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ENGR 3360U Winter 2014Unit 5.2-3

Present Worth Analysis

Dr. J. Michael Bennett, P. Eng., PMP,UOIT,

Version 2014-I-01

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Unit 5 Present Worth Analysis

Change Re or!

2014-"-01 "nitial Creation#e$t Cha%ter 5

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5.2 E+,al i es

/ When sele ting et een t o alternati es,sing %resent orth analysis (a$i i e

/ Net Present Worth Present orth ene7its Present orth o7 osts

/ NPW PW o7 ene7its PW o7 osts #he alternati e ith the higher NPW is

sele te!

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Present Worth A%%roa h (,t,ally

E$ l,si e Pro8e tsAlternati es ,st e o7 e+,al ser i e* that is* e al,ate allalternati es o er the sa e n, er o7 years.9or a single %ro8e t* %ro8e t is 7inan ially ia le i7 PW≥ 0 at

the (ARR

9or 2 or ore alternati es* sele t the oneith the :n, eri ally; larger PW al,e

E$a %les PW1 PW 2 2500 =-500 Alt 1=-1200 = >25 Alt 2

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PW etho! 7or in!e%en!ent %ro8e ts

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E$a %le 5.1

A 7ir is trying to !e i!ehi h o7 2 a hines to ,y.

)oth ha e ,se7,l li es o7 5years ith no sal age al,e.

(a hine A osts =1*000 an!ill sa e =300 ann,ally.

(a hine ) osts =1*350 an!ill sa e =300 the 7irst year*

=350 the se on!* =400 the 3 r! an! so on* "7 the interest rateis B* hi h sho,l! e

hosen

PW A -1000 > 300:PDA* B* 5; =230

PW ) -1000 > 300:PDA* B* 5;> 50:PDG* B*5; =262.5

C FF

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5.3 Une+,al i es

/ "t is NF# orre t to analyse alternati es,sing PW ith !i77erent li es.

/ (etho!s to han!le this %ro le E$a ine the alternati es ,sing a east

Co on (,lti%le o7 li es : C(;H. &e i!e on an analysis %erio! i7 the C(

etho! is too onero,s or !oesnHt aIe sense./ :e.g.* an! 13 years gi es an C( @1 years;

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C(

E.g.* 10 year %ro8e t li7e ers,s a 5 year %ro8e tli7e

/ east o on ,lti%le is 10 years/ Re7or ,late 5 year li7e to 10 year li7e

in l,!ing the ash 7lo s in years 0 to 5 an! also in years5 to 10

the alternati es an no e o %are!

0 1 2 3 45

20

30

20

10

32

Original 5 year project 6 7 8 910

0 1 2 3 45

20

30

20

10

3220

30

20

10

32

5 year project now a 10 year project

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C( E$a %le 5.2

An engineer nee!s to rent an o77i e. ereare her t o hoi es.A 9irst ost* - =15*000* yearly lease -3*500

&e%osit ret,rn 1*000* length 6 years) 9irst ost* - =1?*000* yearly lease -3*100

&e%osit ret,rn 2*000* length @ years

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PW Analysis ,sing C( A%%roa h

#his is a goo! ill,stration o7 C( etho!at i 15B %er year

o ation A has nA 6 years an! ) has n ) @o C( 1? yearsJ !eter ine oth PW al,es o er 1? yearso Ass, e t o re-%,r hases o7 A at the en! o7 years 6 an! 12o Ass, e one re-%,r hase o7 ) at en! o7 year @o All ash 7lo esti ates are ass, e! to ontin,e 7or 1? years*

in l,!ing the en!-o7-lease ret,rn !e%ositH

PW A =-45*036 an! PW ) =-41*3?4

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PW Cal ,lation 7or 1? years

PW A -15*000 >1000:PD9*15B*6; -15*000:PD9*15B*6; > 1*000:PD9*15B*12;

-15*000:PD9*15B*12; > 1*000:PD9*15B*1?;-3*500:PDA*15B*1?;

-=45*036

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Present Worth Analysis o7 &i77erent- i7eAlternati es

9or alternati es ith ,n-e+,al li es the r,le isPW o7 the alternati es ,st e o %are! o er the sa e

n, er o7 years

Calle! K Equal Service L re+,ire ent A%%roa h 1 o7 2 a%%roa hes

C( -- E al,ate the alternati es o er the lo est o on ,lti%le o7li es* e.g.* li es o7 4 an! 6* ,se n 12 an! ass, e re-in est ent atsa e ash 7lo esti ates