Sullivan ch06 Examples PDF

EXAMPLE 6-1 Analyzing Investment Alternatives by
Using Equivalent Worth
Engineering Economy, Sixteenth Edition, Global Edition © Pearson Education Limited 2014
Sullivan | Wicks | Koelling All rights reserved.
EXAMPLE 6-1 (continued) Analyzing Investment
Alternatives by Using Equivalent Worth
continued on next slide
MARR=10%
Capacity = 120,000 units/year
Price =$0.375/unit EXAMPLE 6-2 Analyzing Cost-Only Alternatives,
Using Equivalent Worth
Revenue = 120,000 x 0.375
=$45,000/year
Since all have same R,

we choose the one that min cost
Profit = R-cost
EXAMPLE 6-2 (continued) Analyzing Cost-Only
Alternatives, Using Equivalent Worth
EXAMPLE 6-3 Analyzing Alternatives with Different
Reject Rates
R = 120000 x (1-reject rate) x 0.375

= 45,000 (1-rr)
EXAMPLE 6-3 (continued) Analyzing Alternatives
with Different Reject Rates
EXAMPLE 6-4 Incremental Analysis: Investment
Alternatives
N=10 years
MARR = 10%
EXAMPLE 6-4 (continued) Incremental Analysis:
Investment Alternatives
Investment Alternatives
EXAMPLE 6-5 Incremental Analysis: Cost-Only
Alternatives
Cost-Only Alternatives
Comparison sequence D1-D4-D2-D3
D4-D1
ΔI=22000
ΔA = -22,100 – (-29000) = +6900 savings
Δ S = 4000
EXAMPLE 6-7 Useful Lives ≠ Study Period: The
Repeatability Assumption
6
4
EXAMPLE 6-7 (continued) Useful Lives ≠ Study
Period: The Repeatability Assumption
EXAMPLE 6-8 Useful Lives ≠ Study Period: The
Coterminated Assumption
Study period = 6
case #1: life of A<study period and also A is investment alternative

the cash flow of A is not modified.
1. for PW method compare PW of A with PW of B

PWA= -3500 + 1255 (P/A,10%,4)
2. for FW method compare FW of A at end of study period (not end

of life) with FW of B
FWA = -3500 (F/P,10%,6) + 1255 (F/A,10%,4)(F/P,10%,2)
or FW = PW (F/P,10%,6)
3. for AW. Compare AW of both from 1 – end of study period.

AWA = PWA (A/P,10%,6)
A B
Capital 3500 5000
investment
Annual cost 1255 1480
Useful life 4 6
Study period = 6
case #2: life of A<study period and A is cost alternative
we will assume that the service of the remaining years (study period – life of A =
2years) can be obtained either leased at a specific cost (C2) which will be given in
the question , or the service is leased at the same cost 1255.
if its leased at the same cost:
1. for PW method compare PW of modified A with PW of B

PWA= -3500 - 1255 (P/A,10%,6)
2. for FW method compare FW of modified A at end of study period with FW of B

FWA = -3500 (F/P,10%,6) - 1255 (F/A,10%,6)
or = PWA(F/P,10%,6)
3. for AW. Compare AW of both from EOY1 – end of study period.

AWA = -3500 (A/P,10%,6)-1255
or = PWA (A/P,10%,6)
A B
Capital 3500 5000
investment
Annual cost 1255 1480
Useful life 4 6
For the same example if it is given that the remaining years will be
leased at 2000 per year.
PWA = -3500 – 1255 (P/A,10%,4)-2000 (P/A,10%,2)(P/F,10%,4)
FWA = PWA (F/P,10%,6)
AWA = PWA (A/P,10%,6)
EXAMPLE 6-9 Comparing Alternatives Using CW
CW =AW/MARR
EXAMPLE 6-11 (continued) Modeling Estimated
Expenses as Arithmetic Gradients
AW= -33,200 (A/P,20%,5) - 2,165 – 1,100 – 500 (A/G,20%,5)
PW= -47,600 -1,720 (P/A,20%,9) – 500 (P/A,20%,6)(P/F,20%,3)
– 100(P/G,20%,6)(P/F,20%,3) + 5000 (P/F,20%,9)
AW = PW (A/P,20%,9)
CR = I (A/P,I,n) – S(A/F,I,n)
=47,600 (A/P,20%,9) – 5000(A/F,20%,9)
IMV(t=5) = CR (P/A,20%,4) + S (P/F,20%,4) = 32, 361
32,361
IMV(t=5) = 32, 361

we can compare the new CF of HEPS9 pump over 5 years study period
with the other pump (which life is already 5) using any EW method.
EXAMPLE 6-10 AW and Repeatability: Perfect
Together!
EXAMPLE 6-10 (continued) AW and Repeatability:
Perfect Together!
Here they assumed 50 working weeks / year, 5 working days per week, one 8 hours shift per day
Hours per year = 50*5 * 8 = 2000 hours per year
Availability = probability that the machine is ready to be used (not broken or maintained)
Yield = real output / max capacity
For M1. no. of real productive hour per year per machine = 2000 * 0.9 * .95 = 1710
We need 5850 productive hours to satisfy the demand
No. of machines needed = 5850 / 1710 = 3.42 = 4 machines of M1
Assuming repeatability
EUAC M1= 4 [4000 + 15000(A/P,20%,5] = 36,064/year
EUAC M2 = 3 [ 6000 + 22000 (A/P,20%,8] = 35,200 /year
3 machines of type M2 is better

EXAMPLE 6-10 (continued) AW and Repeatability:
Perfect Together!
EXAMPLE 6-13 Automobile Financing Options
EXAMPLE 6-13 (continued) Automobile Financing
Options
28000 = 663 (P/A,i?,48) i= 0.535%/month
EXAMPLE 6-14 (continued) Mortgage Financing
Options
EXAMPLE 6-14 (continued) Mortgage Financing
Options
EXAMPLE 6-15 Comparison of Two Savings Plans
EXAMPLE 6-15 (continued) Comparison of Two
Savings Plans
15 = x-21
After N years
My F= 500 (F/A,10%,15) (F/P,10,N-36)
Friend’s F = 2000 (F/A,10%, N-31)
EXAMPLE 6-15 (continued) Comparison of Two
Savings Plans
EXAMPLE 6-16 Credit Card Offers
EXAMPLE 6-16 (continued) Credit Card Offers

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EXAMPLE 6-1 Analyzing Investment Alternatives by

Using Equivalent Worth

continued on next slide

continued on next slide

Since all have same R,

continued on next slide

R = 120000 x (1-reject rate) x 0.375

continued on next slide

continued on next slide

continued on next slide

Comparison sequence D1-D4-D2-D3

continued on next slide

continued on next slide

continued on next slide

continued on next slide

continued on next slide

case #1: life of A<study period and also A is investment alternative

1. for PW method compare PW of A with PW of B

2. for FW method compare FW of A at end of study period (not end

3. for AW. Compare AW of both from 1 – end of study period.

case #2: life of A<study period and A is cost alternative

if its leased at the same cost:

1. for PW method compare PW of modified A with PW of B

2. for FW method compare FW of modified A at end of study period with FW of B

3. for AW. Compare AW of both from EOY1 – end of study period.

PWA = -3500 – 1255 (P/A,10%,4)-2000 (P/A,10%,2)(P/F,10%,4)

FWA = PWA (F/P,10%,6)

AWA = PWA (A/P,10%,6)

continued on next slide

continued on next slide

IMV(t=5) = CR (P/A,20%,4) + S (P/F,20%,4) = 32, 361

IMV(t=5) = 32, 361

Hours per year = 50*5 * 8 = 2000 hours per year

Yield = real output / max capacity

EUAC M1= 4 [4000 + 15000(A/P,20%,5] = 36,064/year

EUAC M2 = 3 [ 6000 + 22000 (A/P,20%,8] = 35,200 /year

3 machines of type M2 is better

continued on next slide

28000 = 663 (P/A,i?,48) i= 0.535%/month

Friend’s F = 2000 (F/A,10%, N-31)

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Hours per year = 505 8 = 2000 hours per year