Engineering Economics 3

1
ENGINEERING ECONOMICS
CHAPTER: THREE
ECONOMIC EVALUATION
3.1. PRESENT WORTH,

3.2. ANNUAL WORTH,
3.3. FUTURE WORTH,
3.4. ROR & PAYBACK PERIODS
3.5. BENEFIT COST ANALYSIS
Mettu University (2014/2022) Abraham. A

Civil Engineering Department
3.1 Present worth Analysis
2
 In this method of comparison, the cash flows of each

alternative will be reduced to time zero by assuming an
interest rate i. Then, depending on the type of decision,
the best alternative will be selected by comparing the
present worth amounts of the alternatives.
 The sign of various amounts at different points in time in
a cash flow diagram is to be decided based on the
type of the decision problem.
 Costs (outflow): negative
 profit, revenue, salvage value (all inflows), etc. will be
assigned with Positive sign.
3
To find the present worth of the above cash flow diagram for a given
interest rate, the formula is
4
To compute the present worth amount of the above cash flow diagram for
a given interest rate i, we have the formula
Formulating Alternatives
5
 The evaluation and selection of economic proposals require

cash flow estimates over a stated period of time,
mathematical techniques to calculate the measure of worth
and a guideline for selecting the best proposal.
 From all the proposals that may accomplish a stated
purpose, the alternatives are formulated.
 Up front, some proposals are viable from technological,
economic, and/or legal perspectives; others are not viable.
 Once the obviously nonviable ideas are eliminated, the
remaining viable proposals are fleshed out to form the
alternatives to be evaluated.
 Economic evaluation is one of the primary means used to
select the best alternative(s) for implementation.
3.1.1 Present Worth Analysis of Equal-Life Alternatives
6
 The PW comparison of alternatives with equal lives is

straightforward.
 The present worth P is renamed PW of the alternative.
 The present worth method is quite popular in industry
because all future costs and revenues are transformed to
equivalent monetary units NOW; that is, all future cash flows
are converted (discounted) to present amounts (e.g., dollars)
at a specific rate of return, which is the MARR.
 This makes it very simple to determine which alternative has
the best economic advantage.
 If the alternatives have the same capacities for the same
time period (life), the equal-service requirement is met.
Calculate the PW value at the stated MARR (i) for each
alternative.
7
 One alternative: If PW > 0, the requested MARR (i)

is met or exceeded and the alternative is
economically justified.
 Two or more alternatives: Select the alternative
with the PW that is numerically largest, that is, less
negative or more positive. This indicates a lower
PW of cost for cost alternatives or a larger PW of
net cash flows for revenue alternatives.
8
 Note that: the guideline to select one alternative with the

lowest cost or highest revenue uses the criterion of
numerically largest.
 This is not the absolute value of the PW amount, because the
sign matters. The selections below correctly apply the
guideline for two alternatives A and B.
9
 Example 1: A university lab is a research contractor to NASA for in-

space fuel cell systems that are hydrogen and methanol-based. During
lab research, three equal-service machines need to be evaluated
economically. Perform the present worth analysis with the costs shown
below. The MARR is 10% per year.
 Solution:
 The solar-powered machine is selected since the PW of its costs is the lowest; it
has the numerically largest PW value.
10
 EXAMPLE 2: Alpha Industry is planning to expand its production operation. It has

identified three different technologies for meeting the goal. The initial outlay and
annual revenues with respect to each of the technologies are summarized in Table
4.1. Suggest the best technology which is to be implemented based on the
present worth method of comparison assuming 20% interest rate, compounded
annually.
 Solution: In all the technologies, the initial outlay is assigned a negative sign and
the annual revenues are assigned a positive sign.
11
 TECHNOLOGY 1:
PW = –1,200,000 + 400,000x(P/A, 20%, 10) = Rs. 476,988.83
 TECHNOLOGY 2:
PW = – 2,000,000 + 6,00,000+(P/A, 20%, 10)
= Rs. 515,500
12
 TECHNOLOGY 3:
PW= –1,800,000 + 500,000x(P/A, 20%, 10)

= Rs. 296,250
From the above calculations, it is clear that the present worth of

technology 2 is the highest among all the technologies. Therefore,
Technology 2 is suggested for implementation to expand the production.
13
 EXAMPLE 3: An engineer has two bids for an elevator to be installed in a new

building. The details of the bids for the elevators are as follows: Determine which
bid should be accepted, based on the present worth method of comparison
assuming 15% interest rate, compounded annually.
EXAMPLE 4: Investment proposals A and B have the net cash flows as

follows:
Compare the present worth of A with that of B at i = 18%. Which proposal

should be selected?
14
A) Present worth of A at i = 18%. The cash flow

diagram of proposal A is shown in Fig.
PWA(18%) = –10,000 + 3,000(P/F, 18%, 1) + 3,000(P/F, 18%, 2) + 7,000(P/F, 18%, 3) +

6,000(P/F, 18%, 4)
=2,052.10
B) Present worth of B at i = 18%. The cash flow diagram of the proposal B is shown in Fig.
PWB(18%) = –10,000 + 6,000(P/F, 18%, 1) + 6,000(P/F,

18%, 2) + 3,000(P/F, 18%, 3) + 3,000(P/F, 18%, 4)
= 2,767.40
select proposal B.
15
 Example 5: A firm is considering which of two mechanical devices

to install to reduce costs in a particular situation. Both devices cost
$1000 and have useful lives of 5 years and no salvage value.
Device A can be expected to result in $300 savings annually.
Device B will provide cost savings of $400 the first year but will
decline $50 annually, making the second-year savings $350, the
third-year savings $300, and so forth. With interest at 7%, which
device should the firm purchase?
 SOLUTION:
 PW of benefits A = 300(P/A, 7%,5) = 300(4.100)= $1230
 PW of benefits B = 400(P/A, 7%, 5) - 50(P/G, 7%, 5)
 = 400(4.100) - 50(7.647) = $1257.65
3.1.2 Present Worth Analysis of Different-Life Alternatives
16
 The PW of the alternatives must be compared over the same

number of years and must end at the same time to satisfy the
equal-service requirement.
 LCM: Compare the PW of alternatives over a period of time
equal to the least common multiple (LCM) of their estimated
lives.
 Study period: Compare the PW of alternatives using a
specified study period of n years.
 The assumptions when using the LCM approach are that
1. The service provided will be needed over the entire LCM years
or more.
2. The selected alternative can be repeated over each life cycle
of the LCM in exactly the same manner.
3. Cash flow estimates are the same for each life cycle.
17
 Example 6: National Homebuilders, Inc., plans to

purchase new cut-and-finish equipment. Two
manufacturers offered the estimates below.
Determine which vendor should be selected on the basis of a

present worth comparison, if the interest rate is 15% per year.
18
 Solution: (a) Since the equipment has different lives, compare them over the LCM
of 18 years. For life cycles after the first, the first cost is repeated in year 0 of
each new cycle, which is the last year of the previous cycle.
 These are years 6 and 12 for vendor A and year 9 for B.
 PWA = -15,000 - 15,000(P/F,15%,6) + 1000(P/F,15%,6)
-15,000(P/F,15%,12) + 1000(P/F,15%,12) + 1000(P/F,15%,18)-
3,500(P/A,15%,18)
= $-45,036
 PWB = -18,000 - 1 8,000(P/F, 15%,9) + 2000(P/F,15%,9)+
2000(P/F,15%,18) - 3100(P/A,15%,18)
= $-41,384
Vendor B is selected, since it costs less in PW terms; that is, the PWB value is
numerically larger than PWA.
19
20
Exercise:
 Given:- i= 13%
Vendor A Vendor B
First cost (-) 15,000 ($) 18000 ($)
Annual O&M cost (-) 3500 ($) 3100 ($)
Annual Receipt (+) 2000 ($) 1700 ($)
Salvage values (+) 1000 ($) 2000 ($)
life 6 years 9 years
 Determine which vendor should be selected on the basis of a

present worth comparison?
3.2 Future worth Analysis
21
 In the future worth method of comparison of alternatives, the

future worth of various alternatives will be computed. Then, the
alternative with the maximum future worth of net revenue or
with the minimum future worth of net cost will be selected
as the best alternative for implementation.
 The selection guidelines for FW analysis are the same as for

PW analysis; FW > 0 means the MARR is met or exceeded. For
two or more mutually exclusive alternatives, select the one with
the numerically largest FW value.
22
 Example 7: A man owns a corner plot. He must decide which of the

several alternatives to select in trying to obtain a desirable return on his
investment. After much study and calculation, he decides that the two best
alternatives are as given in the following table:
Evaluate the alternatives based on the future worth method at i = 12%.

 Example 8: Consider the following two mutually exclusive alternatives:
At i = 18%, select the best
alternative based on future worth
method of comparison.
23
 Example 9: The cash flow diagram of two mutually

exclusive alternatives are given in Figs. below.
Select the best alternative based on future worth method at i = 8%.

24
 Solution: Alternative 1: This comes under equal payment gradient series

FW1(8%) = –P(F/P, 8%, 6) + [A1 + G(A/G, 8%, 6) x (F/A, 8%, 6)
= – 5,00,000(1.587) + [50,000 + 50,000(2.2764)] x 7.336
= – 79,35,000 + 1,63,820 x 7.336
= –79,35,000 + 12,01,784
= Rs. 4,08,283.52
Alternative 2: This comes under equal payment gradient series

FW2(8%) = –P(F/P, 8%, 6) + [A1 + G(A/G, 8%, 6)] x (F/A, 8%, 6)
FW2(8%) = –7,00,000 x 1.587 + [70,000 + 70,000 x 2.2764] x 7.336
= –11,10,900 + 16,82,497
= Rs. 5,71,596.93
25
 Example 10: M/S Krishna Castings Ltd. is planning to replace its

annealing furnace. It has received tenders from three different original
manufacturers of annealing furnace. The details are as follows.
 Which is the best alternative based on future worth method at i = 20%?

3.3 Annual worth Analysis
26
 In the annual equivalent method of comparison, first the annual

equivalent cost or the revenue of each alternative will be
computed.
 Then the alternative with the maximum annual equivalent revenue
in the case of revenue-based comparison or with the minimum
annual equivalent cost in the case of cost based comparison will be
selected as the best alternative.
 Annual worth is also known by other titles. Some are equivalent
annual worth (EAW), equivalent annual cost (EAC), annual
equivalent (AE), and equivalent uniform annual cost (EUAC).
 The alternative selected by the AW method will always be the
same as that selected by the PW method, and all other alternative
evaluation methods, provided they are performed correctly.
27
 In the annual equivalent method of comparison, first the annual

equivalent cost or the revenue of each alternative will be
computed.
 Then the alternative with the maximum annual equivalent
revenue in the case of revenue-based comparison or with the
minimum annual equivalent cost in the case of cost based
comparison will be selected as the best alternative.
 The annual worth method offers a prime computational and
interpretation advantage because the AW value needs to be
calculated for only one life cycle.
 The AW value determined over one life cycle is the AW for all
future life cycles. Therefore, it is not necessary to use the LCM
of lives to satisfy the equal-service requirement.
28
29
 Example 11: A company is planning to purchase an advanced

machine center. Three original manufacturers have responded
to its tender whose particulars are tabulated as follows:
Determine the best alternative based on the annual equivalent
method by assuming i = 20%, compounded annually.
30
 Solution:
Alternative 1
AE1(20%) = 500,000(A/P, 20%, 15) + 200,000

= 500,000(0.2139) + 200,000
= 306,950
Alternative 2
AE2(20%) = 400,000(A/P, 20%, 15) + 300,000

= 400,000(0.2139) + 300,000
= Rs. 385,560.
31
 Alternative 3
AE3(20%) = 600,000(A/P, 20%, 15) + 150,000

= 600,000(0.2139) + 150,000
= Rs. 278,340.
 The annual equivalent cost of manufacturer 3 is less than that of

manufacturer 1 and manufacturer 2. Therefore, the company should buy the
advanced machine center from manufacturer 3.
32
 Example 12: Luby’s Cafeterias is in the process of forming a separate

business unit that provides meals to facilities for the elderly, such as
assisted care and long-term care centers. Since the meals are prepared
in one central location and distributed by trucks throughout the city, the
equipment that keeps food and drink cold and hot is very important.
Michele is the general manager of this unit, and she wishes to choose
between two manufacturers of temperature retention units that are
mobile and easy to sterilize after each use. Use the cost estimates
below to select the more economic unit at a MARR of 8% per year.
33
 Solution
 The best evaluation technique for these different-life alternatives is the annual worth
method, where AW is taken at 8% per year over the respective lives of 4 and 12
years.
AW(h)=annual equivalent of P + annual M&O + annual equivalent of S
= -15,000(A/P,8%,4) - 6000 + 0.2(15,000XA/F,8%,4)
= -15,000(0.30192) - 6000 + 3000(0.22192)
= $-9,863
AW(ic) = annual equivalent of P + annual M&O + annual equivalent of refurbishment
+ annual equivalent of S
= -20,000(4/P,8%, 12) - 9000 - 2000[(P/F,8%,4) + (P/F,8%,8)](A/P,8%,12)
+ 0.4(20,000)(A /F,8%, 12)
= -20,000(0.13270) - 9000 - 2000(0.7350 + 0.5403](0.13270) + 8000(0.05270)
= $-11,571
The Hamilton unit is considerably less costly on an annual equivalent basis.
34
 EXAMPLE 13: Two possible routes for laying a power line are
under study. Data on the routes are as follows:
 If 15% interest is used, should the power line be routed around the
lake or under the lake?
35
 Solution:
 Alternative 1: Around the lake
 First cost = 1,50,000 x 15 = Rs. 22,50,000
 Maintenance cost/yr = 6,000 x 15 = Rs. 90,000
 Power loss/yr = 15,000 x 15 = Rs. 2,25,000
 Maintenance cost and power loss/yr = Rs. 90,000 + Rs. 2,25,000
 = Rs. 3,15,000
 Salvage value = 90,000 x 15 = Rs. 13,50,000
36
 Aw1= 22,50,000(A/P, 15%, 15) + 3,15,000 – 13,50,000(A/F, 15%, 15)

= 22,50,000(0.1710) + 3,15,000 – 13,50,000(0.0210)
= Rs. 6,71,400
Alternative 2
AW2= 37,50,000(A/P, 15%, 15) + 1,35,000 – 7,50,000(A/F, 15%, 15)
= 37,50,000(0.1710) + 1,35,000 – 7,50,000(0.0210)
= Rs. 7,60,500
The annual equivalent cost of alternative 1 is less than that of alternative 2.
Therefore, select the route around the lake for laying the power line.
3.4) ROR (Rate of Return)
37
 The rate of return of a cash flow pattern is the interest rate at which
the present worth of that cash flow pattern reduces to zero.
 In this method of comparison, the rate of return for each alternative is
computed.
 Then the alternative which has the highest rate of return is selected
as the best alternative.
 In this type of analysis, the expenditures are always assigned with a
negative sign and the revenues/inflows are assigned with a positive
sign.
 Rate of return (ROR) is the rate paid on the unpaid balance of
borrowed money, or the rate earned on the unrecovered balance of
an investment, so that the final payment or receipt brings the balance
to exactly zero with interest considered.
38
 The rate of return is the interest rate that makes the present worth or
annual worth of a cash flow series exactly equal to 0.
 The ROR value is determined in a generically different way
compared to the PW or AW value for a series of cash flows.
 To determine the rate of return, develop the ROR equation using
either a PW or AW relation, set it equal to 0, and solve for the
interest rate.
i* Using Trial and Error method

1. Draw a cash flow diagram.
2. Set up the rate of return equation in the form of Equation.
3. Select values of i by trial and error until the equation is balanced.
3.4) Rate of Return
39
 Example 14: A person is planning a new business. The initial outlay

and cash flow pattern for the new business are as listed below. The
expected life of the business is five years. Find the rate of return
for the new business.
Solution
PW(i) = –100,000 + 30,000(P/A, i, 5)
When i = 10%,
PW(10%) = –1,00,000 + 30,000(P/A, 10%, 5)

= –1,00,000 + 30,000(3.7908)
= Rs. 13,724.
3.4) Rate of Return
40
 When i = 15%,
PW(15%) = –1,00,000 + 30,000(P/A, 15%, 5)
= –1,00,000 + 30,000(3.3522)
= Rs. 566.
When i = 18%,
PW(18%) = –1,00,000 + 30,000(P/A, 18%, 5)
= –1,00,000 + 30,000(3.1272)
= Rs. – 6,184
Therefore, the rate of return for the new business is 15.252%.

41
 EXAMPLE 15: A company is trying to diversify its business in a new product line.
The life of the project is 10 years with no salvage value at the end of its life. The
initial outlay of the project is Rs. 2,000,000. The annual net profit is Rs. 350,000.
Find the rate of return for the new business.
 Solution:
 Answer: Therefore, the rate of return of the new product line is 11.74%
42
 EXAMPLE 16: A firm has identified three mutually exclusive investment proposals
whose details are given below. The life of all the three alternatives is estimated
to be five years with negligible salvage value. The minimum attractive rate of
return for the firm is 12%.
 Find the best alternative based on the rate of return method of comparison.
 Answer: the rate of return of the alternative A1 is 15.81%, the rate of return
of alternative A2 is 12%, the rate of return for alternative A3 is 11%
 Hence, alternative A1 should be selected. (Select largest rate)
43
 Example 17: For the cash flow diagram shown in figure, compute
the rate of return.
 Solution: A = A1 + G(A/G, i, n) = 150 + 150(A/G, i, 5)

 The formula for the present worth of the whole diagram
 = –1,275 + [150 + 150(A/G, i, 5)] x (P/A, i, 5)
 From try and error method, i = 17.45%
3.5 Benefit cost Analysis
44
 Costs:- estimated expenditures to the government entity for

construction, operation, and maintenance of the project, less
any expected salvage value.
 Benefits:- advantages to be experienced by the owners, the
public.
 Dis-benefits:- expected undesirable or negative consequences
to the owners if the alternative is implemented. Dis-benefits
may be indirect economic disadvantages of the alternative.
 BCR < 1 Investment option generates losses.

 BCR = 1 Investment option is neither profitable nor lossy.
 BCR > 1 Investment option is profitable

Funding and Financing
45
Funding VS Financing
 Funding is related to the way in which money is raised for
supply of transport capacity, ie. tax
 Financing is related to the way in which fund is used for the
supply of transport, ie. Loans
Appraisal and Evaluation

 The most sophisticated method of project appraisal and evaluation
have been developed and applied in transport sector
 Appraisal is the assessment before the project
 Evaluation is the assessment after the project
Economic Cost and Assumption Included in the Evaluation
46
 Initial Project Investment Cost

 Annual Operating and Maintenance Cost
 Periodic Capital Equipment Replacement Cost
 Salvage Value/ Residual Value
Economic Costs not Included in the Evaluation
47
 Federal Funding is sometimes not included in the

evaluation.
 The benefit cost ratio will conservatively ignore any
potential new federal funding.
Key Benefit-Cost Evaluation Measures
48
 Net Present Value

 Equivalent Uniform Annual Worth
 Economic Rate of Return
 Benefit Cost Ratio
If the B/C value is exactly or very near 1.0, noneconomic factors will help make
the decision.
Benefit- cost analysis
49
 The conventional B/C ratio, probably the most

widely used, is calculated as follows:
For Alternative Selection Using Incremental B/C Analysis:-

• If B/C >1.0, choose the higher-cost alternative, because its extra
cost is economically justified.
• If B/C < 1.0, choose the lower-cost alternative.
A) Present Worth Analysis
50
 Steps to do present worth analysis for a single

alternative (investment)
 Select a desired value of the return on investment (i)
 Using the compound interest formulas bring all benefits and
costs to present worth
 Select the alternative if its net present worth (Present worth of
benefits – Present worth of costs) ≥ 0
 Or benefit divided by cost is (B/C) must be greater than 1 to
be project is acceptable
B) Equivalent Uniform Annual Worth
51
 It is considered to be the most desirable method because

the EUAW method is easy to calculate and is easily
understood by anyone.
 Some of is assumption is identical with the present worth
method
 From the title itself this will determine the equivalent annual
worth and cost.
 Advantages of EUAW Method is the EUAW value has to be
calculated for only one life cycle. Therefore it is not
necessary to use LCM of lives compared to PW and FW
method.
52
 Example 18: A construction enterprise is investigating

the purchase of a new dump truck. Interest rate is 9%.
The cash flow for the dump truck are as follows:
 First cost = $50,000
 Annual operating cost = $2000
 Annual income = $9,000
 Salvage value is $10,000
 Life = 10 years.
 Is this investment worth undertaking?
 What should be the minimum annual benefit for making
it a worthy of investment at 9% rate of return?
53
1. A) Using present worth B/C ratio is 0.986 which is not

feasible
2. B) Try using another methods : EUAW, FW….. But the
answers are similar
54
 Example 19: A consulting engineering firm is considering two

models of SUVs for the company principals. “a GM” model will
have a first cost of 26,000 birr, an operating cost of 2,000 birr,
and a salvage value of 12,000 birr after 3 years. A Ford model
will have a first cost of 29,000 birr, an operating cost of 1,200
birr, and a 15,000 birr resale value after 3 years. At an interest
rate of 15% per year, which model should the consulting firm buy?
Use AW analysis.
55
Example 20: A large city is located close to a major seaport. It has

been proposed that a new superhighway be built between the city
and the seaport, running parallel to the present congested, two-lane
highway. A group of consulting engineers has estimated that the new
highway will provide the following direct benefits: (1) additional
commerce between the city and the seaport, having a value of $50
million per year; (2) future economic growth within the region over a
10-year period, resulting in an increase of $5 million per year in
commercial activity, beginning in the second year; (3) a reduction in
highway accidents, resulting in a direct savings of approximately
$0.8 million per year.
56
 On the other hand, the following disadvantages or dis-benefits

are associated with the new highway: (i) the destruction of
valuable farmland that currently contributes $1.3 million per
year to the regional economy; (ii) a decrease in commercial
activity along the present highway, resulting in a loss of $0.7
million per year. Assess the desirability of the proposed
superhighway, based on a construction cost of $280 million
and a yearly maintenance cost of $1.5 million. Assume a
lifetime of 30 years and an interest rate of 7%, compounded
annually.
57
 Solution:
 Over the entire 30-year period, the yearly net benefits, B - D, are
given by the EUAS method as
 Similarly, the yearly costs are given by
 and the benefit-cost ratio is
 Since BCR >.I, the proposed highway is considered to be desirable.

58
 Example 21: A public works project is proposed that has total

present-worth benefits of $75 million and total present-worth
costs of $55 million. In deliberating this proposal, some
members of the town council have suggested that the project
has a total present-worth dis-benefit of $15 million. How
should the proposal be evaluated?
59
 Example 21: National Homebuilders, Inc., plans to purchase new cut-and-

finish equipment. Two manufacturers offered the estimates below.
Vendor A Vendor B Vendor C
First cost 25 million ETB 27.5 million ETB 30 million ETB
Annual O&M cost 1.8 million ETB 2 million ETB 2.4 million ETB
Salvage values 14 million ETB 11 million ETB 10 million ETB
Annual Receipt 2.5 million ETB 2.3 million ETB 1.9 million ETB
Annual dis -benefits 0.7 million ETB 0.9 million ETB 0.8 million ETB
life 3 years 4 years 6 years
Determine Benefit cost ratio of which vendor should be selected if the interest rate is 14%
per year.
on the basis of comparison,
A) Benefit cost by using equivalent present worth
B) Benefit cost by using equivalent uniform Annual worth
NB: apply LCM for present worth analysis (for letter A)

60

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1

3.1. PRESENT WORTH,

Mettu University (2014/2022) Abraham. A

 In this method of comparison, the cash flows of each

 The evaluation and selection of economic proposals require

 The PW comparison of alternatives with equal lives is

 One alternative: If PW > 0, the requested MARR (i)

 Note that: the guideline to select one alternative with the

 Example 1: A university lab is a research contractor to NASA for in-

 EXAMPLE 2: Alpha Industry is planning to expand its production operation. It has

PW = –1,200,000 + 400,000x(P/A, 20%, 10) = Rs. 476,988.83

PW= –1,800,000 + 500,000x(P/A, 20%, 10)

From the above calculations, it is clear that the present worth of

 EXAMPLE 3: An engineer has two bids for an elevator to be installed in a new

EXAMPLE 4: Investment proposals A and B have the net cash flows as

Compare the present worth of A with that of B at i = 18%. Which proposal

A) Present worth of A at i = 18%. The cash flow

PWA(18%) = –10,000 + 3,000(P/F, 18%, 1) + 3,000(P/F, 18%, 2) + 7,000(P/F, 18%, 3) +

PWB(18%) = –10,000 + 6,000(P/F, 18%, 1) + 6,000(P/F,

 Example 5: A firm is considering which of two mechanical devices

 The PW of the alternatives must be compared over the same

 Example 6: National Homebuilders, Inc., plans to

Determine which vendor should be selected on the basis of a

 Determine which vendor should be selected on the basis of a

 In the future worth method of comparison of alternatives, the

 The selection guidelines for FW analysis are the same as for

 Example 7: A man owns a corner plot. He must decide which of the

Evaluate the alternatives based on the future worth method at i = 12%.

 Example 9: The cash flow diagram of two mutually

Select the best alternative based on future worth method at i = 8%.

 Solution: Alternative 1: This comes under equal payment gradient series

Alternative 2: This comes under equal payment gradient series

 Example 10: M/S Krishna Castings Ltd. is planning to replace its

 Which is the best alternative based on future worth method at i = 20%?

 In the annual equivalent method of comparison, first the annual

 In the annual equivalent method of comparison, first the annual

 Example 11: A company is planning to purchase an advanced

AE1(20%) = 500,000(A/P, 20%, 15) + 200,000

AE2(20%) = 400,000(A/P, 20%, 15) + 300,000

AE3(20%) = 600,000(A/P, 20%, 15) + 150,000

 The annual equivalent cost of manufacturer 3 is less than that of

 Example 12: Luby’s Cafeterias is in the process of forming a separate

 Aw1= 22,50,000(A/P, 15%, 15) + 3,15,000 – 13,50,000(A/F, 15%, 15)

i* Using Trial and Error method

 Example 14: A person is planning a new business. The initial outlay

PW(i) = –100,000 + 30,000(P/A, i, 5)

PW(10%) = –1,00,000 + 30,000(P/A, 10%, 5)

Therefore, the rate of return for the new business is 15.252%.

 Solution: A = A1 + G(A/G, i, n) = 150 + 150(A/G, i, 5)

 Costs:- estimated expenditures to the government entity for

 BCR < 1 Investment option generates losses.

Appraisal and Evaluation

 Initial Project Investment Cost

 Federal Funding is sometimes not included in the

 Net Present Value

 The conventional B/C ratio, probably the most

For Alternative Selection Using Incremental B/C Analysis:-

 Steps to do present worth analysis for a single

 It is considered to be the most desirable method because

 Example 18: A construction enterprise is investigating

1. A) Using present worth B/C ratio is 0.986 which is not

 Example 19: A consulting engineering firm is considering two

Example 20: A large city is located close to a major seaport. It has

 On the other hand, the following disadvantages or dis-benefits