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Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
Evaluating Alternatives
• Part of Engineering Economy is the selection and
execution of the best alternative from among a set of
feasible alternatives
• Alternatives must be generated from within the
organization
One of the roles of engineers!
• In part, the role of the engineer to properly evaluate
alternatives from a technical and economic view
• Must generate a set of feasible alternatives to solve a
specific problem/concern
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
Type of Alternatives
• Revenue/Cost – the alternatives consist of cash inflow
and cash outflows (alternatif investasi)
• Select the alternative with the maximum economic
value
Example
F5=$200
MA
0 1 2 3 4
5
A = $900
$2,500
F5=$350
MB
0 1 2 3 4
5
$3,500 A = $700
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
Solving
Example
Machine A Machine B
First Cost $11,000 $18,000
Annual Operating Cost 3,500 3,100
Salvage Value 1,000 2,000
Life 6 years 9 years
Machine A F6=$1,000
0 1 2 3 4 5 6
A 1-6 =$3,500
$11,000
F6=$2,000
Machine B
0 1 2 3 4 5 6 7 8
9
A 1-9 =$3,100
$18,000
Machine A
6 years 6 years 6 years
Machine B
9 years 9 years
18 years
Solving
0 6 12
18
0 9 18
$32,508 $32,508
Choose Machine A
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
• LCM = 35 years ?
• Could assumed study period of, 5 years
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
Alt-1: N = 5 yrs
Alt-2: N= 7 yrs
• present value (evaluated at time T) of the total loss of the asset value
during the period [T, U] and the present value (evaluated at time T) of
the salvage value of the asset at time U.
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
CAPITALIZED COST
(1 i ) N 1
P A N
, let N
i (1 i )
(1 i ) N 1 1 1 A
lim N N
P A
i (1 i ) i i i
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
CAPITALIZED COST
…………………..
1 2 3 4 5 .. N=inf.
A=$50/yr
P=?
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don
Smith, Texas A&M University.
CAPITALIZED COST
• P0 = $50[1/0.04]
• P0 = $50[25] = $1,250.00
• Invest $1,250 into an account that earns 4% per year will
yield $50 of interest forever if the fund is not touched and
the i-rate stays constant.
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. Don Smith,
Texas A&M University.
……….
0 1 2 3 N-1 N
P0
•Convert to: FN
……….
0 1 2 3 N-1 N
P0
$A per year (CR)
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. Don Smith,
Texas A&M University.
• Method I - Compute EAC of the original cost and subtract the EAC of
the salvage value
EAC = P(A|P, i, n) - S(A|F, i, n)
• Method II – Subtract the salvage value from the original cost and
compute the annual cost of the difference. Add to that the interest that
the salvage value would return each year, S(i).
CR(i%)= (P - S) (A|P, i, n) + S(i)
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. Don Smith,
Texas A&M University.
EXAMPLE
0 1 2 3 4 5 6 7 8 9 10
A = $5,000
F5=$50,000
P = $50,000+ $10,000
Artificial Carpet
• A = P(i) for a perpetual life project
Annual Cost of Installation = $150,000 (.10) = $15,000/ year