Cover designed by: Mr.

Medel Valencia

MODULE
ENGINEERING ECONOMY
(BES2)

2ND SEMESTER
ACADEMIC YEAR: 2022-2023

Prepared by:
Engr. Estelita U. Cura
Instructor

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 MODULES FOR BES2
(Engineering Economy)
Credits : 3 units lecture (3 hours/week)
Pre-Requisite : None / 2nd year Standing

1. Lesson Title: Basic Economic Methods /Analysis Tools –

Future Worth Analysis,
Annual Worth Analysis

I. Lesson Objective:
At the end of this topic, learners would be able to;
1. to continue the introduction of some basic concepts of engineering economics
2. Select the best alternative using future worth analysis.

II. Introduction:

 The goal of this module is to continue the introduction of some basic concepts of
engineering economics.
· Future Worth Method or Future Value
· Annual Worth Method and Equivalent Uniform Annual Cost
These concepts are used to evaluate the economic feasibility of an engineered solution.

Future Worth Analysis

 The objective in all time value of money methods is to maximize future wealth, and
therefore, the future worth (FW) is very useful in capital investment decision situations.
 The FW of a series of cash flows is its equivalent value at the end of year, n, at an interest
rate that is typically the MARR.
 Future worth of a project is equivalent to its present worth as follows:

Furthermore,

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Finally,
If FW (i = MARR) ≥ 0, then the project is economically justified

Example 1:
A piece of new equipment has been proposed to increase the productivity of a manual process.
The investment cost is $50,000, and the equipment will have a market value of $15,000 at the
end of five years. Increased productivity attributable to the equipment will amount to $12,000
per year after extra operating costs have been subtracted from the revenue generated by the
additional production. If the company’s MARR is 18% per year, what is the future worth of the
project?

FW = FW of cash inflows – FW of cash outflows

FW(18%) = $12,000 x (F given A, 18%, 5) -$50,000 x (F given P, 18%, 5) + $15,000

FW = -$13,537.4
Since FW(18%) < 0, this equipment would not be economically justified. FW should equal
PW*(F given P, i%, n):

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Example 2:
Determine the future worth of the following series of cash flows, based on an interest rate of
15% per year, compounded annually: $0 (end of year 0), $2,000 (end of year 1), $4,000 (end of
year 2), $6,000 (end of year 3), $8,000 (end of year 4), $10,000 (end of year 5), $10,000 (end of
year 6), $10,000 (end of year 7).
Notice that end of year 1 through year 5 is a gradient series and end of year 6 through year 7 is a
uniform series.

FW(15%) = $58,216.51

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Annual Worth Analysis
The annual worth (AW) method establishes an equal annual series of dollar amounts, for a stated
period of time, and is equivalent to the cash inflows and outflows at a given interest rate that is
typically the MARR. AW is the annual equivalent revenues or savings, R, minus annual
equivalent expenses, E, less the annual equivalent capital recovery, CR.

Also, the AW of a project is equivalent to its PW and FW, such that:

The AW method is often used to compare alternatives with unequal project time periods. It also
can be used to rank alternatives according to their desirability. The alternatives must be mutually
exclusive and repeatedly renewed up to the duration of the longest time period alternative. The
calculated annual cost is often called the equivalent uniform annual cost (EUAC) and the
equivalent uniform annual series (EUAS) for cash inflows.
The CR amount for a project is the equivalent uniform annual cost of the capital invested. It is an
annual amount that covered the loss in value of the asset, and interest on invested capital. One
method of determining the CR is:

Where:
I = the initial investment for the project
S = the salvage (or market) value at the end of the project time period
In some case, the initial investment, I, is spread over several periods in which case the PW of all
investment amounts should be used.
Example 3:
Machine A and Machine B are being considered for a 10-year service in an industrial facility.
The MARR is 8%. What are the equivalent uniform annual costs of each machine, respectively,
and which is the better economic choice?
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EUAC(8%) = $2,995.15

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EUAC(i%) = E + [I(A given P, i%, n) – S(A given F, i%, n)]

EUAC(8%) = $2,852.24
EUACMachine B [$2,852.24] < EUACMacine A [$2,995.15]
Therefore, choose Machine B because it has a smaller EUAC.

Example 4:
Referring back to Example 1, , a piece of new equipment has been proposed to increase the
productivity of a manual process. The investment cost is $50,000, and the equipment will have a
market value of $15,000 at the end of five years. Increased productivity attributable to the
equipment will amount to $12,000 per year after extra operating costs have been subtracted from
the revenue generated by the additional production. If the company’s MARR is 18% per year, is
this proposal a good one considering AW?

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Since AW(18%) < 0, this equipment would not be economically justified. This agrees with the
present worth analysis in Example 1 of Engineering Economics Module 3 and the future worth
analysis in Example 1 of this module.

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Summary of Formulas for Cash Flow Patterns and Interest Factors
Table 1 provides a summary of the formulas used for cash flow patterns and interest factors
discussed .
Table 1: Formulas for Cash Flow Patterns and Interest Factors

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References:
https://www.studocu.com/en-us/document/michigan-state-university/engineering-cooperative-
ed/economics-module-4-future-and-annual-worth-analysis/1144420

Prepared by:

____________
Instructor

Checked by: Reviewed by: Noted:

_______________________ ________________________ ________________________

Program Head, (Program) Area Coordinator (Subjects) Dean (College/ Department)

Recommended by: Approved by:

_______________________ ________________________
CLAMDEV Focal Person, Director, CLAMDEV
(Areas)

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