Professional Documents
Culture Documents
0 10-July-2020
MODULE OVERVIEW
After finishing module 2, you were able to compare simple interest to compound interest. Also, you were able
to analyze situational problems whether ordinary or deferred annuity. This Study Guide for Module 3 will help
you to differentiate the methods for making economic studies namely present worth analysis, annual worth
analysis, & the rate of return (ROR) method.
1. differentiate the methods for making economy studies namely present worth analysis, annual worth
analysis, & the rate of return (ROR) method.
3.1 ECONOMIC STUDY METHODS: PRESENT WORTH ANALYSIS, ANNUAL WORTH ANALYSIS, &
THE RATE OF RETURN (ROR) METHOD
There are several methods for comparing alternatives, but only five methods or patterns will be
discussed in this chapter: Present Worth Analysis, Annual Worth Analysis, Rate of Return on Additional
Investment Analysis, Benefit/Cost Analysis, Breakeven and Payback Analysis.
In comparing alternatives by this method, determine the present worth of the net cash outflows for
each alternative for the same period of time. The alternative with the least present worth of cost is selected.
EXAMPLE
1. A company is considering two types of equipment for its manufacturing plant. Pertinent data are as
follows:
Type A:
First cost = P200,000
Annual operating cost = P32,000
Annual labor cost = P50,000
Insurance and property taxes = 3%
Type B:
First cost = P300,000
Annual operating cost = P24,000
Annual labor cost = P32,000
Insurance and property taxes = 3%
Payroll taxes = 4%
Estimated life = 10 years
If the minimum required rate of return is 15%, which equipment should be selected? Use present
worth cost method.
To apply this method, the annual cost of the alternatives including interest on investment is
determined. The alternative with the least annual cost is chosen. This pattern, like the rate of return on
additional investment pattern, applies only to alternatives which has a uniform cost data for each year and a
single investment of capital at the beginning of the first year of the project life.
EXAMPLE
1. A company is considering two types of equipment for its manufacturing plant. Pertinent data are as
follows:
Type A:
First cost = P200,000
Annual operating cost = P32,000
Annual labor cost = P50,000
Insurance and property taxes = 3%
Payroll taxes = 4%
Estimated life = 10 years
Type B:
First cost = P300,000
Annual operating cost = P24,000
Annual labor cost = P32,000
Insurance and property taxes = 3%
Payroll taxes = 4%
Estimated life = 10 years
If the minimum required rate of return is 15%, which equipment should be selected? Use annual cost
method.
If the rate of return on additional investment is satisfactory, then, the alternative requiring a bigger
investment is more economical and should be chosen.
EXAMPLE
1. A company is considering two types of equipment for its manufacturing plant. Pertinent data are as
follows:
Type A:
First cost = P200,000
Annual operating cost = P32,000
Annual labor cost = P50,000
Insurance and property taxes = 3%
Payroll taxes = 4%
Estimated life = 10 years
Type B:
First cost = P300,000
Annual operating cost = P24,000
Annual labor cost = P32,000
Insurance and property taxes = 3%
Payroll taxes = 4%
Estimated life = 10 years
If the minimum required rate of return is 15%, which equipment should be selected? Use rate of return on
additional investment method.
2. An investment of P270,000 can be made in a project that will produce a uniform annual revenue of
P185,400 for 5 years and then have a salvage value of 10% of the investment. Out-of-pocket costs for
operation and maintenance will be P81,000 per year. Taxes and insurance will be 4% of the first cost per
year. The company expects capital to earn not less than 25% before income taxes. Is this a desirable
investment? Compute using the present worth, annual worth, and rate of return.
For the solution of these examples, watch the video using this link:
Engineering Economics: Economic Study Methods (Present Worth, Annual Worth, & Rate of Return Method)
https://youtu.be/6FoEY1F0OWE
As you go through this module and after you watched the videos provided, solve the following:
1. A food processing plant consumed 600,000 kW of electric energy annually and pays an average ofP2.00
per kWh. A study is being made to generate its own power to supply the plant the energy required, and
that the power plant installed would cost P2,000,000. Annual operation andmaintenance,P800,000. Other
expenses P100,000 per year. Life of power plant is 15 years; salvage value at the end of life is P200,000;
annual taxes and insurances, 6% of first cost; and rate of interest is 15%. Using the sinking fund method
for depreciation, determine if the power plant is justifiable. Compute using the present worth, annual
worth, and rate of return.
2. The manager of a canned food processing plant must decide between two different labeling machines.
Machine A will have a first cost of P42,000,000, an annual operating cost of P28,000,000, and a service
life of 4 years. Machine B will cost P51,000,000 to buy and will have an annual operating cost of
P17,000,000 during its 4-year life. At an interest rate of 10% per year, which should be selected?
Compute using the present worth, annual worth, and rate of return.
(Your answer in this learning activity will be compiled in your Assignment 3 to be submitted on an announced
date)
REFERENCE/S
INSTRUCTIONS
Format of Assignment:
I. Cover Page (no borderline):
a. Pangasinan State University
b. Urdaneta Campus
c. College of Engineering and Architecture
d. Civil Engineering Department
e. __ Sem AY 20__ - 20__
f. Subject Code and Subject Title
g. Assignment Number
h. Title of Topics
i. Submitted by:
j. Submitted to:
II. Body (with borderline):
Handwritten problems and solutions
Take a picture of your Assignment with your ID. Using CamScanner, DOC Scanner, or any pdf converting
app, Assignments should be submitted as soft copy in pdf format. Soft copy should be turned-in in MS Teams
(or private message on MS Teams or messenger if technical difficulties arise in turning in). Files should be
named as COURSE CODE_SECTION_SURNAME, GIVEN NAME_ASSIGNMENT NUMBER
Prepared By:
DIANNE C. OLIVER, CE
Faculty, Civil Engineering Department