ENERGY MANAGEMENT &

ECONOMICS

BY: Lec. AHMED REYADH

Seventh Lecture
Jan 2021

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 LECTURE HEADLINE

 Present Worth and Future Worth.

 Present Worth Analysis of Equal-Life Alternatives.
 Present Worth Analysis of Different-Life Alternatives.

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 PRESENT WORTH (PW).
AND FUTURE WORTH (FW).
 Present worth (PW): it’s the value amount of money at
current time.
 Future Worth (FW): it’s the value of money at a specified
time which may be in the future or the past.
 The difference between (PW) and (FW) is the effect of
interest rate or inflation or any other economic measures per
unit time.
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 F0 = P
F1 = F0 + F0 i = P + P i = P (1 + i ).
 F2 = F1 + F1 i = P (1 + i + i + i 2 ) = P (1 + 2 i + i 2 ) = P (1 + i ) 2
𝟏
𝟏− 𝒏
𝟏+𝒊
F = P(1 + i)n P=𝑨
𝒊
AW: Annual worth
 The evaluation and selection of economic proposals require cash flow
estimates over a stated period of time, mathematical techniques to
calculate the measure of worth, and a guideline for selecting the best
proposal. 4
PRESENT WORTH ANALYSIS OF EQUAL-LIFE
ALTERNATIVES
 The present worth P is renamed PW of the alternative. The present
worth method is quite popular in industry because all future costs and
revenues are transformed to equivalent monetary units NOW; that is,
all future cash flows are converted (discounted) to present amounts
(e.g., dollars) at a specific rate of return, which is the MARR (Minimum
Attractive Rate of Return).
 If the alternatives have the same capacities for the same time period
(life), the equal-service requirement is met. Calculate the PW value at
the stated MARR for each alternative. 5
 PRESENT WORTH RULES

 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 or a larger PW of net cash flows for revenue
alternatives.
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PW A PW B Selected Alternative
$ 2600 $ 1800 A
+ 700 - 1100 A
- 3800 - 3200 B
- 2300 + 400 B

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EXAMPLE:
 A university lab is a research contractor to NASA for in-space fuel cell
systems that are hydrogen and methanol-based. During lab research,
three equal-service machines need to be evaluated economically.
Perform the present worth analysis with the costs shown below. The
MARR is 10% per year.
Electric-Powered Gas-Powered Solar-Powered
First cost, $ 4500 3500 6000
Annual operating cost $ 900 700 50
Salvage value S $ 200 350 100
Life, years 8 8 8 8
 CASH FLOW DIAGRAM
$ 200
0
1 2 3 4 5 6 7 8

$ 900

$ 4500 P = $ 4500
A = $ 900 / YEAR
S = $ 200
N=8 9
 Solution:
PW E = - 4500 – 900 ( P / A ,10%,8) + 200 ( P / F ,10%,8) =

𝟏
𝟏− 𝟖
200
𝟏+𝟎.𝟏
= - 4500 – 900 𝟎.𝟏 + 8 = $ - 9208
1+0.1
PW G = - 3500 – 700 ( P / A ,10%,8) + 350 ( P / F ,10%,8) = $ - 7071
PW S = - 6000 – 50 ( P / A ,10%,8) + 100 ( P / F ,10%,8) = $ - 6220

 The solar – powered machine is selected since the PW of its

costs is the lowest; it has the numerically largest PW value.
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 PRESENT WORTH ANALYSIS OF
DIFFERENT-LIFE ALTERNATIVES
 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 of 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. 11
 LCM APPROACH ASSUMPTIONS

 The assumptions when using the LCM approach are that:

1. The service provided will be needed over the entire LCM years or
more.
2. The selected alternative can be repeated over each life cycle of the
LCM in exactly the same manner.
3. Cash flow estimates are the same for each life cycle.

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 EXAMPLE:
An energy engineer decided to use a heat recovery system for industrial
facility and having an offer from two suppliers to procure and install the
system. Each supplier give the data below:
Supplier A Supplier B
First cost,$ - 15,000 - 18,000
Annual M&O cost, $ per year $ - 3,500 - 3,100
Salvage value, $ 1,000 2,000
Life, years 6 9

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(a) Determine which supplier should be selected on the basis
of a present worth comparison, if the MARR is 15% per year.
(b) The management has a standard practice of evaluating all
options over a 5-year period. If a study period of 5 years is
used and the salvage values are not expected to change,
which vendor should be selected?

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 Solution:

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(a) PW A = - 15,000 - 15,000(P/F,15%,6) + 1000(P/F,15%,6) -
15,000(P/F,15%,12) + 1000(P/F,15%,12) +
1000(P/F,15%,18) - 3,500(P/A,15%,18) = - $45,036

PW B = - 18,000 - 18,000(P/F,15%,9) + 2000(P/F,15%,9) +

2000(P/F,15%,18) - 3100(P/A,15%,18) = - $41,384

 Supplier B is selected.
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(b) For a 5 - year study period, no cycle repeats are necessary.
The PW analysis is

PWA = - 15,000 - 3500(P/A,15%,5) + 1000(P/F,15%,5) = - $26,236

PWB = - 18,000 - 3100(P/A,15%,5) + 2000(P/F,15%,5) = - $27,397

 Supplier A is selected
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ASSIGNMENT

 A-Z Industry is planning to expand its production operation.

It has identified three different technologies for meeting the
goal. The initial outlay and annual revenues with respect to
each of the technologies are summarized in next Table.
Suggest the best technology which is to be implemented
based on the present worth method of comparison assuming
20% interest rate, compounded annually.
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 Initial Annual O&M Life (y) salvage
Cost revenue Cost (year) value

Technology 1 -4,000,000 400,000 -50,000 3 750,000

Technology 2 -20,000,000 600,000 -30,000 12 450,000
Technology 3 -5,000,000 500,000 -40,000 4 500,000

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THANK YOU
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