1

Module 5: Annual Worth

Analysis
SI-4251 Ekonomi Teknik
2

Outline Module 5
• Selection of Alternatives with Different Lives
• Salvage Sinking-Fund Method
• Salvage Present Worth Method
• Capital-Recovery-Plus-Interest Method
• AW of a Perpetual Investment
• Life Cycle Cost Analysis

9/21/2021 SI-4251 Ekonomi Teknik 5-2

3
Selection of Alternatives with Different
Lives
1. Selection of investment alternatives can commonly evaluate by comparing their equivalence-uniform-annual-worth
(over the life of the investment)
2. Unlike other method, for evaluating alternatives with different lives, EUAW does not require comparison over the least
common multiple periods.
SV SV SV

O&M R R R R R R R R R
A
0 1 2 3
I I I

I R R R I = Rp. 240 millions

O&M
B O&M = Rp. 25 millions/month
R = Rp. 190 millions/4 months
0 1 SV = Rp 75 millions
SV

EUAWA = EUAWB
9/21/2021 SI-4251 Ekonomi Teknik 5-3
4

Example
• Consider a project with $3000 annual operating cost and a $5000
investment required each 5 years. i = 10%

0 1 2 3 4 5

A 1-5 = $3,000
$5,000

For one cycle

EAC = 3000 + 5000(A/P,10%,5) = $4319/yr

9/21/2021 SI-4251 Ekonomi Teknik 5-4

5

Multiple cycle..same result!

0 1 2 3 4 5 6 7 8 9 10

A 1-10 = $3,000
$5,000

$5,000

For two cycles

EAC = 3000 + 5000 (1+(P|F, .10, 5))(A|P, .10, 10)
= 3000 + 1319 = $4319/yr

9/21/2021 SI-4251 Ekonomi Teknik 5-5

6

(A) Salvage Sinking-Fund Method

1. Initial investment and salvage value are to be converted into an
equivalent uniform annual value
2. Any other cash flows are to be converted first to present value (P) or
future value (F), then converted into equivalent uniform annual value
3. Combine all equivalent uniform annual values
P O1
I1 SV

A1

0 1 2 3
EUAW = – P(A/P, i, 36) +SV(A/F, i, 36) – A1 – O1(P/F, i, 9)(A/P, i, 36) + I1(F/P, i, 14)(A/F, i, 36)

9/21/2021 SI-4251 Ekonomi Teknik 5-6

7

(B) Salvage Present Worth Method

1. Calculate the present worth of salvage value using (P/F) factor, and subtract that
value from the initial cost, P
2. Convert that value (2) into equivalent uniform worth
3. Any other cash flows are to be converted first to present value (P) or future
value (F), then converted into equivalent uniform annual value
4. Combine all equivalent uniform annual values
P O1
I1 SV

A1

0 1 2 3
EUAW = – [P-SV(P/F, i, 36)](A/P, i, 36) – A1 – O1(P/F, i, 9)(A/P, i, 36) + I1(F/P, i, 14)(A/F, i, 36)

9/21/2021 SI-4251 Ekonomi Teknik 5-7

8

(C) Capital-Recovery-Plus-Interest Method

1. Subtract the salvage value from initial cost, then convert that value into equivalent uniform
worth
2. Multiply the salvage value by the interest rate
3. Add value obtained from (1) and (2)
4. Any other cash flows are to be converted first to present value (P) or future value (F), then
converted into equivalent uniform annual value
5. Combine all equivalent uniform annual values

P O1
I1 SV

A1

0 1 2 3
EUAW = – (P-SV)(A/P, i, 36) - SV(i) – A1 – O1(P/F, i, 9)(A/P, i, 36) + I1(F/P, i, 14)(A/F, i, 36)

9/21/2021 SI-4251 Ekonomi Teknik 5-8

9

Exercise
• Perusahaan Subkontraktor DingSer membeli satu set mesin yang
digunakan untuk pekerjaan shear wall dengan harga Rp. 300.000.000,
salvage value dari mesin ini setelah 5 tahun sebesar Rp. 70.000.000.
• Hitunglah berapa revenue yang harus didapat oleh perusahaan
DingSer untuk menutupi biaya kepemilikan alat ini selama 5 tahun
• Asumsikan tidak ada biaya M&O, serta interest rate 10%/tahun
• Gunakan metode: Salvage Sinking-Fund Method; Salvage Present
Worth Method dan Capital-Recovery-Plus-Interest Method, lalu
bandingkan hasilnya

9/21/2021 SI-4251 Ekonomi Teknik 9

10

Example:
S = +$1500
• Cash Flow Diagram is:
A = +$1200/yr

1 2 3 4 5

-$650
-$700
-$750
P=-23,000 -$800
-$850

9/21/2021 SI-4251 Ekonomi Teknik 5-10

11

Example:
• The Capital Recovery component is:
S = +$1500

1 2 3 4 5

CR(10%) = -23,000(A/P,10%,5) +
1500(A/F,10%,5) = -$5822

P=-23,000

9/21/2021 SI-4251 Ekonomi Teknik 5-11

12

Example:
• (Revenue – Operating Costs) are:

A = +$1200/yr

1 2 3 4 5

$650
$700
$750
$800
$850

9/21/2021 SI-4251 Ekonomi Teknik 5-12

13

Example:
• Cost/Revenue component is seen to equal:
1.8101
=+550 –50(A/G,10%,5)
= 550 – 90.50
= $459.50

9/21/2021 SI-4251 Ekonomi Teknik 5-13

14

Example
• Total Annual worth (CR + Cost/Rev)
• CR(10%) = -$5822
• Revenue/Cost Annual amount: $459.50
• AW(10%) = -$5822+$459.50
• AW(10%) = $5,362.50

This amount would be required to recover the investment and operating costs at the
10% rate on a per year basis

9/21/2021 SI-4251 Ekonomi Teknik 5-14

15

AW of a Perpetual Investment
• EAC of a perpetual investment

• If an investment has no finite cycle it is called a perpetual investment.

If “P” is the present worth of the cost of that investment, then EAC is
P times i, the interest P would have earned each year.

EAC=A = P(i)
Remember: P = A/i
From the previous chapter

9/21/2021 SI-4251 Ekonomi Teknik 5-15

16

Example: Perpetual Investment

Untuk membuat jaringan air minum di daerah Tembagapura, PT.
Freeport memiliki 2 alternatif. Alternatif A, membuat terowongan
menembus gunung dengan biaya awal $5.5 Juta dan bisa dimanfaatkan
secara permanen dalam waktu yang sangat Panjang. Alternatif B,
memasang jaringan pemipaan yang mengelilingi gunung dengan biaya
awal $5 Juta. Kedua alternatif di desain “zero maintenance”. Tidak ada
salvage value untuk kedua alternatif.
Jika jaringan air minum ini ingin dimanfaatkan selama mungkin (waktu
tak terhingga) alternatif manakah yang lebih baik? Asumsikan interest
rate 6%/year

9/21/2021 SI-4251 Ekonomi Teknik 5-16

17

Example: Perpetual Investment

• EUAC Terowongan = P.i = -$5.5 Juta(0.06) = -$330.000
• EUAC Jaringan Pipa = -$5 Juta(A/P, 6%, 50) = -$317.000
• Pilih Jaringan Pipa dengan biaya annual yang lebih rendah

9/21/2021 SI-4251 Ekonomi Teknik 5-17

18

Life Cycle Cost Analysis

• The PW and AW estimates ➔first cost P , annual operating and maintenance
costs (AOC or M&O), salvage value S , predictable periodic repair and upgrade
costs, plus revenue.
• There are usually additional costs involved when the complete project life costs
are evaluated.
• Life-cycle cost (LCC) Estimates will cover the entire life span from the early
conceptual stage, through the design and development stages, throughout the
operating stage, and even the phaseout and disposal stages.
• Both direct and indirect costs are included to the extent possible, and differences
in revenue and savings projections between alternatives are included.
• The direct costs ➔ material, human labor, equipment, supplies, and other costs
directly related to a product, process, or system.
• indirect cost components ➔ taxes, management, legal, warranty, quality, human
resources, insurance, software, purchasing, etc.
9/21/2021 SI-4251 Ekonomi Teknik 18
19

Life Cycle Cost Analysis

• LCC analysis is most effectively applied when a substantial percentage of
the life span (postpurchase) costs, relative to the initial investment, will be
expended in direct and indirect operating, maintenance, and similar costs
once the system is operational.
• Format for the major phases of acquisition, operation, and
phaseout/disposal , and their respective stages:
▪ Acquisition phase: all activities prior to the delivery of products and services.
✓ Requirements definition stage—Includes determination of user/customer needs, assessing
them relative to the anticipated system, and preparation of the system requirements
documentation.
✓ Preliminary design stage—Includes feasibility study, conceptual, and early-stage plans; final
go–no go decision is probably made here.
✓ Detailed design stage—Includes detailed plans for resources—capital, human, facilities,
information systems, marketing, etc.; there is some acquisition of assets, if economically
justifiable.

9/21/2021 SI-4251 Ekonomi Teknik 19

20

Life Cycle Cost Analysis

▪ Operation phase: all activities are functioning, products and services are
available.
✓Construction and implementation stage — Includes purchases, construction, and
implementation of system components; testing; preparation, etc.
✓Usage stage — Uses the system to generate products and services; the largest
portion of the life cycle.
▪ Phaseout and disposal phase: covers all activities to transition to a new
system; removal/recycling/disposal of old system.

9/21/2021 SI-4251 Ekonomi Teknik 20

21

Life Cycle Cost Analysis

9/21/2021 SI-4251 Ekonomi Teknik 21

22

Life Cycle Cost Analysis

9/21/2021 SI-4251 Ekonomi Teknik 22

23

Exercise

9/21/2021 SI-4251 Ekonomi Teknik 23

24

Contoh Antareja Minggu 4 (Exercise 1)

• Perusahaan Konstruksi Antareja akan melakukan pembelian Bucket
Excavator teknologi terbaru untuk efisiensi proyek – proyek dredging yang
sedang dilakukan. Terdapat 2 pilihan bucket, dan akan dipilih salah satunya.
Kedua bucket tersebut mempunyai masa pakai optimal 5 tahun dan tidak
memiliki salvage value.
• Bucket tipe A memiliki harga Rp. 100.000.000, dan diprediksi akan
memberikan penghematan hingga Rp. 30.000.000 per tahun.
• Bucket tipe B memiliki harga Rp. 135.000.000, dan diprediksi akan
memberikan penghematan Rp. 30.000.000 pada tahun pertama, untuk
kemudian meningkat sebesar Rp. 5.000.000 per tahun (Rp. 35.000.000
tahun ke 2, Rp. 40.000.000 tahun ke 3, dst)
• Dengan interest 7% per tahun, bucket tipe apa yang sebaiknya dipilih oleh
Perusahaan Antareja? Gunakan Analisis EUAW

9/21/2021 SI-4251 Ekonomi Teknik 24

25

2. Comparing Alternatives by EUAW

Two types of production systems are being considered based on interest rate of 9% and
the following characteristics:

system A system B
Initial cost Rp 860.000.000,- Rp 1.360. 000.000,-
Annual O & M expenses Rp 89.000.000,- Rp 73.000.000.-
Annual receipts Rp 121.500.000,- Rp 133.400.000,-
Salvage value Rp 200.000.000,- Rp 320.000.000,-
Life 6 years 10 years

(A/P, 9%, 6) = 0.21632 (A/P, 9%, 10) = 0.14903

(A/F, 9%, 6) = 0.13632 (A/F, 9%, 10) = 0.06903
(P/F, 9%, 6) = 0.60320 (P/F, 9%, 10) = 0.46320
9/21/2021 5-25 SI-4251 Ekonomi Teknik
26

Exercise 3
• Kamu sebagai manager fasilitas dan operasi sebuah perusahaan tambang sedang
mereview biaya perawatan dan perbaikan fleet front shovel. Berikut adalah review biaya
perawatan dan perbaikan selama 5 tahun terakhir:
• 5 tahun lalu Rp. 600 juta
• 4 tahun lalu Rp. 700 juta
• 3 tahun lalu Rp. 800 juta
• 2 tahun lalu Rp. 900 Juta
• Tahun lalu Rp. 1 milyar
• Kondisi ini, membuat kamu mengembangkan SOP terbaru dalam proses perawatan dan
perbaikan fleet front shovel tersebut. Dengan SOP yang baru ini kamu yakin dapat
menurunkan biaya perawatan dan perbaikan pada tahun ini menjadi Rp. 900 Juta dan
akan terus turun sebesar Rp. 100 Juta pertahun selama 4 tahun ke depan.
• Hitunglah EUAW dari kondisi perawatan dan perbaikan fleet front shovel selama period
10 tahun tersebut untuk nantinya Kamu bisa mengevaluasi revenue yang didapat selama
ini serta rencana revenue ke depan.

9/21/2021 SI-4251 Ekonomi Teknik 26

27

Thank you

9/21/2021 SI-4251 Ekonomi Teknik 27