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Capacity and Constraint Management

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S7

Capacity and Constraint

Management

PowerPoint presentation to accompany

Heizer and Render

Operations Management, 10e

Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

S7 - 2 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline

Capacity

Design and Effective Capacity

Capacity and Strategy

Capacity Considerations

Managing Demand

Demand and Capacity

Management in the Service Sector

S7 - 3 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline Continued

Bottleneck Analysis and Theory of

Constraints

Process Times for Stations,

Systems, and Cycles

Theory of Constraints

Bottleneck Management

Break-Even Analysis

Single-Product Case

Multiproduct Case

S7 - 4 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline Continued

Reducing Risk with Incremental

Changes

Applying Expected Monetary

Value to Capacity Decisions

Applying Investment Analysis to

Strategy-Driven Investments

Investment, Variable Cost, and

Cash Flow

Net Present Value

S7 - 5 2011 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives

When you complete this supplement,

you should be able to:

1. Define capacity

2. Determine design capacity, effective

capacity, and utilization

3. Perform bottleneck analysis

4. Compute break-even analysis

S7 - 6 2011 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives

When you complete this supplement,

you should be able to:

5. Determine the expected monetary

value of a capacity decision

6. Compute net present value

S7 - 7 2011 Pearson Education, Inc. publishing as Prentice Hall

Process Strategies

The objective of a process strategy is

to build a production process that

meets customer requirements and

product specifications within cost

and other managerial constraints

S7 - 8 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity

The throughput, or the number of

units a facility can hold, receive,

store, or produce in a period of time

Determines

fixed costs

Determines if

demand will

be satisfied

Three time horizons

S7 - 9 2011 Pearson Education, Inc. publishing as Prentice Hall

Planning Over a Time

Horizon

Figure S7.1

Modify capacity Use capacity

Intermediate-

range

planning

Subcontract Add personnel

Add equipment Build or use inventory

Add shifts

Short-range

planning

Schedule jobs

Schedule personnel

Allocate machinery *

Long-range

planning

Add facilities

Add long lead time equipment

*

* Difficult to adjust capacity as limited options exist

Options for Adjusting Capacity

S7 - 10 2011 Pearson Education, Inc. publishing as Prentice Hall

Design and Effective

Capacity

Design capacity is the maximum

theoretical output of a system

Normally expressed as a rate

Effective capacity is the capacity a

firm expects to achieve given current

operating constraints

Often lower than design capacity

S7 - 11 2011 Pearson Education, Inc. publishing as Prentice Hall

Utilization and Efficiency

Utilization is the percent of design capacity

achieved

Efficiency is the percent of effective capacity

achieved

Utilization = Actual output/Design capacity

Efficiency = Actual output/Effective capacity

S7 - 12 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

S7 - 13 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

S7 - 14 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

S7 - 15 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

S7 - 16 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

S7 - 17 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

S7 - 18 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Efficiency = 84.6%

Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

S7 - 19 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls

Design capacity = 1,200 rolls per hour

Bakery operates 7 days/week, 3 - 8 hour shifts

Efficiency = 84.6%

Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

S7 - 20 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity and Strategy

Capacity decisions impact all 10

decisions of operations

management as well as other

functional areas of the organization

Capacity decisions must be

integrated into the organizations

mission and strategy

S7 - 21 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity Considerations

1. Forecast demand accurately

2. Understand the technology and

capacity increments

3. Find the optimum

operating level

(volume)

4. Build for change

S7 - 22 2011 Pearson Education, Inc. publishing as Prentice Hall

Economies and

Diseconomies of Scale

Economies

of scale

Diseconomies

of scale

25 - room

roadside motel

50 - room

roadside motel

75 - room

roadside motel

Number of Rooms

25 50 75

A

v

e

r

a

g

e

u

n

i

t

c

o

s

t

(

d

o

l

l

a

r

s

p

e

r

r

o

o

m

p

e

r

n

i

g

h

t

)

Figure S7.2

S7 - 23 2011 Pearson Education, Inc. publishing as Prentice Hall

Managing Demand

Demand exceeds capacity

Curtail demand by raising prices,

scheduling longer lead time

Long term solution is to increase capacity

Capacity exceeds demand

Stimulate market

Product changes

Adjusting to seasonal demands

Produce products with complementary

demand patterns

S7 - 24 2011 Pearson Education, Inc. publishing as Prentice Hall

Complementary Demand

Patterns

4,000

3,000

2,000

1,000

J F M A M J J A S O N D J F M A M J J A S O N D J

S

a

l

e

s

i

n

u

n

i

t

s

Time (months)

Jet ski

engine

sales

Figure S7.3

S7 - 25 2011 Pearson Education, Inc. publishing as Prentice Hall

Complementary Demand

Patterns

4,000

3,000

2,000

1,000

J F M A M J J A S O N D J F M A M J J A S O N D J

S

a

l

e

s

i

n

u

n

i

t

s

Time (months)

Snowmobile

motor sales

Jet ski

engine

sales

Figure S7.3

S7 - 26 2011 Pearson Education, Inc. publishing as Prentice Hall

Complementary Demand

Patterns

4,000

3,000

2,000

1,000

J F M A M J J A S O N D J F M A M J J A S O N D J

S

a

l

e

s

i

n

u

n

i

t

s

Time (months)

Combining both

demand patterns

reduces the

variation

Snowmobile

motor sales

Jet ski

engine

sales

Figure S7.3

S7 - 27 2011 Pearson Education, Inc. publishing as Prentice Hall

Tactics for Matching

Capacity to Demand

1. Making staffing changes

2. Adjusting equipment

Purchasing additional machinery

Selling or leasing out existing equipment

3. Improving processes to increase throughput

4. Redesigning products to facilitate more

throughput

5. Adding process flexibility to meet changing

product preferences

6. Closing facilities

S7 - 28 2011 Pearson Education, Inc. publishing as Prentice Hall

Demand and Capacity

Management in the

Service Sector

Demand management

Appointment, reservations, FCFS rule

Capacity

management

Full time,

temporary,

part-time

staff

S7 - 29 2011 Pearson Education, Inc. publishing as Prentice Hall

Bottleneck Analysis and

Theory of Constraints

Each work area can have its own unique

capacity

Capacity analysis determines the

throughput capacity of workstations in a

system

A bottleneck is a limiting factor or

constraint

A bottleneck has the lowest effective

capacity in a system

S7 - 30 2011 Pearson Education, Inc. publishing as Prentice Hall

Process Times for Stations,

Systems, and Cycles

The process time of a station is the

time to produce a unit at that single

workstation

The process time of a system is the

time of the longest process in the

system the bottleneck

The process cycle time is the time it

takes for a product to go through the

production process with no waiting

S7 - 31 2011 Pearson Education, Inc. publishing as Prentice Hall

A Three-Station

Assembly Line

Figure S7.4

2 min/unit 4 min/unit 3 min/unit

A B C

QuickTime and a

decompressor

are needed to see this picture.

S7 - 32 2011 Pearson Education, Inc. publishing as Prentice Hall

Process Times for Stations,

Systems, and Cycles

The system process time is the

process time of the bottleneck after

dividing by the number of parallel

operations

The system capacity is the inverse

of the system process time

The process cycle time is the total

time through the longest path in the

system

S7 - 33 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity Analysis

Two identical sandwich lines

Lines have two workers and three operations

All completed sandwiches are wrapped

Wrap

37.5 sec/sandwich

Order

30 sec/sandwich

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

S7 - 34 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity

Analysis

Wrap

37.5 sec

Order

30 sec

Bread Fill Toast

15 sec 20 sec 40 sec

Bread Fill Toast

15 sec 20 sec 40 sec

Toast work station has the longest processing

time 40 seconds

The two lines each deliver a sandwich every 40

seconds so the process time of the combined

lines is 40/2 = 20 seconds

At 37.5 seconds, wrapping and delivery has the

longest processing time and is the bottleneck

Capacity per hour is 3,600 seconds/37.5

seconds/sandwich = 96 sandwiches per hour

Process cycle time is 30 + 15 + 20 + 40 + 37.5 =

142.5 seconds

S7 - 35 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity Analysis

Standard process for cleaning teeth

Cleaning and examining X-rays can happen

simultaneously

Check

out

6 min/unit

Check in

2 min/unit

Develops

X-ray

4 min/unit 8 min/unit

Dentist

Takes

X-ray

2 min/unit

5 min/unit

X-ray

exam

Cleaning

24 min/unit

S7 - 36 2011 Pearson Education, Inc. publishing as Prentice Hall

Capacity

Analysis

All possible paths must be compared

Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46

minutes

X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27

minutes

Longest path involves the hygienist cleaning the

teeth

Bottleneck is the hygienist at 24 minutes

Hourly capacity is 60/24 = 2.5 patients

Patient should be complete in 46 minutes

Check

out

6 min/unit

Check

in

2 min/unit

Develops

X-ray

4 min/unit 8 min/unit

Dentist

Takes

X-ray

2 min/unit

5 min/unit

X-ray

exam

Cleaning

24 min/unit

S7 - 37 2011 Pearson Education, Inc. publishing as Prentice Hall

Theory of Constraints

Five-step process for recognizing and

managing limitations

Step 1: Identify the constraint

Step 2: Develop a plan for overcoming the

constraints

Step 3: Focus resources on accomplishing Step 2

Step 4: Reduce the effects of constraints by

offloading work or expanding capability

Step 5: Once overcome, go back to Step 1 and find

new constraints

S7 - 38 2011 Pearson Education, Inc. publishing as Prentice Hall

Bottleneck Management

1. Release work orders to the system at the

pace of set by the bottleneck

2. Lost time at the bottleneck represents

lost time for the whole system

3. Increasing the capacity of a non-

bottleneck station is a mirage

4. Increasing the capacity of a bottleneck

increases the capacity of the whole

system

S7 - 39 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

Technique for evaluating process

and equipment alternatives

Objective is to find the point in

dollars and units at which cost

equals revenue

Requires estimation of fixed costs,

variable costs, and revenue

S7 - 40 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

Fixed costs are costs that continue

even if no units are produced

Depreciation, taxes, debt, mortgage

payments

Variable costs are costs that vary

with the volume of units produced

Labor, materials, portion of utilities

Contribution is the difference between

selling price and variable cost

S7 - 41 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

Costs and revenue are linear

functions

Generally not the case in the

real world

We actually know these costs

Very difficult to verify

Time value of money is often

ignored

Assumptions

S7 - 42 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

Total revenue line

Total cost line

Variable cost

Fixed cost

Break-even point

Total cost = Total revenue

900

800

700

600

500

400

300

200

100

| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 1000 1100

C

o

s

t

i

n

d

o

l

l

a

r

s

Volume (units per period)

Figure S7.5

S7 - 43 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

BEP

x

= break-even point in

units

BEP

$

= break-even point in

dollars

P = price per unit (after

all discounts)

x = number of units

produced

TR = total revenue = Px

F = fixed costs

V = variable cost per unit

TC = total costs = F + Vx

TR = TC

or

Px = F + Vx

Break-even point occurs when

BEP

x

=

F

P - V

S7 - 44 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Analysis

BEP

x

= break-even point in

units

BEP

$

= break-even point in

dollars

P = price per unit (after

all discounts)

x = number of units

produced

TR = total revenue = Px

F = fixed costs

V = variable cost per unit

TC = total costs = F + Vx

BEP

$

= BEP

x

P

= P

=

=

F

(P - V)/P

F

P - V

F

1 - V/P

Profit = TR - TC

= Px - (F + Vx)

= Px - F - Vx

= (P - V)x - F

S7 - 45 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

BEP

$

= =

F

1 - (V/P)

$10,000

1 - [(1.50 + .75)/(4.00)]

S7 - 46 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

BEP

$

= =

F

1 - (V/P)

$10,000

1 - [(1.50 + .75)/(4.00)]

= = $22,857.14

$10,000

.4375

BEP

x

= = = 5,714

F

P - V

$10,000

4.00 - (1.50 + .75)

S7 - 47 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Example

50,000

40,000

30,000

20,000

10,000

| | | | | |

0 2,000 4,000 6,000 8,000 10,000

D

o

l

l

a

r

s

Units

Fixed costs

Total

costs

Revenue

Break-even

point

S7 - 48 2011 Pearson Education, Inc. publishing as Prentice Hall

Break-Even Example

BEP

$

=

F

1 - x (W

i

)

V

i

P

i

Multiproduct Case

where V = variable cost per unit

P = price per unit

F = fixed costs

W = percent each product is of total dollar sales

i = each product

S7 - 49 2011 Pearson Education, Inc. publishing as Prentice Hall

Multiproduct Example

Annual Forecasted

Item Price Cost Sales Units

Sandwich $5.00 $3.00 9,000

Drink 1.50 .50 9,000

Baked potato 2.00 1.00 7,000

Fixed costs = $3,000 per month

S7 - 50 2011 Pearson Education, Inc. publishing as Prentice Hall

Multiproduct Example

Annual Forecasted

Item Price Cost Sales Units

Sandwich $5.00 $3.00 9,000

Drink 1.50 .50 9,000

Baked potato 2.00 1.00 7,000

Fixed costs = $3,000 per month

Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248

Drinks 1.50 .50 .33 .67 13,500 .186 .125

Baked 2.00 1.00 .50 .50 14,000 .193 .096

potato

$72,500 1.000 .469

Annual Weighted

Selling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

S7 - 51 2011 Pearson Education, Inc. publishing as Prentice Hall

Multiproduct Example

Annual Forecasted

Item Price Cost Sales Units

Sandwich $5.00 $3.00 9,000

Drink 1.50 .50 9,000

Baked potato 2.00 1.00 7,000

Fixed costs = $3,000 per month

Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248

Drinks 1.50 .50 .33 .67 13,500 .186 .125

Baked 2.00 1.00 .50 .50 14,000 .193 .096

potato

$72,500 1.000 .469

Annual Weighted

Selling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

BEP

$

=

F

1 - x (W

i

)

V

i

P

i

= = $76,759

$3,000 x 12

.469

Daily

sales

= = $246.02

$76,759

312 days

.621 x $246.02

$5.00

= 30.6 31

sandwiches

per day

S7 - 52 2011 Pearson Education, Inc. publishing as Prentice Hall

Reducing Risk with

Incremental Changes

(a) Leading demand with

incremental expansion

D

e

m

a

n

d

Expected

demand

New

capacity

(c) Attempts to have an average

capacity with incremental

expansion

D

e

m

a

n

d

New

capacity Expected

demand

(b) Capacity lags demand with

incremental expansion

D

e

m

a

n

d

New

capacity

Expected

demand

Figure S7.6

S7 - 53 2011 Pearson Education, Inc. publishing as Prentice Hall

Reducing Risk with

Incremental Changes

(a) Leading demand with incremental

expansion

Expected

demand

Figure S7.6

New

capacity

D

e

m

a

n

d

Time (years)

1 2 3

S7 - 54 2011 Pearson Education, Inc. publishing as Prentice Hall

Reducing Risk with

Incremental Changes

(b) Capacity lags demand with incremental

expansion

Expected

demand

Figure S7.6

D

e

m

a

n

d

Time (years)

1 2 3

New

capacity

S7 - 55 2011 Pearson Education, Inc. publishing as Prentice Hall

Reducing Risk with

Incremental Changes

(c) Attempts to have an average capacity

with incremental expansion

Expected

demand

Figure S7.6

New

capacity

D

e

m

a

n

d

Time (years)

1 2 3

S7 - 56 2011 Pearson Education, Inc. publishing as Prentice Hall

Expected Monetary Value

(EMV) and Capacity Decisions

Determine states of nature

Future demand

Market favorability

Analyzed using decision trees

Hospital supply company

Four alternatives

S7 - 57 2011 Pearson Education, Inc. publishing as Prentice Hall

Expected Monetary Value

(EMV) and Capacity Decisions

-$90,000

Market unfavorable (.6)

Market favorable (.4)

$100,000

Market favorable (.4)

Market unfavorable (.6)

$60,000

-$10,000

Medium plant

Market favorable (.4)

Market unfavorable (.6)

$40,000

-$5,000

$0

S7 - 58 2011 Pearson Education, Inc. publishing as Prentice Hall

Expected Monetary Value

(EMV) and Capacity Decisions

-$90,000

Market unfavorable (.6)

Market favorable (.4)

$100,000

Market favorable (.4)

Market unfavorable (.6)

$60,000

-$10,000

Medium plant

Market favorable (.4)

Market unfavorable (.6)

$40,000

-$5,000

$0

EMV = (.4)($100,000)

+ (.6)(-$90,000)

Large Plant

EMV = -$14,000

S7 - 59 2011 Pearson Education, Inc. publishing as Prentice Hall

Expected Monetary Value

(EMV) and Capacity Decisions

-$90,000

Market unfavorable (.6)

Market favorable (.4)

$100,000

Market favorable (.4)

Market unfavorable (.6)

$60,000

-$10,000

Medium plant

Market favorable (.4)

Market unfavorable (.6)

$40,000

-$5,000

$0

-$14,000

$13,000

$18,000

S7 - 60 2011 Pearson Education, Inc. publishing as Prentice Hall

Strategy-Driven Investment

Operations may be responsible

for return-on-investment (ROI)

Analyzing capacity alternatives

should include capital

investment, variable cost, cash

flows, and net present value

S7 - 61 2011 Pearson Education, Inc. publishing as Prentice Hall

Net Present Value (NPV)

where F = future value

P = present value

i = interest rate

N = number of years

P =

F

(1 + i)

N

F = P(1 + i)

N

In general:

Solving for P:

S7 - 62 2011 Pearson Education, Inc. publishing as Prentice Hall

Net Present Value (NPV)

where F = future value

P = present value

i = interest rate

N = number of years

P =

F

(1 + i)

N

F = P(1 + i)

N

In general:

Solving for P:

While this works

fine, it is

cumbersome for

larger values of N

S7 - 63 2011 Pearson Education, Inc. publishing as Prentice Hall

NPV Using Factors

P = = FX

F

(1 + i)

N

where X = a factor from Table S7.1

defined as = 1/(1 + i)

N

and

F = future value

Portion of

Table S7.1

Year 6% 8% 10% 12% 14%

1 .943 .926 .909 .893 .877

2 .890 .857 .826 .797 .769

3 .840 .794 .751 .712 .675

4 .792 .735 .683 .636 .592

5 .747 .681 .621 .567 .519

S7 - 64 2011 Pearson Education, Inc. publishing as Prentice Hall

Present Value of an Annuity

An annuity is an investment which

generates uniform equal payments

S = RX

where X = factor from Table S7.2

S = present value of a series of

uniform annual receipts

R = receipts that are received every

year of the life of the investment

S7 - 65 2011 Pearson Education, Inc. publishing as Prentice Hall

Present Value of an Annuity

Portion of Table S7.2

Year 6% 8% 10% 12% 14%

1 .943 .926 .909 .893 .877

2 1.833 1.783 1.736 1.690 1.647

3 2.676 2.577 2.487 2.402 2.322

4 3.465 3.312 3.170 3.037 2.914

5 4.212 3.993 3.791 3.605 3.433

S7 - 66 2011 Pearson Education, Inc. publishing as Prentice Hall

Present Value of an Annuity

$7,000 in receipts per for 5 years

Interest rate = 6%

From Table S7.2

X = 4.212

S = RX

S = $7,000(4.212) = $29,484

S7 - 67 2011 Pearson Education, Inc. publishing as Prentice Hall

Limitations

1. Investments with the same NPV may

have different projected lives and

salvage values

2. Investments with the same NPV may

have different cash flows

3. Assumes we know future interest rates

4. Payments are not always made at the

end of a period

S7 - 68 2011 Pearson Education, Inc. publishing as Prentice Hall

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