Ch5 Lecture Notes

Ch5 Lecture Notes - 1 2 Mutually Exclusive Alternatives One...

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3 Mutually Exclusive Alternatives One of the important functions of financial management and engineering is the creation of alternatives . If there are no alternatives to consider then there really is no problem to solve. Given a set of feasible alternatives, engineering economy attempts to identify the best economic approach to a given problem.
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In this chapter Techniques for comparing two or more mutually exclusive alternatives using the present worth method are presented. Several extensions to PW analysis are covered future worth, capitalized cost, payback period, life-cycle costing, and bond analysis These all use present worth relations to analyze alternatives. 4
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5 MUTUALLY EXCLUSIVE ALTERNATIVES Two types of investment categories Mutually Exclusive Set Independent Project Set Mutually Exclusive set is where more than one alternative exist Objective: Pick one from the set. Once selected, the remaining alternatives are excluded.
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6 INDEPENDENT PROJECT SET Given a set of alternatives The objective is to: Select the best possible combination of projects from the set that will optimize a given criteria. Subject to constraints. More difficult problem than the mutually exclusive approach
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7 P1 P2 Pn Economic Analysis And Assessment . . P j P k P OK P OK Infeasible or Rejected! Viable
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8 Assessing Alternatives Feasible Alternatives Economic Analysis And Assessment P OK P OK Feasible Set Mutually Exclusive Set Independent Set or
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9 Alternatives Problem Analysis Selection Execute
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10 Present Worth – A function of the assumed interest rate. If the cash flow contains a mixture of positive and negative cash flows, Calculate: PW(positive Cash Flows) at i%; PW(negative Cash Flows) at i%; Add the result. If P(i%) > 0 then the project is deemed acceptable. If P(i%) < 0 then the project is deemed unacceptable. If the net present worth = 0 then, the project earns i% return.
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11 Present Worth Approach ( Equal-Lives ) Convert all of the current and future estimated cash flow back to a point in time (time t = 0). Need a discount rate before the analysis in started. The result will be in equivalent dollar comparison.
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12 Present Worth Approach (Equal-Lives)*
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A project engineer with EnvironCare is assigned to start up a new office in a city where a 6-year contract has been finalized to take and analyze ozone-level readings. Two lease options are available, each with a first cost, annual lease cost, and deposit-return estimates shown below. 13 Determine which lease option should be selected on the basis of a present worth comparison, if the MARR is 15% per year. Present Worth Example: Unequal lives
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Comparison must be made over equal time periods; Compare over the least common multiple, LCM .
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This note was uploaded on 04/07/2008 for the course MSE 304 taught by Professor Reiner during the Spring '08 term at CSU Northridge.

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Ch5 Lecture Notes - 1 2 Mutually Exclusive Alternatives One...

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