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# Department of Chemical Engineering

## & Energy Sustainability

Faculty of Engineering

## KNC 3262 ENGINEERING ECONOMY

CASE STUDY
ON
APPLICATION OF MONEY-TIME RELATIONSHIP

By

## Dayangku Nur Hamiza Binti Awang Kedari (45221)

Ahmad Auzaee Bin Mohamed Ali (45428)
Nor Liyana Binti Yusop (48052)
Nur Jihan Nazihah Binti Amin (45886)
Mohd Fazlieman Bin Gurahman (45688)

## Bachelor of Engineering with Honours

(Chemical Engineering)
2017

TABLE OF CONTENTS

## 1.0 Overview of the case 1

2.0 Problem Statement 2
3.0 Solution Methodology (Formula) 2
a) By using the Present Worth (PW) method
b) By using the Future Worth (FW) method
c) By using the Annual Worth (AW) method
4.0 Recommendations and Conclusion 5
5.0 References 6
6.0 Learning Outcomes 7
1.0 Overview of the case

## to exercise the option. The equipment will have a market value of RM

5000 at the end of a study period of five years. Market value refers to the

## Increased productivity attributable to equipment will amount to RM

8000 per year after extra operating costs have been subtracted from the

## 3.0 A cash-flow diagram for this investment opportunity is

given in Figure 1.1. Noted, the firms MARR is 20% per year. An analysis

## to the investment of new equipment is prepared by using three different

method which are Present Worth (PW), Future Worth (FW) and Annual

## discounted to the present time at the MARR. FW is the value of an

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asset at a specific date. AW of project is the equivalent annualized

4.0

5.0

## attributable to equipment will amount to RM 8000 per year after extra

operating costs have been subtracted from the revenue generated by the

additional production.

## investment analysis is documented in this report. By using method such

as the present worth method, future worth method and annual worth

## method, the investment analysis can be made.

9.0
10.0 Solution Methodology (Formula)

11.0 Question 1:

4
12.0 New equipment has been proposed by process engineers to

## productivity attributable to equipment will amount to RM 8000 per year

after extra operating costs have been subtracted from the revenue

13.0

14.0

15.0
RM 5000
16.0

17.0

## 18.0 RM 8000 RM 8000 RM 8000 RM 8000 RM 8000

19.0

20.0
1 2 3
21.0 4 5
Years
22.0
i=20 / yr
23.0
RM
24.0

25.0 Figure 1.1: Cash Flow Diagram for the investment of new
equipment

5
26.0

mentioned below:

## a) By using the Present Worth (PW) method

b) Evaluate the Future Worth (FW) of the potential improvement project.
c) By using the Annual Worth (AW) method

28.0 Solution

## 29.0 The table below summarizes the equivalency factors.

The Name column shows the traditional names for the factors. Each

factor has a formula that depends on i, the interest rate per compounding

## period, and N, the number of compounding periods in the interval. The

factors are valid for i strictly greater than zero and N integer.

## 30.0 Table 1: Factor formula

6
31.0

32.0 The solution for the questions above are shown in table below

N hod

## 36.0 37.0 Pres 38.0

7
1 ent Worth
PW =PV ( PP , 20 , 5)+ AV ( PA ,20 ,5)+ FV ( PF ,20 ,5)
(PW)

( 1+i )n1
39.0
PW =PV (1 ) + AV
( )
i ( 1+ i )
n
n
+ FV ( (1+i ) )

40.0

( 1+i )n1
PW =25000+8000
( i ( 1+i )
n)+5000 ( 1+i )
n

41.0

( 1+0.2 )51
PW =25000+8000
( i ( 1+0.2 )
5 )
+5000 ( 1+0.2 )
5

42.0
PW =2009.3879+23924.897125000

43.0
PW =RM 934.28

2 re Worth

## (FW) FW =PV ( FP ,20 ,5)+ AV ( FA , 20 , 5)+ FV ( FF , 20 , 5)

( 1+i )n1
47.0
FW =PV
1
(
( 1+ i )n
+ AV
) ( i
+ FV ( 1 ) )
( 1+i )n1
48.0
FW =PV
( 1
) (
( 1+ i )n
+ AV
i )
+ FV ( 1 )

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49.0

( 1+i )n 1
FW =25000
( 1
)
( 1+ i )n
+ (
8000
i ) +5000

50.0

5
FW =25000
( 1
( 1+ 0.2 )5 )
+8000 (
( 1+0.2 ) 1
0.2
+5000 )
51.0
FW =8359.492+59532.8+5000

52.0
FW =RM 2324.8

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53.0 54.0 Ann 55.0

3 ual Worth

## (AW) AW =PV ( AP ,20 ,5)+ AV ( AA , 20 , 5)+ FV ( FA , 20 , 5)

56.0

n
AW =PV
(
i ( 1+ i )
n
( 1+i ) 1 )
+ AV ( 1 ) + FV
i
(
i ( 1+i )n1 )
57.0

n
AW =25000
(
i ( 1+i )
n
( 1+i ) 1 )
+8000+5000
i
n
i ( 1+ i ) 1 ( )
58.0

5
AW =25000
(
0.2 ( 1+ 0.2 )
5
( 1+0.2 ) 1
+8000+5000
) 0.2
(
0.2 ( 1+ 0.2 )51 )
59.0
AW =8359.492+8000+671.8985

60.0
AW =RM 312.41

61.0

## 62.0 Recommendations and Conclusion

63.0 Recommendation

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64.0 Using the present worth method, there are 2 analyses that

can be done which is if the value obtained is negative or less than zero,

## the investment is deemed unprofitable and if the value obtained is

positive, the investment can bring profit. From the calculation done

previously, the value obtained is positive which means that the future

value of the machine will be greater than the future cost and it is

## suggested that the equipment should be bought and it is economically

feasible.

65.0 Using the future worth method, there are also 2 possible

analyses that can be made which is the same as the present method.

## Based on the calculations done previously using the future worth

method, the suggested answer is also the same which is the investment is

## recommended and it is economically feasible.

66.0 Last but not least, using the annual worth method, there

are also 2 possible analyses that can be made whether it is greater or less

than zero. From the calculations done previously, the value obtained is

positive and the suggestion is also the same where the equipment should

## be bought and it is economically feasible.

67.0 Conclusion

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68.0 For this case, there are various ways to determine the

## economic feasibility of the investment which is through the present worth

method, future worth method and the annual worth method. Each of the

methods have different calculations and formula used but for this case,

all the methods points to a single answer where the investment of the

operation

69.0

70.0 References

## 71.0 Utexas (2017) Factor Formulas Available at:

https://www.me.utexas.edu/~me353/lessons/S2_Evaluation/L02_Equivale

73.0

## 74.0 75.0 Learning/Idea/Recomme 76.0 Reference

Key ndation

wor

d
77.0 78.0 Definition: The amount of 79.0 IGI Global

## cost to exercise the option (cost of Available at:

12
converting the investment http://www.igi-

## underlying asset. ry/investment-

cost/15660,

Accessed on 12

March 2017

80.0
81.0 82.0 Definition: The income 83.0 Business

## expenses are deducted. finition/revenue.ht

ml, Accessed on 12

March 2017
84.0 85.0 Definition: Operating costs 87.0 Investopedia

## cost of a business on a day-to-day Available at:

basis. http://www.investo

86.0 pedia.com/terms/o/

operating-

cost.asp#ixzz4b5r

VJZkX, Accessed on

12 March 2017

88.0
89.0 90.0 All cash inflows and 99.0 Berrado, A.

## Present outflows are discounted to the (2017), Chapter 5:

13
wort present time at the MARR Present Worth

h 91.0 Analysis,

## project is economically justified personal/~A.Berrad

93.0 o/EGR2302/EGR23

94.0 02_Ch05.pdf,

Accessed on 12

P P P March 2017
PW =PV ( P ) (
, i, n + AV
A )
, i, n + FV ( , i, n)
F 100.0 Blank, L. &

n Tarquin, A. (2005),
P (1+ i) 1
95.0 =
A i(1+ i)n Engineering

Economy, New
P n
96.0
=(1+i)
F York, McGraw Hill.

97.0

98.0
101.0 102.0 If FW (i %) 0, then the 111.0 Man-Cho So,

## wort 103.0 Engineering

h 104.0 Economics,

105.0 Department of

106.0 System

## 107.0 Engineering &

Engineering

F F F Management, Hong
PW =PV ( P ) (
,i , n + AV
A )
,i , n + FV ( ,i , n)
F Kong, China.

## 112.0 Blank, L. &

F
108.0
=(1+i)n
P Tarquin, A. (2005),

14
n
F (1+ i) 1 Engineering
109.0 =
A i
Economy, New

## 110.0 York, McGraw Hill.

113.0 114.0 AW of project is the 120.0 Man-Cho So,

## project; is economically justified Engineering &

116.0 Engineering

Management, Hong

A A A Kong, China.
PW =PV ( P ) (
, i ,n + AV
A )
, i ,n + FV ( , i, n)
F 121.0 Blank, L. &

n Tarquin, A. (2005),
A i(1+ i)
117.0 =
P (1+ i)n1 Engineering

Economy, New
A i
=
118.0 F i(1+i)n 1 York, McGraw Hill.

119.0
122.0

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