Engineering Economics Case Study Annual Worth Analysis

BATANGAS STATE UNIVERSITY
College of Engineering, Architecture & Fine Arts

Civil and Sanitary Engineering Department
ENGG 404
ENGINEERING ECONOMICS
A Case Study
Presented to
the Faculty of College of Engineering, Architecture, and Fine Arts
Batangas State University
Batangas City
In Partial Fulfillment of the

Requirements for the Subject
Engineering Economics
Submitted By:
Abaday, Allyza Jane B.
Alcantara, Francis Marc L.
Arias, Vanessa Joy P.
Banaira, Sonny C.
Fajarda, Jonathan D.
Gupo, Kailah F.
Macalalad, Blezie Mae H.
Mendoza, Mark Jacob D.
BSCE 3104
Submitted To:
Engr. Grace Uribe
December 2021
ENGG 404
CASE STUDY 1
ANNUAL WORTH ANALYSIS
Background and Information
Manny, owner of an automobile battery distributorship in Cainta, Rizal, performed an

economic analysis 3 years ago when he decided to place surge protectors in-line for all his major
pieces of testing equipment. The estimates used and the annual worth analysis at MARR = 15%
are summarized below. Two different manufacturers’ protectors were compared.
Table 1 Parameters of Surge Protector Alternatives

BRAND M BRAND O
Cost and Installation Php 26000 Php 36000
Annual Maintenance Cost Php 800 Php 300
Salvage Value Php 2000 Php 3000

Equipment Repair Savings Php 25000 Php 35000
Useful lie, years 6 10
The displayed spreadsheet is the one Manny used to make the decision. Due to its
substantially larger AW value, Brand O was the clear choice. Installed were the Brand O
protectors. It was evident that the maintenance costs and repair savings did not follow (and will
not follow) the estimates made 3 years ago during a rapid review last year (year 3 of operation).
In fact, the cost of the maintenance contract (including quarterly inspection) goes from php300 to
Php 1200 per year next year and for the next 10 years it will then increase 10 percent per year.
Also, Php 35,000, Php 32,000, and Php 28,000, as best as Manny can determine, were the repair
savings for the last 3 years. He believes that savings will subsequently decrease by Php 2000 per
year. Ultimately, these 3-year-old protectors are now worth nothing on the market, so the 7-year
rescue is zero, not Php3000.
Table 2 Annual Worth Analysis of Surge Protector Alternatives

MARR =15%
ENGG 404
BRAND M BRAND O
ANNUAL ANNUAL
INVESTMENT MAINTE REPAIR INVESTMENT MAINTE REPAIR
YEAR AND SALVAGE NANCE SAVINGS AND SALVAGE NANCE SAVINGS
0 26000 0 0 36000 0 0
1 800 25000 0 300 35000
2 800 25000 0 300 35000
3 800 25000 0 300 35000
4 800 25000 0 300 35000
5 800 25000 0 300 35000
6 2000 800 25000 0 300 35000
7 0 300 35000
8 0 300 35000
9 0 300 35000
10 0 300 35000
AW
Element 7025 300 35000
Total AW Php 27675
1. Draw a graph of the current expected cost reductions for repairs and maintenance,
considering protectors last 7 additional years.
Table 3 Expected Cost Reductions for Repairs and Maintenance
YEAR REPAIR SAVINGS ANNUAL MAINTENANCE

0 0 0
1 35000 -300
ENGG 404
2 32000 -300
3 28000 -300
4 26000 -1200
5 24000 -1320
6 22000 -1452
7 20000 -1597.2
8 18000 -1756.92
9 16000 -1932.612
10 14000 -2125.8732
Figure 1 Cost Reductions for Repairs and Maintenance

ENGG 404
2. With these latest forecasts, what's the Brand O protectors' recalculated AW? Using the
old's first cost expense and maintenance cost forecasts. If these figures were made 3 years
earlier, was Brand O still the economic choice?
Recalculating Brand O’s annual worth:
STEP 1. The values of the new estimate are tabulated below.
(A/F, 15%, n)= i

¿¿
Table 4 Values of the New Estimates

SALVAGE REPAIR ANNUAL
YEAR, n (A/F, 15%, n) INVESTMENT VALUE SAVINGS MAINTENANCE
0 1 -36000 0 0 0
1 0.8695652174 0 0 35000 -300
2 0.7561436673 0 0 32000 -300
3 0.6575162324 0 0 28000 -300
ENGG 404
4 0.5717532456 0 0 26000 -1200
5 0.4971767353 0 0 24000 -1320
6 0.4323275959 0 0 22000 -1452
7 0.3759370399 0 0 20000 -1597.2
8 0.3269017738 0 0 18000 -1756.92
9 0.284262412 0 0 16000 -1932.612
10 0.2471847061 0 0 14000 -2125.8732
STEP 2. The values in each column are multiplied to their respective (A/F, 15%, n)
value. Then, the sum of each column is calculated.
Table 5 Annual Worth of Elements

INVESTMEN SALVAGE ANNUAL
YEAR T VALUE REPAIR SAVINGS MAINTENANCE
0 -36000 0 0 0
1 0 0 30434.78261 -260.8695652
2 0 0 24196.59735 -226.8431002
3 0 0 18410.45451 -197.2548697
4 0 0 14865.58439 -686.1038947
5 0 0 11932.24165 -656.2732906
6 0 0 9511.20711 -627.7396693
7 0 0 7518.740798 -600.4466402
8 0 0 5884.231929 -574.3402645
9 0 0 4548.198593 -549.3689487
10 0 0 3460.585886 -525.4833422
SUM -36000 0 130762.6248 -4904.723585
i
(A/P, 15%, 10)= = 0.1992520625
1−¿ ¿
ENGG 404
STEP 3. The sums on step 2 are multiplied to the value of (A/P, 15%, 10), with
MARR=15%. The total AW is calculated by adding the values of the investment, salvage value,
repair savings, and annual maintenance.
Table 6 Recalculated Annual Worth

INVESTMENT SALVAGE VALUE REPAIR SAVINGS ANNUAL
(A/P, 15%, 10) (A/P, 15%, 10) (A/P, 15%, 10) MAINTENANCE
(A/P, 15%, 10)
-7173.074251 0 26054.7227 -977.2762904
TOTAL AW 17904.37215
Therefore, the total recalculated annual worth of Brand O is Php 17904.37215.
Table 7 Comparison of the annual worth of Brand M and Brand O.

BRAND M BRAND O
YEAR INVESTMENT ANNUAL REPAIR INVESTMENT ANNUAL REPAIR
AND SALVAGE MAINTE SAVING AND SALVAGE MAINTENANC SAVINGS
NANCE S E
0 -26000 0 0 -36000 0 0
1 -800 25000 0 -300 35000
2 -800 25000 0 -300 32000
3 -800 25000 0 -300 28000
4 -800 25000 0 -1200 26000
5 -800 25000 0 -1320 24000
6 2000 -800 25000 0 -1452 22000
7 0 -1597.2 20000
8 0 -1756.92 18000
9 0 -1932.612 16000
10 0 -2125.8732 14000
AW -6641.685758 -800 25000 -7173.074251 -977.2762904 26054.7227
ENGG 404
element
TOTAL 17558.31424 17904.37215
AW
If these estimates were made 3 years earlier, given that the old first cost and annual
maintenance cost will be used, Brand O would still be the economic choice since it has a
greater value than Brand M (17904.37215>17558.31424).
3. How has the capital recovery amount changed for the Brand O protectors with these new
estimates?
The capital recovery amount increased from Php 7025 to Php 7173.07. The previous capital
recovery amount is the one obtained when the salvage value was still Php 3000, while the latter
is the value calculated when the 7-year rescue is zero, instead of Php 3000.
7 173.07−7025
Change in percentage = x 100 = 2.11%
7025
CASE STUDY 2
RATE OF RETURN ANALYSIS – SINGLE PROJECT
ENGG 404
Background
Three engineers employed with AMP Engineering, a firm involved in the construction of
public housing, shared lunch many days a week together. They agreed over time to focus on
concepts for solar energy development. They planned and built a prototype of a low-cost,
scalable solar power plant for use in multifamily residences on the low end and medium size
industrial facilities on the upper end after a number of weekends over many years. The collector
could be installed alongside a TV dish for residential applications and be designed to track the
sun. In a closet-sized space in an apartment or on a floor for multiple-apartment materials, the
generator and additional equipment are mounted. The system acts as a supplement to the energy
that the local power utility supplies. It was decided after some 6 months of research that the
device was ready for marketing and confidently stated that a high-rise energy bill could be
lowered by about 40 percent per month. For low-income households on government grants that
are expected to fund their own energy costs, this was excellent news.
Information
With a large bank loan and php200,000 of their own money, demonstration sites were
constructed in three sunbelt cities. Net cash flow was appropriate after all investments, loan
repayment, and taxes for the first four years; php55,000 at the end of the first year, rising by 5%
per year afterwards.
After just 4 years of ownership, a business friend introduced them to a prospective buyer
of patent rights and existing subscriber base with an estimated 500,000 net cash-out. However,
after careful discussion replaced the initial sales bid enthusiasm, the trio agreed not to sell at this
point. They decided to remain in the company for a while to build some improvement ideas to
see how much sales could increase over the coming years.
During the next year, the fifth year of the partnership, the engineer who obtained the
patents on which the collector and generator designs were based became very dissatisfied with
ENGG 404
the partnership arrangements and left the trio to partner with a
foreign energy corporation. With new R&D funds and patent rights, a rival concept was soon on
the market and took away most of the business from the initial two developers. Net cash flow fell
to php40,000 in year 5 and proceeded to fall by $5,000 annually. Another sale offer was made in
year 8, but only for php100,000 net cash. This was considered too much of a loss, so the two
owners disagreed. Instead, they agreed to bring php200,000 more of their own savings into the
business to create more housing applications. It's 12 years after publicly introduced the device.
With increased advertisement and growth, net cash flow has been positive over the past four
years, beginning at php5000 in year 9 and rising by php5000 annually to date.
Case Study
It is now 12 years after product growth, and engineers have spent much of their savings
in a revolutionary concept. But the question is When are we selling? "These circumstances are
still present. Determine the following to assist with the analysis:
1. The rate of return at the end of year 4 for two situations:

(a) the business is sold for the net cash amount of php500,000 and
(b) no sale.
The Rate of Return (RoR) is the net gain or loss of an investment over a specified time
period, expressed as a percentage of the investment’s initial cost.
Formula used for Rate of return = [(Current Value - Initial Value) / Initial Value]100 %.
ENGG 404
Table 8 Business Inflow and Outflow
Yea Inflow Outflo If business is If business is not sold

r Php w sold Php
Php Php
1 55 000 200 000
2 57 750
3 60 637.5
4 63 669.37 500 000 0
Tota 237 200 000 737 056.875 237 056.875
l 056.87
Table given above gives the detailed explanation of the business inflow and outflow for
the four years if sold or not sold.
For the year 1 inflow is given as 55 000 and then after each year inflow is increased by
5% every year,
2nd year = 55 000 + (55 000 * 0.05)

= 57 750
So, for the 2nd year inflow would be 57 500, for 3rd year inflow would be
3rd year = 57 750+ (57 750* 0.05)

= 60 637.5
For 4th year inflow would be
4th year = 60 637.5 + (60 637.5* 0.05)

= 63 669.37
ENGG 404
(a) If business is sold:
If we accept the proposal of acquisition then it will generate an inflow of 500 000 and the
total inflow would be 737 056.875
If we calculate the ROR,
Current Value−Initial Value

ROR= × 100 %
Initial Value
737 056.875 .−200,000
ROR= ×100 %
200,000
ROR=268.528 %
Therefore, the rate of return if the business is sold after 4 year is 268.528%
(b) If the business is not sold:
If we don’t accept the proposal of acquisition then our inflow would be 237 056.875.
If we calculate the ROR,

ROR= × 100 %
Initial Value
237 056.87 .−200,000
ROR= × 100 %
200,000
ROR=¿18.528%
Therefore, the rate of return if the business is not sold after 4 year is 18.528%
ENGG 404
2. The rate of return at the end of year 8 for two situations:
(a) the business is sold for the net cash amount of php100,000 and
(b) no sale.
Table 9 Inflows and Outflows Per Year Within Eight Years

Year Inflow Outflow If business is If business is not
Php Php sold sold
Php
1 55,000 200,000
2 57,750
3 60,637.5
4 63,669.375
5 40,000
6 35,000
7 30,000
8 25,000 100,000 0
Total 367,056.875 467,056.875 367,056.875
This table shows the inflows and outflows per year within eight years, also the offered
market value of the business at its eighth year.
The first-year inflow is given as Php 55,000 and increases by 5% per year, then at its fifth
year, inflow dropped to Php 40,000 and decreases annually by Php 5,000.
(a) The business is sold for the net cash amount of php100,000
If the proposal was accepted, it would generate an inflow of Php 100,000 and the total
inflow would be Php 467,056.875.

ROR= × 100 %
Initial Value
467,056.875−200,000
ROR= ×100 %
200,000
ROR=133.528 %
Therefore, if the business was sold, the rate of return after 8 years would be 133.528%.
ENGG 404
(b) The business was not sold
If the proposal was declined, the total inflow would be Php 367,056.875

ROR= × 100 %
Initial Value
367,056.875−200,000
ROR= ×100 %
200,000
ROR=83.528 %
Therefore, if the business was not sold, the rate of return after 8 years would be 83.528%.
ENGG 404
3. The rate of return now at the end of year 12.
Table 10 Inflow and Outflow Over the Period Of 12 Years
Year Inflow Outflow
1 55 000 200000
2 57 750
3 60 637.5
4 63 669.37
5 40 000
6 35 000
7 30 000
8 25 000
9 30 000 200000
10 35 000
11 40 000
12 45 000
Total 517 056.87 400 000
The table above gives the detail
of inflow and outflow over the period of 12 years.
In the 9th year of business, additional capital of 200 000 has been introduced which
resulted in change of outflow to 400 000.
So, the Rate of return at the end of 12 years would be,

ROR= × 100 %
Initial Value
517056.87−400,000
ROR= ×100 %
400,000
ROR=29.26 %
Therefore, the Rate of Return at the end of 12 years is 29.26 %.
ENGG 404
ENGG 404
CASE STUDY 3
RATE OF RETURN – MULTIPLE ALTERNATIVES
Background
Currently, ACCESS Corp. software used in 3D printer systems can produce voids, cones,
and "web support" to save development time. Network printing can be used on different devices
and locations worldwide. New software, called JIT II, is being beta-tested to enable remote
machine connections of IIoT-type (Industrial Internet of Things). When on-board control sensors
detect that a device is about to fail or it is time to repair one of the high-profile modules, the JIT
II software will immediately queue the production code of the component onto a 3D printer
detected to be locally idle or available. The company claims it can design and produce the JIT II
technology, 3D printers, and corresponding computer equipment needed to place this technology
in a wide variety of harsh environments—chemically poisonous to humans, in flight, underwater
mines, on the ocean floor, in war-torn countries, etc.
Information
In this scenario, we will evaluate available computers that can provide the server feature
required to make this interconnection available and efficient. The first expense forecasts and
other parameters, including estimated contribution to annual net cash flow, are summarized
below.
Table 11 Parameters for Server 1 and Server 2

ENGG 404
Server 1 Server 2
First Cost Php 100,000 Php 200,000
Net Cash Flow, per year Php 35,000 Php 50,000 year 1, plus 5,000
per year for years 2, 3, and 4
(gradient) php 70,000
maximum for years 5 on, even
if the server is replaced.
Life, years 3 or 4 5 or 8
MARR 12%
The life estimates were developed by two different individuals: a design engineer and a
manufacturing manager. They have asked that, at this stage of the project, all analyses be
performed using both life estimates for each system.
Case Study
Use may use excel for your analysis to determine the following:
1. If the MARR = 12%, which server should be selected? Use the PW to make the
selection.
The given situation calls for the approach to making mutually exclusive alternative
selections by the incremental ROR method based on present worth relation. But this case
suggests to use Present Worth Method in the selection. With these, it is necessary to determine
the values of PW of each server and use the results as basis for selection.
The tables below summarize the results of the computations:

ENGG 404
Table 12 Present Worth of Server 1 (3 Years)
YEAR NET CASH FLOW MARR 12 % PRESENT WORTH
0 -100000 1.00 -100000.00
1 35000 0.89 31250.00
2 35000 0.79 27901.79
3 35000 0.71 24912.31
TOTAL PRESENT WORTH -15935.91
Considering life of 3 years, the table above shows that the total present worth of server 1
is Php -15935.91.
0 -100000 1.00 -100000.00
1 35000 0.89 31250.00
2 35000 0.80 27901.79
3 35000 0.71 24912.31
4 35000 0.64 22243.13
TOTAL PRESENT WORTH 6307.23
As we set the life of the same server to 4 years, it will have a present worth of Php
6307.23.
0 -200000 1.00 -200000.00
1 50000 0.89 44642.86
2 55000 0.80 43845.66
3 60000 0.71 42706.81
4 65000 0.64 41308.68
5 70000 0.57 39719.88
Moving on with the next server, shown above is the value of its present worth after life of
5 years, which is Php 12223.89.
ENGG 404
YEAR NET CASH FLOW MARR 12 % PRESENT
WORTH
0 -200000 1.00 -200000.00
1 50000 0.89 44642.86
2 55000 0.80 43845.66
3 60000 0.71 42706.81
4 65000 0.64 41308.68
5 70000 0.57 39719.88
6 70000 0.51 35464.18
7 70000 0.45 31664.45
8 70000 0.40 28271.83
Finally, considering life of 8 years for the 2nd server, a present worth of Php 107624.34 is
recorded.
From the computations made, different values of present worth are obtained for different
servers, considering different lives. Selecting the better server, we choose Server no. 2 with life
of 8 years, having the largest value of PW, which is Php 107624.34.

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BATANGAS STATE UNIVERSITY

College of Engineering, Architecture & Fine Arts

In Partial Fulfillment of the

Background and Information

Manny, owner of an automobile battery distributorship in Cainta, Rizal, performed an

Table 1 Parameters of Surge Protector Alternatives

Salvage Value Php 2000 Php 3000

Table 2 Annual Worth Analysis of Surge Protector Alternatives

Table 3 Expected Cost Reductions for Repairs and Maintenance

YEAR REPAIR SAVINGS ANNUAL MAINTENANCE

Figure 1 Cost Reductions for Repairs and Maintenance

Recalculating Brand O’s annual worth:

STEP 1. The values of the new estimate are tabulated below.

(A/F, 15%, n)= i

Table 4 Values of the New Estimates

Table 5 Annual Worth of Elements

Table 6 Recalculated Annual Worth

Therefore, the total recalculated annual worth of Brand O is Php 17904.37215.

Table 7 Comparison of the annual worth of Brand M and Brand O.

1. The rate of return at the end of year 4 for two situations:

Yea Inflow Outflo If business is If business is not sold

2nd year = 55 000 + (55 000 * 0.05)

3rd year = 57 750+ (57 750* 0.05)

For 4th year inflow would be

4th year = 60 637.5 + (60 637.5* 0.05)

If we calculate the ROR,

Current Value−Initial Value

(b) If the business is not sold:

If we calculate the ROR,

Current Value−Initial Value

2. The rate of return at the end of year 8 for two situations:

Table 9 Inflows and Outflows Per Year Within Eight Years

Current Value−Initial Value

(b) The business was not sold

Current Value−Initial Value

3. The rate of return now at the end of year 12.

Table 10 Inflow and Outflow Over the Period Of 12 Years

Year Inflow Outflow

So, the Rate of return at the end of 12 years would be,

Current Value−Initial Value

Table 11 Parameters for Server 1 and Server 2

The tables below summarize the results of the computations:

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