27107958-Engineering-Economy-Chapter-6x

27107958-Engineering-Economy-Chapter-6x - ENGINEERING...

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1 CHAPTER 6 Annual Worth Analysis ENGINEERING ECONOMY, Sixth Edition by Blank and Tarquin M c Gra w Hill
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2 Ch. 6: Learning Objectives: Topics AW over one project life cycle AW calculations Capital Recovery analysis Two approaches Selecting Alternatives by Annual Worth AW analysis for a permanent investment
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3 Section 6.1 Advantages and uses of Annual Worth Popular Analysis Technique Easily understood-results are reported in $/time period Eliminates the LCM problem associated with the present worth method Only have to evaluate one life cycle of a project
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4 6.1 AW Calculations General in nature such that: AW = PW(A/P,i%,n) AW = FW(A/F,i%,n) Convert all cash flows to their end of period equivalent amounts
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5 6.1 EQUIVALENT ANNUAL COST Cash Flow analysis approach where the cash flows are converted to their respective equal, end-of-period amounts. The result is reported in terms of $/period Variant of the present worth approach Popular with some managers who tend to thing in terms of “$/year, $/months, etc
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6 6.1 AW and Repeatability Assumption If two or more alternatives possess unequal lives then one need only evaluate the AW for any given cycle The annual worth of one cycle is the same as the annual worth of the other cycles (by assumption)
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7 6.1 Repeatability Assumption Given alternatives with unequal lives The assumptions are : 1. The services so provided are needed forever 2. The first cycle of cash flows is repeated for successive cycles 3. All cash flows will have the same estimated values in every life cycle
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8 6. 1. One or More Cycles Cycle 1 Cycle 2 Cycle K Annualize any one of the cycles AW assumes repeatability of CF’s Find the annual worth of any given cycle ($/period)
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9 6.1 6 year & 9 year Problem (Ex 6.1) See Example 6.1 Present Worth would mandate a 18-year study period 3 Cycles of the 6 year project 2 cycles of the 9 year project 6 year Project 9 year Project
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10 6.1 6 year & 9 year Problem (Ex 6.1) Need an 18 year study period for both Present Worth would mandate a 18- year study period 3 Cycles of the 6 year project 2 cycles of the 9 year project Means a lot of calculation time! 6 year Project
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27107958-Engineering-Economy-Chapter-6x - ENGINEERING...

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