PWA&CFA [Compatibility Mode]

PWA&CFA [Compatibility Mode] - 7/6/2010 Present...

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7/6/2010 1 Present Worth Analysi Present Worth Analysis & Cash Flow Analysis ME 434 ME 434 Present Worth Analysis 1 Han P. Bao Department of Mechanical Engineereing Assumptions 1. End-of-Year Convention Year 1 A F 2. Sunk Cost: Sunk cost is a past cost and, therefore, should not be considered in the selection of the best among a number of alternatives 3. Economic Criteria: P 01 ME 434 Present Worth Analysis 2 Situation Criterion Fixed input Maximize output Fixed output Minimize input Neither input nor output fixed Maximize (output-input)
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7/6/2010 2 Payback Period • The payback period is the time it takes to pay back the investment. It is the time for net receipts to equal investment outlays without including any equal investment outlays without including any time value analysis . • Example 1: – Machine costs $300,000. Estimated annual revenue is $75,000. The payback time is 300000/75000 = 4 years. • Example 2: ME 434 Present Worth Analysis 3 – Machine costs $85K. Revenues in the next 5 years are respectively 35K, 45K, 50K, 25K, and 30K.Determine payback period. – Answer: 3 years, or more accurately 2.1 years. Present Worth Analysis • A method to select the best among a number of alternatives NPW =PW of benefits – PW of costs Three types of conditions: 1- Useful life of each alternative = analysis period 2- Alternatives have useful lives different from the analysis period ME 434 Present Worth Analysis 4 3- Analysis period is infinitely long
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PWA&CFA [Compatibility Mode] - 7/6/2010 Present...

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