AWW911S -2022 Example solutions

Example 5
5.1
Based on Present Worth (PW) value, do a comparative economic analysis of two water schemes
(data as in table below).

Recommend which one of the two schemes would be more economically feasible to invest in.

Assume a minimum rate of return of 10% p.a.

Do calculation for the following examples by hand aided by interest factor tables

Solution
For Scheme 1:

1. Based on PW :

PW = N$ 5000 + 500 (P/A, 10%, 6) = 5000 + 500 (5.417) = N$ 5000 + 2708.50 = N$ 7708.50

2. Based on EUAC:

EUAC = 5000 (A/P, 10%, 6) + 500 = N$ 5000 (0.1846) + 500 = N$ 923.00 + 500 = N$ 1423.00

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For Scheme 2:

1. Based on PW :

PW = N$ 4000 + 800 (P/A, 10%, 6) = 4000 + 800 (5.417) = N$ 4000 + 4333.60 = N$ 8333.60

2. Based on EUAC:

EUAC = 4000 (A/P, 10%, 6) + 800 = N$ 4000 (0.1846) + 800 = N$ 738.40 + 800 = N$ 1538.60

Economic feasibility:

Based on PW: PW project 1 < PW project 2 → Scheme 1 more feasible

Based on EUAC: EUAC project 1 < EUAC project 2 → Scheme 1 more feasible

Example 5.2
There is an urgent need to invest in a portion of a water supply network in areas that were not
serviced before.
Finance will be borrowed from a bank at an attractive interest rate.

Determine the maximum interest rate payable to the lending bank without a loss to the company.

Data of the investments is as shown in the table below.

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 Solution

N$ 500 N$ 500 N$ 500

INCOME +

1 2 3
COST -
Time (yrs)
N$ 1200

Considering cost as negative and income as positive

Then

NPW = -1200 + 500 (P/F, i %, 1) + 500 (P/F, i %, 2) + 500 (P/F, i %, 3)

or
NPW = -1200 + 500 (P/A, i %, 3)

Economic break-even determined setting NPW = 0:

Determine the IRR by trail-and-error selection of rate of return (interest tables on pages 4, 5 & 6)

Select i = 10% pa: NPW = -1200 + 500 (0.9091)+ 500 (0.8265) + 500 (0.7513) = N$ 43.45

Or NPW = -1200 + 500 (2.4869) = N$ 43.45

Select i = 12% pa: NPW = -1200 + 500 (0.8929) + 500 (0.7972) + 500 (0.7118) = N$ 0.95

or NPW = -1200 + 500 (2.4018) = N$ 0.90

Select i = 13% pa: NPW = -1200 + 500 (0.8850) + 500 (0.7832) + 500 (0.6931) = - N$ 19.35

or NPW = -1200 + 500 (2.3612) = - N$ 19.45

Break-even IRR :

0.95 (1 – x) 13%

12% x
19.35

Based on linear interpolation can derive the ratio:

x/0.95 = (1 – x)/19.35 → x = 0.047 %

then

Economic break-even (IRR) = 12 + x = 12.047 %

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