

Price of the project = -$74.416M + $419.25M - $30M = $314.83M

PW (10%) A = $105(P / F,10%,5)

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

(b) Assume that A2 = $500.

Net Cash Flow

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

Capitalized Equivalent Worth

PW (13%) = $100, 000(P / A,13%, 5) + $130, 000(P / A,13%, 5)(P / F,13%, 5)

z Capitalized equivalent amount:

$10, 000 $20, 000(A / F,10%, 4)

CE(10%) = $100, 000 +

A = [$100(P / A,15%, 2) + $40(P / A,15%, 2)(P / F,15%, 2)

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

5.36 Given: Construction cost = $15,000,000, renovation cost = $3,000,000

$3, 000, 000( A / F ,10%,15)

P3 = $1, 000, 000 / 0.1

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

P1 = $15, 000, 000

P3 = $1, 000, 000 / 0.1

Mutually Exclusive Alternatives

Net Cash Flow

Net Cash Flow