Ch4-F11

# Ch4-F11 - Chapter 4 Comparison Methods Part 1 Present Worth...

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Chapter 4: Comparison Methods Part 1 Present Worth, Annual Worth, Payback Period, Levelized Cost Assumptions (for now): Costs and benefits are measurable in \$ Sufficient funding is available No uncertainty No tax (Chapter 8) No inflation or deflation (Chapter 9)

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Relations Among Projects Independent: Costs and benefits of one project do not depend on whether the other is chosen e.g., a marketing ad campaign project and office equipment decision Mutually Exclusive (ME): One project is excluded if the other is chosen e.g., one-storey versus two-storey building on one village lot Related, but not mutually exclusive: Costs and benefits of one project depend on whether or not the other is chosen e.g., city can spend up to \$30 million on: (a) pool @\$10 million; (b) rink @\$15 million; (c) community hall @\$12 million
Example 4-1: The AAM Company is considering opening three new marble quarries, call them T, L and M. A cutter-loader machine may be purchased, but only if quarry L goes ahead. The overall budget is limited to \$2.5 million. Thus the projects are related. What feasible, mutually exclusive alternatives are available ? Project First Cost T quarry \$0.9 million L quarry \$1.4 million M quarry \$1.0 million cutter-loader \$0.4 million (only with quarry L)

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# T? L? M? Option Cost 1 No No No 2 No No Yes 3 No Yes No 4 No Yes Yes 5 Yes No No 6 Yes No Yes 7 Yes Yes No 8 Yes Yes Yes Generate T, L, M combinations:
# T? L? M? Option Cost 1 No No No no quarry 0 2 No No Yes M 1.0 M 3 No Yes No L 1.4 M 4 No Yes Yes LM 2.4 M 5 Yes No No T 0.9 M 6 Yes No Yes TM 1.9 M 7 Yes Yes No TL 2.3 M 8 Yes Yes Yes TLM 3.3 M Generate T, L, M combinations; note total first cost:

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Include Cutter-Loader (symbol C)   only relevant for quarry L # T? L? M? C? Option Cost 1 No No No No no quarry 0 2 No No Yes No M 1.0 M 3 No Yes No No L 1.4 M 4 No Yes No Yes 5 No Yes Yes No LM 2.4 M 6 No Yes Yes Yes 7 Yes No No No T 0.9 M 8 Yes No Yes No TM 1.9 M 9 Yes Yes No No TL 2.3 M 10 Yes Yes No Yes 11 Yes Yes Yes No TLM 3.3 M 12 Yes Yes Yes Yes
# T? L? M? C? Option Cost 1 No No No No do nothing 0 2 No No Yes No M 1.0 M 3 No Yes No No L 1.4 M 4 No Yes No Yes LC 1.8 M 5 No Yes Yes No LM 2.4 M 6 No Yes Yes Yes LMC 2.8 M 7 Yes No No No T 0.9 M 8 Yes No Yes No TM 1.9 M 9 Yes Yes No No TL 2.3 M 10 Yes Yes No Yes TLC 2.7 M 11 Yes Yes Yes No TLM 3.3 M 12 Yes Yes Yes Yes TLMC 3.7 M   Include Cutter-Loader (symbol C)   only relevant for quarry L

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# T? L? M? C? Option Cost 1 No No No No do nothing 0 2 No No Yes No M 1.0 M 3 No Yes No No L 1.4 M 4 No Yes No Yes LC 1.8 M 5 No Yes Yes No LM 2.4 M 6 No Yes Yes Yes LMC 2.8 M 7 Yes No No No T 0.9 M 8 Yes No Yes No TM 1.9 M 9 Yes Yes No No TL 2.3 M 10 Yes Yes No Yes TLC 2.7 M 11 Yes Yes Yes No TLM 3.3 M 12 Yes Yes Yes Yes TLMC 3.7 M   Eliminate options that exceed \$2.5 million Answer: no new quarry, M, L, LC, LM, T, TM, TL are feasible
Proposal Present Worth (\$)

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## This note was uploaded on 04/01/2012 for the course MSCI 261 taught by Professor Bonkoo during the Winter '09 term at Waterloo.

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Ch4-F11 - Chapter 4 Comparison Methods Part 1 Present Worth...

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