4th Lecture

Evaluation of Engineering Project:

Present Worth Comparison (PW):
The present worth comparisons are made only between projects which
have the same live time (n) . Net present worth (NPW) is the difference between
the present worth of benefits and that of costs.
NPW= PW of benefits- PW of costs
Many economists prefer PW analysis because it is easier to use.
Conditions &Assumptions for NPW Comparisons:
The present worth of a cash flow stream is denoted by (PW), the present
worth of receipts and present worth of disbursements are associated with action.
Each alternative is thus represented by a NPW , which is a measure of economic
merit. The ingredients of a present worth comparisons are :
1- The amount of money invested initially (P).
2- Timing of cash flow(n)
3- Interest rate (i) at which the flow is disconnected.
4- Salvage value (S) or (F) if any , which is available at the end of the life of an
alternative.
Then:
If NPW1=+
NPW2=+ Choose the bigger

If NPW1=+
NPW2= - Choose positive

If NPW1= -
NPW2= - Choose the less loses
Example(1):
Elpha company is planning to expand its production operations , it has
three alternatives which has the cash flow as represent in the table below , suggest
the best alternative if you know that the interest rate is (20%)
Details Investment amount(CU) Annual revenue(CU) Life(year)
Alternative 1 1200 000 400 000 10
Alternative 2 2000 000 600 000 10
Alternative 3 1800 000 500 000 10
Solution:
Rem: The initial amount will assigned a negative sign and the annual revenue
will assigned a positive sign. A=400 000 CU

Alternative 1 :
I=20% n=10
P=1200 000 GU
For uniform payment series:
NPW1= -P+A[{(1+i)n-1}/i(1+i)n]
NPW1= (-1200 000)+400 000[{(1+0.2)19-1}/0.2(1+0.2)10]
= +477 000 CU
. A=600 000 CU

Alternative 2 :
I=20% n=10
P=2000 000 GU
NPW2= -P+A[{(1+i)n-1}/i(1+i)n]
NPW2= (-2000 000)+600 000[{(1+0.2)19-1}/0.2(1+0.2)10]
 = +515 500 CU
.

A=500 000 CU

Alternative 3 :
I=20% n=10
P=1800 000 GU
NPW3= -P+A[{(1+i)n-1}/i(1+i)n]
NPW3= (-1800 000)+500 000[{(1+0.2)19-1}/0.2(1+0.2)10]
= +296 250 CU Then alternative 2 is the highest amount,
there for it is suggested to be implemented.
Example (2):
There are two alternatives to invest the money of a contractor , the data
are shown in table below , find the best alternative if you know that the interest
rate is (12%)
Details Project A Project B
Initial investment(CU) 18000 14000
Annual revenue(CU/year) 5000 4000
Annual expenses (CU/year) 4000 3500
Salvage value(CU) 3500 2000
Project life (year) 10 5
Solution:
Project A :
Net Annual Cash= 5000 – 4000 = 1000 CU/year
NPWA= (-18000)+1000 [{(1+0.12)10-1}/0.12(1+0.12)10] +3500{1/(1+0.12)10}
= - 11223 CU
Project B:
 Net Annual Cash= 4000 – 3500 = 500 CU/year
NPWB1= (-14000)+500 [{(1+0.12)5-1}/0.12(1+0.12)5] +2000{1/(1+0.12)5}
= - 11063 CU
NPWB2= NPWB1 + NPWB1{1/(1+i)n}
= - 11063 + (-11063){1/(1+0.12)5}
= - 17348.8 CU
So that Project (A) is better because it have less losses
Example (3):
There are two alternatives to invest the money of a contractor, the data
are shown in table below, find the best alternative if you know that the interest
rate is (10%)
Details Project A Project B
Initial investment(CU) 12000 10000
Annual revenue(CU/year) 5000 4000
Annual expenses (CU/year) 4000 3500
Salvage value(CU) 2500 1500
Project life (year) 3 2
Solution:
Project A :
Net Annual Cash= 5000 – 4000 = 1000 CU/year
NPWA1= (-12000)+1000 [{(1+0.1)3-1}/0.1 (1+0.1)3] +2500{1/(1+0.1)3}
= - 7634.86 CU
NPWA2= NPWA1 + NPWA1{1/(1+i)n}
= - 7634.86 +( - 7634.86){1/(1+0.1)3}
= -13371.04 CU
Project B:
Net Annual Cash= 4000 – 3500 = 500 CU/year
NPWB1= (-10000)+500 [{(1+0.1)2-1}/0.1 (1+0.1)2] +1500{1/(1+0.1)2}
 = - 7892.56 CU
NPWB2= NPWB1 + NPWB1{1/(1+i)n}
= - 7892.56 + (-7892.56){1/(1+0.1)2}(-7892.56){1/(1+0.1)4}
= - 19776.05 CU
So that Project (A) is better because it have less losses
Example (4):
A company is planning to expand its production operations, it has two
alternatives which have the data shown in table below, find the best alternative if
you know that the interest rate is (10%)
Details Alternative 1 Alternative 2
Initial investment(CU) 13000 11000
Annual revenue(CU/year) 5000 4000
Annual expenses (CU/year) 4000 3500
Salvage value(CU) 2000 1000
Project life (year) 10 7
Solution:
Project A :
Net Annual Cash= 5000 – 4000 = 1000 CU/year
NPWA1= (-13000)+1000 [{(1+0.1)10-1}/0.1 (1+0.1)10] +2000{1/(1+0.1)10}
= - 6084.35 CU
NPWA2= NPWA1 + NPWA1{1/(1+i)n}
= - 6084.35 +( - 6084.35){1/(1+0.1)10}+ ( - 6084.35){1/(1+0.1)20}
+( - 6084.35){1/(1+0.1)30}+( - 6084.35){1/(1+0.1)40}
+( - 6084.35){1/(1+0.1)50}+( - 6084.35){1/(1+0.1)60}
= -9889.47 CU
Project B:
Net Annual Cash= 4000 – 3500 = 500 CU/year
NPWB1= (-11000)+500 [{(1+0.1)7-1}/0.1 (1+0.1)7] +1000{1/(1+0.1)7
 = - 8050.94 CU
NPWB2= NPWB1 + NPWB1{1/(1+i)n}
= - 8050.94 +( - 8050.94){1/(1+0.1)7}+(-- 8050.94){1/(1+0.1)14}
+( - 8050.94){1/(1+0.1)21}+(-- 8050.94){1/(1+0.1)28}
+( - 8050.94){1/(1+0.1)35}+(-- 8050.94){1/(1+0.1)42}
+( - 8050.94){1/(1+0.1)49}+(-- 8050.94){1/(1+0.1)56}
+( - 8050.94){1/(1+0.1)63}
= - 16516.11 CU
So that Project (A) is better because it have less losses