ASSET MANAGEMENT

DAY 01

Winda Nur Cahyo, S.T., M.T., Ph.D

winda.nurcahyo@uii.ac.id

5 Core Question Related to AM

• What is the current state of my assets?
• What is my required “sustainable” level of service?
• Which assets are critical to sustained performance?
• What are my “minimum life-cycle-cost” CIP and O&M
strategies?
• Given the above, what is my best long-term funding
strategy?
 Page 3

Asset Problem 1 :

• Tools kami umurnya

sudah tua, Backhoe
misalnya, jika availability-
nya sekitar 80% maka
menurut kebijakan
perusahaan harus ada
replacement.

Page 4

Asset Problem 2 :
• Kami (bagian pengadaan)
diminta mengadakan Bearing
untuk replacement, tetapi ada
order untuk mencari bearing
dengan spesifikasi yang sama
tetapi dengan harga yang lebih
murah. Akibatnya, ternyata
pergantian bearing yang
harusnya tiap tahun menjadi
hanya tiap 6 bulan.
Page 5

Asset Problem 3 :
Jika dianalogikan, mesin- mesin
kami seperti kijang tahun 80an
sedangkan mesin dari
perusahaan lain seperti kijang
tahun 2000an. Hal ini membuat
biaya maintenancenya menjadi
lebih tinggi dan akhirnya
berujung pada HPP yang juga
lebih tinggi. Sehingga produk
kami kurang bisa bersaing
karena harga yang lebih mahal.
Outline Day 1:
1. Asset and Asset Management
2. Asset management system
3. ISO 55000
4. Asset Life Cycle Management.
5. Pengantar Ekonomi Teknik untuk pembuatan model
LCC

Outline Day 2:
1. Aplikasi Life Cycle Cost untuk pendukung keputusan
2. Studi kasus LCC
3. Framework untuk optimasi maintenance dan
maintenance resources
4. Studi Kasus optimasi maintenance dan maintenance
resources.
5. Risk Management untuk asset
6. Tactical asset related decision making.
 Outline Day 3:
1. Asset Managemet Maturity Model
2. Regulasi tentang Perijinan Aset

What is Asset ISO 55000 :

Asset : An asset is an
item, thing or entity that
has potential or actual
value to an organization.
The value will vary
between different
organizations and their
stakeholders, and can be
tangible or intangible,
financial or non-financial

• A fixed asset is a long-term tangible piece of property that a firm owns and uses in
the production of its income and is not expected to be consumed or converted into
cash any sooner than at least one year's time.
• Fixed assets can include buildings, computer equipment, software, furniture, land,
machinery and vehicles. For example, if a company sells produce, its delivery
trucks are fixed assets. If a business creates a company parking lot, the parking lot
is a fixed asset.
 Page 12

What is Asset Management?

• The coordinated activity of an organisation to realise value
of asset

• Asset management translates the organization’s objectives

into asset-related decisions, plans and activities, using a risk
based approach.

• Asset management enables an organization to realize value

from assets in the achievement of its organizational
objectives.
Page 13

What is Asset Management? (2)

ISO 55000:
Asset management
involves the balancing of
costs, opportunities and
risks against the desired
performance of assets, to
achieve the organizational
objectives. The balancing
might need to be
considered over different
timeframes.

14

New
New Roof Carpet
$10,000 $4,000

Painting
Replace
Windows $8,000
$5,000

New
Furnace Landscaping

$8,000 $3,000
 15

Asset management for a car

New Car

• Regular oil changes,

• Flush radiator
• Wash/wax regularly
• Repair paint chips
• Change belts,
• Change transmission fluid

16

Asset management for a car

Aging Car

• Charge AC

• Repaint

• Engine overhaul

• New tires
17

Asset management for a car

Old Car

• Only critical maintenance

• Only critical repair

• Not worried about auxiliary

features that fail

• Keep it running until it can be

replaced - minimize cost

18

Not worried about scratches on this one!

 19

Innovative Repair Strategies

Page 20 How to
Can we
reduce
reduce the
freq of SM?
operation
cost
Asset Life Cycle
Do you
need the
asset?
Discovering The Hidden Factory

Production Output
The Truth is Hidden under the Surface

What is the impact to organisation?

Page 24

Why Asset Management?

• Saat ini, mengelola aset secara efektif bukan sebuah
pilihan, tetapi sebuah keharusan.
• Di semua perusahaan (khususnya “capital intesive
business”) menghadapi tantangan manajemen aset
yang signifikan:
• Perusahaan baru berusaha mengidentifikasi lowest cost
/highest return on investments untuk memperoleh
benefit lebih cepat.
• Perusahaan yang berkembang dihadapkan pada
persoalan life cycle costs aset mereka.
• Perusahaan yang lebih “mature” mencari cara
memperpanjang umur asetnya serta memenuhi
tantangan global seperti perubahan iklim.
Page 25

Why Asset Management (2) ?

Asset management thinking can provide structure to assist
in all of these scenarios.

It can improve the quality of life for millions of people.

It is an important cog in the big machine of our evolving

company.

Page 26

The Challenges :
• Asset does not respond to economy or politics
• But it does respond to how it is treated and used.
• This creates a challenge for management. “ How do you
get the right behaviour from an entity that won’t listen?”
 Page 27

Asset Management is :
• a mind-set which sees physical assets not as inanimate
and unchanging lumps of metal / plastic / concrete, but as
objects and systems which respond to their environment,
change and normally deteriorate with use, and
progressively grow old then fail / stop working / die!
• a recognition that assets have a life cycle
• as important for those working in finance as it is for
engineers
• an approach that looks to get the best out of the assets for
the benefit of the organisation and/or its stakeholders
• Is about understanding and managing the risk associated
with owning assets

Page 28

Asset Management is not :

• just about maintenance. Maintenance is part of the stewardship of assets,
but so is design, procurement, installation, commissioning, operation, etc.
See a description of the Asset Life Cycle later
• a substitute for quality management. Asset Management, like other
management processes, should be subject to scrutiny through a quality
process to ensure rigour
• a project management system
• just for engineers. Everyone working in a company that owns or operates
assets should be interested. This includes those working in procurement,
finance, personnel, service, planning, design, operations, administration,
leadership, marketing and Sales
• just an accounting exercise. Whilst it may help you understand the
deterioration and hence depreciation of an asset, it is of interest to every
part of the organisation
• a purely academic discipline. Whilst it is a worthy subject for academic
review and advancement, it is primarily a pragmatic, hands-on subject
 Page 29

Why AM is important?
Asset Management is important because it can help organisations
to:
1. Reduce the total costs of operating their assets
2. Reduce the capital costs of investing in the asset base
3. Improve the operating performance of their assets (reduce
failure rates, increase availability, etc)
4. Reduce the potential health impacts of operating the assets
5. Reduce the safety risks of operating the assets
6. Minimise the environmental impact of operating the assets
7. Maintain and improve the reputation of the organisation
8. Improve the regulatory performance of the organisation
9. Reduce legal risks associated with operating assets

Page 30

The key :
The key to good Asset Management is that it
OPTIMISES these benefits. That means that asset
management takes all of the above into account and
determines the best blend of activity to achieve the best
balance for all of the above for the benefit of the
organisation.
Fundamental of Asset Management:
Analysis
• Stakeholder : Children who want to get value from the
asset.
• Park is a system that consist of several sub-systems :
trees as a shade, swing, slide and sandpit for playing,
table and seats for waiting parent, grass for “soft landing”.
• What questions you can ask related to the asset planning,
operating, and maintenance?

Asset Management System

• Winda Nur Cahyo, S.T., M.T., Ph.D

• winda.nurcahyo@uii.ac.id
Definition of Key Terms :
• Asset : item, thing or entity that has potential or actual
value to an organization
• Asset System : set of assets that interact or are
interrelated
• Asset Management : coordinated activity of an
organization to realize value from assets
• Management System : set of interrelated or interacting
elements of an organization to establish policies and
objectives and processes to achieve those objectives
• Asset Management System : management system for
asset management whose function is to establish the
asset management policy and asset management
objectives.

Page 42

Relationship Between Key terms

Operational Definition of AMS
• Asset Management System (AMS ) is a set of
interrelated and interacting elements of an
organization, whose function is to establish the
asset management policy and asset
management objectives, and the processes,
needed to achieve those objectives.
• The elements of AMS should be viewed as a set
of tools, including policies, plan, business
processes, IT/IS, which are integrated to give
assurance that asset management activities can
be delivered.
 Page 45

Benefit of AMS
An asset management system provides a structured
approach for the development, coordination and control of
activities undertaken on assets by the organization over
different life cycle stages, and for aligning these activities
with its organizational objectives.
1. Creating an asset management system provides
benefits in itself.
2. Top management benefits from new insights and cross
functional integration
3. Financial functions benefit from improved data and
linkages
4. Many parts of the organization benefit from an asset
management system.

1. Creating an asset management system provides benefits in itself.

• The process of implementing an AMS can require significant time effort and
expense; however, the organization does not need to wait until the entire system is
fully operational to begin accruing benefits. The benefits, or quick wins, in areas
such as risk reduction, opportunity identification or process improvement can be
identified early in the implementation, and can be exploited to demonstrate returns
and gain stronger stakeholder support.
• Asset management is data intensive and new tools and processes are often
necessary to collect, assemble, manage, analyse and use asset data. The creation
and use of these tools can stimulate and improve organizational knowledge and
decision making.
• The process of creating an asset management system brings new perspectives to
the organization and new ideas on value creation from the use of assets. These
new perspectives can also stimulate improvements in other organizational
functions, such as purchasing, finance, human resources and information
technology.
• The creation of an asset management system is usually cross-functional and
based on life cycle considerations; this can provide a focal point for addressing the
issues of functional integration of the organization and life cycle planning.
2. Top management benefits from new insights and cross functional integration
• An asset management system can help in gaining an understanding
of assets, their performance, the risks associated with managing
assets, investment needs, and asset value as an input to decision
making and organizational strategic planning.
• Top management should recognize the need to improve
communication and interaction across functions. An asset
management system inherently supports this interaction. It ensures
that assets are managed in an integrated manner, and asset value
is improved.
• An asset management system supports a long-term and
sustainable approach to decision making.
• An asset management system provides an ideal framework for the
identification, understanding and integration of the many technical
standards, codes, guidelines and best practices that affect the
organization’s assets, and support the implementation of asset
management.
• An asset management system supports energy management,
environmental management and other activities related to
sustainability.

3. Financial functions benefit from improved data and linkages

• Integration of an organization’s strategic asset management plan
(SAMP), with its long-term financial plans can enable the balancing of
short-term financial needs with the needs of medium-term activity plans,
and with the much longer-term plans that some assets require.
• Robust financial information, based on integrated processes between
the asset management and finance functions, is an important benefit of
the asset management system. The linkage of asset management
information to financial information is an important contribution of the
asset management system to the financial function. This interaction
supports improved assessment of the financial position and funding
requirements of the organization in relation to its assets.
• The organization’s risk-based decision making processes can become
more effective by addressing asset and financial risks together, and by
balancing performance, costs and risks.
• An effective taxonomy, which may be a feature of the asset
management system, can enable an integrated financial and technical
view of assets and asset systems.
4. Many parts of the organization benefit from an asset management system.
An asset management system touches many parts of the organization:
• the organization’s human resources function may work with its asset
management system on the development of competency models, training
programs and processes for coaching and mentoring; these developments
benefit both functions;
• some asset data comes from control systems, which are often isolated
from other information systems. Integration of this data through the asset
management system can provide new asset information, leading to
improved organizational decision making;
• communicating with employees, suppliers and contracted service
providers about the asset management system can result in improvements
in the quality of asset information; it will also increase awareness amongst
individuals, inside and outside of the organization, of their role in asset
management decision making and the value of the activities they are
undertaking;
• the asset management system can stimulate creativity and innovation by
supporting people who understand the importance of asset management
and are motivated to work towards achieving the asset management
objectives.

ISO 55000 Series : The International Standard of AMS

• In 2004 the UK Institute of Asset Management, in

conjunction with British Standards Institution, developed
PAS 55, the first publicly available Introduction 4
specification for optimized management of physical
assets
• This has proven very successful, with widespread
adoption in utilities, transport, mining, process and
manufacturing industries worldwide.
• The 2008 update (PAS 55:2008) was developed by 50
organisations from 15 industry sectors in 10 countries
• The International Standards Organisation (ISO) has now
accepted PAS 55 as the basis for development of the new
ISO 55000 series of international standard.
Content of ISO 55000 Series
• ISO 55000 : provides an overview of the subject of asset
management and the standard terms and definitions to be
used.

• ISO 55001 : is the requirements specification for an

integrated, effective management system for assets.

• IS0 55002 : provides guidance for the implementation of

such a system

Clauses of ISO 55001

1. Scope
2. Normative references
3. Terms and definitions
4. Context of the organization
5. Leadership
6. Planning
7. Support
8. Operation
9. Performance evaluation
10. Improvement
The Clauses in PDCA Layout
Relation to Other Asset Type
 Asset Life Cycle Management

Winda Nur Cahyo, S.T., M.T., Ph.D

39 Subjects and 6 Groups in the Model

 Life-Cycle Management
Life Cycle Management is a business management approach
that can be used by all types of business (and other
organizations) in order to improve their sustainability
performance.

Value of Asset to Organisation

• Asset management does

not focus on the asset
itself, but on the value
that the asset can provide
to the organization.

• To realize the value from

asset, a life cycle
management approach
can be used.
 Asset Life Cycle

Planning
• Planning is the first stage of the asset life cycle. This stage
establishes and verifies asset requirements. Establishment of asset
requirements is based on evaluation of the existing assets and their
potential to meet service delivery needs. Identification of
management strategies is required in order to include and analyze
the need for an asset. Throughout all stages of planning, it is crucial
to make sure that the ongoing development adds value to the
organization.
• If the company uses effectively planning in all asset management
cycle stages, it will help in:
• assessing the practical sufficiency of existing assets
• ensuring resources are available when necessary
• recognizing excess or under-performing assets
• estimating options for asset provision and funding asset acquisition
• ensuring assets are maintained and liable
• The progress of an asset management project as component of the
organization’s planning procedures gives the most excellent means
of delivering value-added asset management.
Acquisition
• Taking the best decision on choosing the best option can only be
made after defining the cost and the requirements. The choice will be
the phase of further planning, the acquisition planning. The
acquisition planning includes activities involved in purchasing an
asset with the aim of ensuring cost effective acquisition. This covers
activities such as designing and procuring an asset. Appropriate
application of these activities guarantees that the asset is fit for use.

• Initially, the organization should decide whether the asset will be

perpetually bought or built. Next, establish a budgeting for asset
acquisition along with a time frame for its acquisition and a
purchasing requirement. A practical budget and cash flow should be
put as deficient funds or otherwise project management can put at
risk the process of asset acquisition. Whenever these requirements
are met, a project team should run the process to make sure that all
acquisition process activities will be completed to meet service
delivery and other organization objectives.

Operation and Maintenance

• The operation and maintenance stage indicates the
application and management of an asset, including
maintenance, with the aim of delivering services. The plan
of asset management should have a high focus on asset
maintenance issues. Long lived assets, in the majority of
public sector assets, especially roads and buildings
require particular maintenance during their life cycle.

• Throughout this time, the asset should be focus to

appropriate maintenance, monitoring and potential
improvement to overpass any adjustment in operational
requirement.
Disposal
• When an asset reaches its end of a useful life, it can be treated
as a surplus, or otherwise is considered as an underperforming
asset. Disposal should be treated in the perspective of the
effects of the decision on service delivery and any
departmental responsibilities. A special focus should be placed
on cultural heritage where there are detailed requirements that
organization should take into consideration. If in the near future
an asset is to be disposed, in order that statutory maintenance
to be taken, the maintenance strategy should be properly
adjusted.

• Any organization, in either public or private sector, will need to

deal with asset handling. Recognizing asset’s value, future
value and costs are essential, therefore developing a strategic
asset management plan is highly preferred and required. Such
a strategic asset management plan would enable an effective
and well-organized asset and deliver services.
Activity Based Costing (ABC)
• Activity-based costing (ABC) is an accounting method that
identifies the activities that a firm performs and then
assigns indirect costs to products. An activity-based
costing (ABC) system recognizes the relationship
between costs, activities and products, and through this
relationship, it assigns indirect costs to products less
arbitrarily than traditional methods.
• In Delivering Asset Life-Cycle, hundreds or perhaps
thousands of activities occurs from the planning until the
disposal stage of the asset.
• Refer to the ABC, these activities generates cost.
• The cost to deliver the asset life-cycle is “Life-Cycle Cost”
(LCC)

Life-Cycle Cost (LCC)

• The total cost throughout its life including planning, design, acquisition
and support costs and any other costs directly attributable to owning
or using the asset.
• Life Cycle Cost (LCC) of an item represents the total cost of its
ownership, and includes all the cots that will be incurred during the life
of the item to acquire it, operate it, support it and finally dispose it. Life
Cycle Costing adds all the costs over their life period and enables an
evaluation on a common basis for the specified period (usually
discounted costs are used).
• This enables decisions on acquisition, maintenance, refurbishment or
disposal to be made in the light of full cost implications. In essence,
Life Cycle Costing is a means of estimating all the costs involved in
procuring, operating, maintaining and ultimately disposing a product
throughout its life.
• Life cycle costing is different from traditional cost accounting system
which reports cost object profitability on a calendar basis (i.e. monthly,
quarterly and annually) whereas life cycle costing involves tracing
costs and revenues of a cost object (i.e. product, project etc.) over
several calendar periods (i.e. projected life of the cost object).
Elements of LCC :
• Acquisition costs (or design and development costs).
• Operating costs:
• Cost of failures
• Cost of repairs
• Cost for spares
• Downtime costs
• Loss of production
• Maintenance costs:
• Cost of corrective maintenance
• Cost of preventive maintenance
• Cost for predictive maintenance
• Disposal costs.

LCC formula (1) :

• Ebeling (2010)
Assumption:
• Ebeling (2010) has proposed assumptions in
association with the application of his LCC model.
These assumptions are:
1. The component replaced is as good as new
2. All operating units are identical and obtained at the
same time
3. Constant annual operating requirement
4. The system is in steady state
5. No preventive maintenance is undertaken during the
operational period of unit
6. No failures occur in standby, perfect switching with
insignificant down time.

LCC formula (2) :

• LCC in Cahyo (2016):
Introduced Cost Elements

New LCC

• The new introduced LCC is only for 1 year.

• However, the asset life cycle is multi-years.
• It is important to consider the value of money in the LCC
• Engineering Economics can be applied.
Engineering Economics for LCC

• Winda Nur Cahyo, S.T., M.T., Ph.D

• winda.nurcahyo@uii.ac.id

Engineering Economy
• It deals with the concepts and techniques of analysis
useful in evaluating the worth of systems, products, and
services in relation to their costs
• It is used to answer many different questions
• Which engineering projects are worthwhile?
• Has the mining or petroleum engineer shown that the mineral or oil
deposits is worth developing?
• Which engineering projects should have a higher priority?
• Has the industrial engineer shown which factory improvement projects
should be funded with the available dollars?
• How should the engineering project be designed?
• Has civil or mechanical engineer chosen the best thickness for
insulation?

76
Basic Concepts
• Cash flow
• Interest Rate and Time value of money
• Equivalence technique

77

Cash Flow
• Engineering projects generally have economic
consequences that occur over an extended
period of time
• For example, if an expensive piece of machinery is
installed in a plant were brought on credit, the simple
process of paying for it may take several years
• The resulting favorable consequences may last as long
as the equipment performs its useful function
• Each project is described as cash receipts or
disbursements (expenses) at different points in
time

78
 Categories of Cash Flows
• The expenses and receipts due to engineering
projects usually fall into one of the following
categories:
• First cost: expense to build or to buy and install
• Operations and maintenance (O&M): annual expense,
such as electricity, labor, and minor repairs
• Salvage value: receipt at project termination for sale or
transfer of the equipment (can be a salvage cost)
• Revenues: annual receipts due to sale of products or
services
• Overhaul: major capital expenditure that occurs during
the asset’s life

79

Cash Flow diagrams

• The costs and benefits of engineering projects
over time are summarized on a cash flow
diagram (CFD). Specifically, CFD illustrates
the size, sign, and timing of individual cash
flows, and forms the basis for engineering
economic analysis
• A CFD is created by first drawing a segmented
time-based horizontal line, divided into
appropriate time unit. Each time when there is
a cash flow, a vertical arrow is added −
pointing down for costs and up for revenues or
benefits. The cost flows are drawn to relative
scale

80
Drawing a Cash Flow Diagram
• In a cash flow diagram (CFD) the end of period t is the
same as the beginning of period (t+1)
• Beginning of period cash flows are: rent, lease, and
insurance payments
• End-of-period cash flows are: O&M, salvages,
revenues, overhauls
• The choice of time 0 is arbitrary. It can be when a
project is analyzed, when funding is approved, or
when construction begins
• One person’s cash outflow (represented as a negative
value) is another person’s inflow (represented as a
positive value)
• It is better to show two or more cash flows occurring in
the same year individually so that there is a clear
connection from the problem statement to each cash
flow in the diagram

81

An Example of Cash Flow Diagram

• A man borrowed $1,000 from a bank at 8%
interest. Two end-of-year payments: at the end
of the first year, he will repay half of the $1000
principal plus the interest that is due. At the
end of the second year, he will repay the
remaining half plus the interest for the second
year.
• Cash flow for this problem is:
End of year Cash flow
0 +$1000
1 -$580 (-$500 - $80)
2 -$540 (-$500 - $40)
82
Cash Flow Diagram

$1,000

1 2

$540
$580

83

Time Value of Money

• Money has value
• Money can be leased or rented
• The payment is called interest
• If you put $100 in a bank at 9% interest for one time
period you will receive back your original $100 plus $9

Original amount to be returned = $100

Interest to be returned = $100 x .09 = $9

84
Compound Interest
• Interest that is computed on the original unpaid debt
and the unpaid interest
• Compound interest is most commonly used in practice
• Total interest earned = In = P (1+i)n - P
• Where,
• P – present sum of money
• i – interest rate
• n – number of periods (years)

I2 = $100 x (1+.09)2 - $100 = $18.81

85

Future Value of a Loan With Compound

Interest
• Amount of money due at the end of a loan
• F = P(1+i)1(1+i)2…..(1+i)n or F = P (1 + i)n
• Where,
• F = future value and P = present value
• Referring to slide #10, i = 9%, P = $100 and say n= 2. Determine the
value of F.

F = $100 (1 + .09)2 = $118.81

86
Notation for
Calculating a Future Value
• Formula:
F=P(1+i)n is the
single payment compound amount factor.
• Functional notation:
F=P(F/P,i,n) F=5000(F/P,6%,10)
• F =P(F/P) which is dimensionally correct.

87

Notation for
Calculating a Present Value
• P=F(1/(1+i))n=F(1+i)-n is the
single payment present worth factor.
• Functional notation:
P=F(P/F,i,n) P=5000(P/F,6%,10)
Interpretation of (P/F, i, n): a present sum P, given a future
sum, F, n interest periods hence at an interest rate i per
interest period

88
Spreadsheet Function
P = PV(i,N,A,F,Type)
F = FV(i,N,A,P,Type)
i = RATE(N,A,P,F,Type,guess)
Where, i = interest rate, N = number of interest periods, A = uniform
amount, P = present sum of money, F = future sum of money, Type
= 0 means end-of-period cash payments, Type = 1 means
beginning-of-period payments, guess is a guess value of the
interest rate

89

Equivalence
• Relative attractiveness of different alternatives can be
judged by using the technique of equivalence
• We use comparable equivalent values of alternatives to
judge the relative attractiveness of the given alternatives
• Equivalence is dependent on interest rate
• Compound Interest formulas can be used to facilitate
equivalence computations

90
 Technique of Equivalence
• Determine a single equivalent value at a point in time
for plan 1.
• Determine a single equivalent value at a point in time
for plan 2.

Both at the same interest rate and at the same time point.

•Judge the relative attractiveness of the

two alternatives from the comparable
equivalent values.
91

Given the choice of these two plans which would

you choose?
Year Plan 1 Plan 2
0 $5,000
1 $1,000
2 $1,000
3 $1,000
4 $1,000
5 $1,000
Total $5,000 $5,000

To make a choice the cash flows must be altered so a comparison may be made.
92
Resolving Cash Flows to Equivalent Present Values

• P = $1,000(P|A,10%,5)
• P = $1,000(3.791) =
$3,791

• P = $5,000
• Alternative 2 is better than
alternative 1 since
alternative 2 has a greater
present value

93

An Example of Future Value

• Example: If $500 were deposited in a bank savings
account, how much would be in the account three
years hence if the bank paid 6% interest compounded
annually?
• Given P = 500, i = 6%, n = 3, use F = FV(6%,3,,500,0)
= -595.91
• Note that the spreadsheet gives a negative number to
find equivalent of P. If we find P using F = -$595.91,
we get P = 500.

94
An Example of Present Value
• Example 3-5: If you wished to have $800 in a savings
account at the end of four years, and 5% interest we
paid annually, how much should you put into the
savings account?
• n = 4, F = $800, i = 5%, P = ?
• P = PV(5%,4,,800,0) = -$658.16
• You should use P = $658.16

95

Present Worth Analysis

• A construction enterprise is investigating the
purchase of a new dump truck. Interest rate is
9%. The cash flow for the dump truck are as
follows:
• First cost = $50,000, annual operating cost =
$2000, annual income = $9,000, salvage value is
$10,000, life = 10 years. Is this investment worth
undertaking?
• P = $50,000, A = annual net income = $9,000 -
$2,000 = $7,000, S = 10,000, n = 10.
• Evaluate net present worth = present worth of
benefits – present worth of costs
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Present Worth Analysis
• Present worth of benefits = $9,000(P|A,9%,10) =
$9,000(6.418) = $57,762
• Present worth of costs = $50,000 +
$2,000(P|A,9%,10) - $10,000(P|F,9%,10)=
$50,000 + $2,000(6..418) - $10,000(.4224) =
$58,612
• Net present worth = $57,762 - $58,612 < 0 ⇒ do
not invest
• What should be the minimum annual benefit for
making it a worthy of investment at 9% rate of
return?
97

Present Worth Analysis

• Present worth of benefits = A(P|A,9%,10) = A(6.418)
• Present worth of costs = $50,000 + $2,000(P|A,9%,10) -
$10,000(P|F,9%,10)= $50,000 + $2,000(6..418) -
$10,000(.4224) = $58,612
• A(6.418) = $58,612 ⇒ A = $58,612/6.418 = $9,312.44

98