class lead_ime 403 - 01 teams 1_attempt_2015-10-23-08-23-08_chapter 5_class lead presentation.ppt
TRANSCRIPT
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Chapter 5
PRESENT WORTH
ANALYSIS
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Where we are going in this chapter: Understanding economic criteria
Applying present worth techniques
Assumptions in solving economic analysis
problems
Where we have been:
Equivalence concept Cash lows Compound interest actors
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Economic Criteria
Situation Criterion
"i#ed input $a#imi%e output
"i#ed output $inimi%e input
&either i#ed $a#imi%e dierence'output(input)
*ro+ects are +udged against an economic criterion,
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Economic Criteria RestatedPresent Worth Techniques
Situation Criterion
"i#ed input Amount ocapital available
i#ed
$a#imi%epresent worth o
beneits
"i#ed output . amount obeneit is i#ed
$inimi%epresent worth ocosts
&either i#ed &either capitalnor . beneitsare i#ed
$a#imi%e netpresent worth'&*/)
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Economic Criteria E!amp"ePurchasin# $ui"din# Space
Alt Situation Example Criterion
A "i#edinput
.10 ma# $a#imum square eet obuilding or the price
3 "i#edoutput
2 t2buildingavailable
&egotiate or minimumcost4t2
C &eitheri#ed
.10ma#10(2 t2
required
5imultaneously negotiateor ma#imum buildingsi%e 6 minimum cost4t2
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Equi%a"ence
7wo cash low streams are said to beequivalent at 89 interest i and only i theirpresent worths are equal at 89 interest,
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Equi%a"ence E!amp"e
What uniorm series over periods ;1End o& Period Cash '"o(
) *)++
, *-++
. *)++
5 *,++
?
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Equi%a"ence E!amp"e
What uniorm series over periods ;1
5olution:
;1'"@* 109?)2'"@* 1090)1'"@* 109-)
!'"@* 109!)='A@" 109
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E!amp"e ,/-5
"or what interest rate are the two cash low diagrams
equivalent>
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E!amp"e ,/-5 0Continued1"or what interest rate are the two cash low diagramsequivalent>
(.-'A@* i90) .10 B
(.?'A@* i90) .10 .0'A@D i90)
i 1!,
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S2stematic Economic Ana"2sis Technique)/ Identi&2 the in%estment a"ternati%es
-/ 3e&ine the p"annin# hori4on ,/ Speci&2 the discount rate ./ Estimate the cash &"o(s 5/ Compare the a"ternati%es / Per&orm supp"ementar2 ana"2ses
6/ Se"ect the pre&erred in%estment
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3eterminin# the P"annin# Hori4on
Feast common multiple o lives
Fongest lie
5hortest lie5tandard hori%on
Grgani%ational need
Hninitely long
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E!amp"e ./)
7hree production machines are being considered,
7he pertinent data are as ollows:
3ased on the least common multiple o the lives theplanning hori%on is yearsI based on the shortestlie the planning hori%on is - yearsI based on thelongest lie the planning hori%on is yearsI andbased on the irmJs KstandardL the planning hori%on
is 1 years, 1!
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C'3 &or Least Common 7u"tip"e o& Li%es
1-
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7easures o& Economic Worth
*resent Worth 'M .)
"uture Worth 'M .)
Annual Worth 'M .)
Capitali%ed Worth 'M .)
Niscounted *aybac8 *eriod 'O /alue e,g, 2 yrs) *aybac8 *eriod 'O /alue)
Hnternal Pate o Peturn 'M $APP)
E#ternal Pate o Peturn 'M $APP) $odiied Hnternal Pate o Peturn 'M $APP)
3eneit4Cost Patio 'M 1,)
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7easures o& Economic Worth
Pan8ing $ethods or Hncremental $ethods
*resent Worth
"uture Worth
Annual Worth
Capitali%ed Worth Niscounted *aybac8 *eriod
*aybac8 *eriod
Hncremental $ethods
Hnternal Pate o Peturn E#ternal Pate o Peturn
$odiied Hnternal Pate o Peturn
3eneit4Cost Patio1
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App"2in#
Present Worth Techniques
Analysis period must be considered Useul lie o the alternative equals the analysis
period Alternatives have useul lives dierent rom the
analysis period
7he analysis period is ininite n B
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Present Worth Ana"2sis
5ingle Alternative
1
*W B (.0R .2,0R'*@A 191) .0R'*@" 191)
B .
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Present Worth Ana"2sis
7u"tip"e A"ternati%es
Choose the alternative with the greatest presentworth
=
+=
n
i
t
jtj iAiPWMaximize0
)1(%)(j
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E!amp"e 5/,7wo design alternatives 'A 6 3) are being considered or a newride '7he 5cream $achine) at a theme par8 in "lorida,
Alternative A requires a .! investment and will producenet annual revenue o .004yr, Alternative 3 requires a.-0 investment and will produce net annual revenue o. '7he Kdo nothingL alternativeis easible and assumed to have a *W o .,)
*WA'19) B (.! .00'P|A191) B .!?01,!0
B*/'191(00)(! B .!?01,1M .
'A is better than doing nothing)*W3'19) B (.-0 .
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E!amp"e 5/,7wo design alternatives 'A 6 3) are being considered or a newride '7he 5cream $achine) at a theme par8 in "lorida,
Alternative A requires a .! investment and will producenet annual revenue o .004yr, Alternative 3 requires a.-0 investment and will produce net annual revenue o. '7he Kdo nothingL alternativeis easible and assumed to have a *W o .,)
*WA'19) B (.! .00'P|A191) B .!?01,!0
B*/'191(00)(! B .!?01,1M .
'A is better than doing nothing)*W3'19) B (.-0 .
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Present Worth Ana"2sis
KGne 5hotL Hnvestments
20
E "
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E!amp"e 5/57wo investment alternatives '1 6 2) are available withthe C"Ns shown below, 7hey are Kone shotL
investments, Using a 109 $APP which should bechosen>
*W1'109) B (.- .!0'*@A 109-) .1'*@" 109-)
*W1'109) B .0-,1
CCB .?0 .?0'*@" 091) .?0'*@" 092) S
or
CCB .?0'A@* 091)4,0 B .?0',120)4,0 B .1-20CCB*$7'091(?0)4,0 B .1-20orCCB .?0 .?0'A@" 091)4,0CCB .?0 .?0',?0)4,0 B .1-20
CCB?0*$7'091(?0)4,0 B .1-20
Pecall(A|P i%,n) = (A|F i%,n) + i
!!
E " 5 )-
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E!amp"e 5/)-
A new highway is to be constructed, Asphalt paving will beused, 7he asphalt will cost .104t including the material and
paving operation, Nue to heavy usage the asphalt ise#pected to last 0 yrs beore requiring resuracing, 7he costo resuracing will be the same4t, *aved ditches must beinstalled on each side o the highway and will cost .?,?04t to
installI ditches will have to be re(paved in 10 yrs at a costequal to the initial cost, "our pipe culverts are required4mileIeach costs .
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*aving Tighway and Nitches4mileCC B 02
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E!amp"e 5/),
Tow much will it cost to endow a .120
scholarship i the endowment earns -,09interest>
CW B .1204,-0 B .2?????,?
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so"ution
*W'A)B(1!'*4A?90)B(1!'-,1)B2!
*W'3)B (1-'*4A?90) ( 0'*4D?90)
B (1 - -,1( 0 ?,-? B 20?,0
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E!amp"e
Wayne County will build an aqueduct to bring water inrom the upper part o the state, Ht can be built at areduced si%e now or .! million and be enlarged 20
years hence or an additional .!0 million, Analternative is to construct the ull(si%ed aqueduct nowor .- million, 3oth alternatives would provide theneeded capacity or the 0(years analysis period,
$aintenance costs are small and may be ignored, At9 interest which alternative should be selected>
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So"ution
"or two stage:
*W G" CG57B !$ !0$'*4"920)
!$
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E!amp"e &or
A *urchasing agent is considering the purchase osome new equipment or the mailroom,
7wo dierent manuacturers have providedquotations, An analysis o the quotations indicates the
ollowing:
$anuacturer Cost Useul lie 5alvage value
5peedy .10 0 .2
Allied 1 0 .!20
"or a ive(year period which manuacturer should be selected> Assume?9 interest and equal maintenance cost,
H Allied has a ten(year useul lie then which
one do you select,
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