College of Engineering

Civil Engineering Department

Instructional Material for
BES 125 ENGINEERING ECONOMICS
Lecture 5: Basic Analysis Tools
October 5-9, 2020

Prof. Jesssica Maria Paz S. Casimiro, CE, EnP, DiSDS

Note: I shall greatly appreciate if you can take time to call my attention to any error(s) that
you may discover in the lecture slides. THANK YOU.
 Scope of this lecture:
Measures of economic worth: PW, FW, CC

Basic Analysis tools: Chapter 5

1. Select the best equal life alternative using
PW.
2. Select the best different-life alternative
using PW analysis.
3. Select the best alternative using FW
analysis.
4. Select the best alternative using
Capitalized Cost (CC) analysis.
Selection Guidelines:

One alternative: If PW ≥ 0, the requested MARR is met

or exceeded and the alternative is economically justified.
Two or more alternatives: Select the alternative with
the PW that is numerically largest, that is less negative
or more positive. This indicates a lower PW of cost for
cost alternatives of a larger PW of net cash flows for
revenue alternatives.
One or more independent projects: Select all projects
with PW ≥ 0 at the MARR.
When comparing based on PW or FW, the alternatives
must have equal service or must satisfy the
equal-service requirement.
PW analysis – equal life
1. If the alternative have the same capacities for the
same time period (equal life), the equal service
requirement is met. Calculate the PW value at the stated
MARR for each alternative.
2. Mutually exclusive alternatives: Only one of the
proposals can be selected. For terminology purposes,
each viable proposal is called an alternative. Mutually
exclusive alternative compete with one another and are
compared pairwise.
3. Independent projects: More than one proposal can be
selected. Each viable proposal is called a project.
Independent projects are evaluated one at a time and
compete only with the Do Nothing project.
 Solved Problem: 5.13/143
A public water utility is trying to decide between two different
sizes of pipe for a new water main. A 250-mm line will have an
initial cost of P155,000, whereas a 300-mm line will cost
P210,000. Since there is more head loss through the 250-mm
pipe, the pumping cost is expected to be P3,000 more per year
than the 250-mm line. If the lines are expected to last 30 years,
which size should be selected on the basis of PW analysis using
an interest
Solution rate
following theof
QL10% per year?
rubric.
Step 1: Interpretation: Tabulate the given values
Size of Pipe 250 mm 300 mm
Initial Cost P155,000 P210,000
Pumping Cost/year P3,000 -
Life, years 30 30
 5.13/143
Step 2: Representation: Draw the cash flow diagram based on
cost
250-mm
pipe
0 1 2 3 4 28 29 30 year

A1-30 =
P155,00 P3,000
0
300-mm
0 1 2 3 4 28 29 30 year
pipe

Step 4: Conclusion:
PW=210,00 On the basis of PW comparison,
Step 3: 0 the 250-mm pipe appears to be less
Calculation: costly, thus more economically
feasible than the 300-mm pipe.
Exercise No. 1 Try this:
The manager of a canned food processing
plant must decide between two different
labelling machines. Machine A will have a
first cost of P42,000, an annual operating cost
of P28,000, and a service life of 4 years.
Machine B will cost P51,000 to buy and will
have an operating cost of P17,000 during its
4-year life. At an interest rate of 10% per year,
what should be selected on the basis of
present worth analysis?
 Alternative Comparison-Different lives
The PW of the alternatives must be compared over the
same number of years and must end at the same time to
satisfy the equal-service requirement.

LCM: compare the PW alternatives over a period of time

equal to the least common multiple (LCM) of their
estimated lives.
Study period: Compare the PW of alternatives using a
specified study period of n years. This approach does not
necessarily consider the useful life of an alternative. The
study period is also called the planning horizon.
 Solved Problem: 5.19/144
Machines that have the following costs are under
consideration for a robotized welding process. Using an
interest rate of 10% per year, determine which alternative
should be selected on the basis of a present worth
analysis. Machine X Machine Y
First cost, P -250,000 -430,000
Annual Optg cost, P/year -60,000 -40,000
Salvage value, P 70,000 95,000
Life, years 3 6

1. Interpretation: to comply with equal-service requirement,

we calculate PW using the same study period. Since the LCM
of 3 and 6 is 6, therefore, the study period will be 6 years for
both alternatives.
2a. Representation for Machine X: The cash flow diagram for
Machine X will be repeated twice over a 6 year study period. Salvage
value is the expected future worth of the machine if it is sold. It creates
positive cash flow in the analysis.

Machine X 70,00
0 70,00
0 1 2 3 0
year 0 1 2 3
year
250,00 A=60,00
0 A=60,00
0 250,00 0
P 0
W
2b. Representation for Machine Y. The free diagram will be drawn
according to the tabulated values. The study period is 6 since it is the
LCM.
95,00
Machine 0
Y 0 1 2 3 4 5 6

A=
430,00 40,000
0
P
W

4. Application/Analysis:
The present worth analysis example presented is overly simplified for academic
purposes only. However, in reality, there are numerous other single-payment
costs that may be incurred during the 6-year period.
4. Assumption:
The interest rate of 10% is constant throughout the
study period. In reality, this may not be the case.
5. Conclusion:
On the basis of Present Worth analysis, Machine Y
is more economically feasible since it is less
negative than Machine X.
Future Worth Analysis
The future worth (FW) of an alternative may be
determined directly from the cash flows, or by
multiplying PW value by the P/F factor, at the
established MARR.
FW analysis of alternatives is especially applicable to
large capital investment decisions when the goal is to
maximize the future wealth of a corporation’s
stockholders.
FW analysis is also used when assets (equipment,
buildings, etc.) might be sold or traded at some time
before the expected life is reached.
Selection guidelines
The selection guidelines is the same as for PW analysis.
FW ≥ 0 means the MARR is met or exceeded.
For two or more mutually exclusive alternatives, select
the one with the numerically largest FW.
From previous example problem, on the basis of FW, which
machine is more economically feasible for purchase?

Machine X
0 1 2 3
year 0 1 2 3 FWX = -607,037 (F/P, 10%,
year 6)
= -607,037(1.7716)
FWX = -1,075,427

607,03
7 FW
X

FWY = -550,585(F/P, 10%,

Machine
Y 0 1 2 3 4 5 6 6)
= -550,585(1.7716)
FWY = 975,416 cash
outflow

550,58
5 FW
 Exercise No. 2: Try this 5.22/145
An engineer is considering two different liners for an
evaporation pond that will receive salty concentrate from
a brackish water desalting plant. A plastic liner will cost
P0.90 per sq. ft initially and will require replacement in
15 years when precipitated solids will have to be
removed from the pond using heavy equipment. This
removal will cost P500,000. A rubberized elastomeric
liner is tougher and, therefore, is expected to last 30
years but it will cost P2.20 per sq.ft. If the size of the
pond is 110 acres (1 acre = 43,560 sq.ft).
a) Which liner is more cost effective on the basis of a
present
b) Performworth comparison
using FW at an interest rate of 8% per
year?
analysis.
Capitalized Cost (CC) Analysis
⚫
 Procedure to determine the CC for an infinite
sequence of cash flows is as follows:
1. Draw the cash flow diagram showing all the nonrecurring
(one-time) cash flows, and at least two cycles of all
recurring (periodic) cash flows.
2. Find the present worth of all non-recurring amounts.
This is their CC value.
3. Find the A value through one life cycle of all recurring
amounts. Add this to all other uniform amounts (A)
occurring in years 1 through infinity. The result is the
total equivalent uniform annual worth (AW).
4. Divide the AW obtained in step 3 by the interest rate to
obtain a CC value.
5. Add the CC values obtained in steps 2 and 4.
Study Example 5.6 on page
139.
 Solved Problem: 5.31/146
A wealthy businessman wants to start a permanent fund for supporting
research directed toward sustainability. The donor plans to give equal
amounts of money for each of the next 5 years, plus one now (i.e. six
donations) so that P100,000 per year can be withdrawn each year
forever, beginning in year 6. If the fund earns interest at a rate of 8%
per year, how much money must be donated each time?
1. Interpretation: This is a capitalized cost problem because the
objective of the investment is to draw P100,000 every year forever
beginning
2. year 6. The corresponding cash flow diagram is
Representation:
drawn. AW=100,00
0

0 1 2 3 4 5 6 7 8 9 10
∞

AW0-5 =
?
 C
C
AW=10
0,000

0 1 2 3 4 5 6 7 8 9 10
∞
4. Analysis: This is the amount we need in year 5 in order to realize an annual
P100,000 every year thereafter until forever. But we need to calculate the
equivalent annual investment from year 0 to year 5.
To calculate uniform payments (A0-5) for n=6 years, using A/F, where F is
the PW5 )
0 1 2 3 4 5 6 7 8 9 10
∞

AW0-5
=?
6. Conclusion:
A yearly investment of P170,400 beginning now until year 5, that
earns 8% per year will allow the businessman to withdraw annually
P100,000 forever.

AW=100,00
0

0 1 2 3 4 5 6 7 8 9 10 ∞
year

AW =
P170,400
Homework No. 2
Solve completely using the QL rubric, at least 2
end-of-chapter problems from Chapter 5 (page 143-147)
on:
a) PW with equal life alternative
b) PW with different-life alternative
c) FW analysis
d) Capitalize Cost analysis

THANK YOU