EKONOMIKA TEKNIK

Annual Cash Flow Analysis

 What have we learnt so far?
(1)
• With present worth analysis, we resolved
alternatives into an equivalent cash sum.
• Equivalent cash sum can be equivalent PW of
cost, equivalent PW of benefit or equivalent
net present worth.
• Here in annual cash flow analysis, we compare
alternatives based on their equivalent annual
cost flows.

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 What have we learnt so far?
(2)
• Before we go into annual cash flow analysis, It is
necessary to know these concepts :
• A) Sinking Fund Factor
• B) Capital Recovery Factor

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 Sinking Fund Factor
Sinking Fund Factor (A/F,i,n)

Takes a single payment and spreads into a uniform

series over n earlier periods. The last payment in
the series occurs at the same time as F.

The equation :

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 Capital Recovery Factor
Capital Recovery Factor (A/P,i,n)

Takes a single payment and spreads it into a

uniform series over n later periods. The first
payment in the series occurs one period later than P.

The equation :

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 Annual Cash Flow
Calculations
Resolving a Present Cost to an Annual Cost
• Simplest case is to convert the PV to an A-series
(annual worth)

A = P(A/P,i,n)
• When there is salvage value :
A = F(A/F,i,n)

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 Example-Calculating Equivalent
Uniform Annual Cost (EUAC) (1)

Take a look at this example :

A student bought $1000 worth of home furniture. If it is expected to

last 10 years, what will the equivalent uniform annual cost be if
interest is 7%?

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 Example-Calculating Equivalent
Uniform Annual Cost (EUAC) (2)
Equivalent uniform annual cost = P(A/P,i,n)
= 1000(A/P, 7%, 10)
= $142.40

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 Example-Calculating Equivalent
Uniform Annual Cost (EUAC) (3)

The student now believes the furniture can be sold at the

end of 10 years for $200. Under these circumstances,
what is the equivalent uniform annual cost?

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 Example-Calculating Equivalent
Uniform Annual Cost (EUAC) (4)

EUAC = P(A/P,i,n) – S(A/F,i,n)

= 1000(A/P,7%,10) – 200(A/F,7%,10)
= 1000(0.1424) – 200(0.0724)
= 142.40 – 14.48 = $127.92

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 Example – Calculating EUAC
(5)
• Compute the EUAC of cash flows below :
Year Maintenance and Repair
Cost for Year
1 $45
2 $90
3 $135
4 $180
5 $225

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 EUAC – Essential Points (1)

• When an alternative has an initial cost P and

salvage value S, there are three ways of computing
the equivalent uniform annual cost :

EUAC = P(A/P,i,n) – S(A/F,i,n)

EUAC = (P - S)(A/F,i,n) + Pi

EUAC = (P - S)(A/P,i,n) + Si

The EUAC calculated in these equations is commonly

known as capital recovery cost of a project.

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 EUAC - Essential Points (2)

The Essential Points

(1) EUAC = (PW of cost)(A/P,i,n)

(2) EUAW is decreased by cost and increased by benefit.

(3) For Irregular cash disbursements over the analysis

period, first determine PW of cost and then calculate
EUAC

(4) Where there is arithmetic gradient EUAC may be rapidly

computed using the arithmetic gradient uniform series
factor, (A/G,i,n).

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 Annual Cash Flow Analysis

Situation Criterion
Fixed input Amount of capital Maximize EUAB
available is fixed
Fixed output Amount of benefit is Minimize is EUAC
fixed
Neither fixed Neither capital nor Maximize EUAW
amount of benefits
are fixed

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 Example-Analyzing Annual
Cash Flow of Alternatives
• Three alternatives are being considered for improving an
operation on the assembly line. Each of plans A, B and C
has 10 year life and scrap value equal to 10% of its original
cost. If interest is 8% which plan should be adopted?
Plan A Plan B Plan C
Installed cost of equipment $15,000 $25,000 $33,000
Material and labor savings per 14,000 9,000 14,000
year
Annual operating expenses 8,000 6,000 6,000
End-of-useful life scrap value 1,500 2,500 3,300

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 Analysis Period (1)
Take a look at this example!

Two pumps are being considered for purchase. If

interest is 7% which pump should be bought?
PUMP A PUMP B
Initial Cost $7000 $5000
End-of-useful-life 1500 1000
salvage value
Useful life, in years 12 6

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 Analysis Period (2)

• Based on the example above, the annual worth

method offers computational and interpretation
advantage because the EUAC value needs to be
calculated for only one life cycle.
• The EUAC value determined over one life cycle is
the EUAC for all future life cycles. Therefore is is
not necessary to use the LCM of lives to satisfy
the equal service requirement.

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Analysis Period Considerations
• Analysis period equal to alternative lives
• Base the comparison on the life of the alternatives
• Often in consideration, very rarely in real life organization

• Analysis period a common multiple of alternative lives

• You only need to use one useful life to get the EUAW

• Analysis period for a continuing requirement

• Use an infinite time period( A = Pi)

• Some other period such as project life

• Often physical equipment has useful life that varies from the project
life.
• In this case, use project life as the analysis period
• This is the most common case in real life organization
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 Reference
• Newnan, Donald G; Eschenbach, Ted G; Lavelle, Jerome P. 2004.
Engineering Economic Analysis. 9th Edition. Oxford University Press, New
York.

• Pujawan, I Nyoman. Ekonomi Teknik. 2009. Guna Widya.Surabaya,

• Park, Chan S. 1997. Contemporary Engineering Economics. 2nd Edition.

Addison-Wesley.

• Sharma, Kal Renganathan. 2015. An Introduction to Engineering

Economics. Cognella Academic Publishing. San Diego

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