OTHER ANALYSIS

TECHNIQUES

(Newnan, D.G, Eschenbach, T.G. &

Lavelle, J.P. (2012), Engineering
Economic Analysis, Oxford
University Press, Eleventh Edition)
After Completing This Topic, The Student
Should Be Able to:
1. Use future worth, benefit–cost ratio, payback period, and sensitivity analysis methods to solve
engineering economy problems.
2. Link the use of future worth analysis to the present worth and annual worth methods developed
earlier.
3. Mathematically develop the benefit–cost ratio, and use this model to select alternatives and make
economic choices.
4. Understand the concept of the payback period of an investment, and be able to calculate this
quantity for prospective projects.
5. Demonstrate a basic understanding of sensitivity and breakeven analyses and the use of these
tools in an engineering economic analysis.
6. Use a spreadsheet to perform sensitivity and breakeven analyses.
AGENDA

BENEFIT–COST RATIO SENSITIVITY,

FUTURE WORTH
OR PRESENT WORTH PAYBACK PERIOD BREAKEVEN, AND
ANALYSIS
INDEX ANALYSIS WHAT-IF ANALYSIS
1. FUTURE WORTH ANALYSIS
 FUTURE WORTH ANALYSIS
➢ IN MANY SITUATIONS WE WOULD LIKE TO KNOW WHAT THE FUTURE
SITUATION WILL BE, IF WE TAKE SOME PARTICULAR COURSE OF ACTION
NOW.
➢ THIS IS CALLED FUTURE WORTH ANALYSIS
EXAMPLE 9.1
EXAMPLE 9.2
SOLUTION
SOLUTION (CONT.)
BENEFIT COST RATIO ANALYSIS
BENEFIT COST RATIO
BENEFIT COST RATIO
EXAMPLE 9.3
INCREMENTAL ANALYSIS
DON’T USE BCR COMPARATION
EXAMPLE 9.4
ASSUME THAT INTEREST -10%%
SOLUTION
SOLUTION (CONT.)
SOLUTION (CONT.)
DON’T USE THIS ANALYSIS
EXAMPLE 9.5

SOLUTION
SELECTION
ALTERNATIVE A WILL BE SELECTED
CASE-1
A road can be paved with either asphalt or concrete. Concrete costs $15,000/km and lasts 20
years. Assume the annual maintenance costs are $500 for concrete and $800 for asphalt per
kilometer per year. Use an interest rate of 8% per year. Contributed by D. P. Loucks, Cornell
University

a) What is the maximum that should be spent for asphalt if it lasts only 10 years?

b) Assume the asphalt road costs $7000 per kilometer. How long must it last to be the preferred
alternative?
PAYBACK PERIODE
PAYBACK PERIOD

PAYBACK PERIOD IS THE PERIOD OF TIME REQUIRED FOR

THE PROJECT’S PROFIT OR OTHER BENEFITS TO EQUAL
THE PROJECT’S COST.
EXAMPLE 9-8
SOLUTION
EXAMPLE 9-9
SOLUTION
SOLUTION
4 IMPORTANT POINTS
1. THIS IS AN APPROXIMATE, RATHER THAN AN EXACT, ECONOMIC ANALYSIS CALCULATION.

2. ALL COSTS AND ALL PROFITS, OR SAVINGS OF THE INVESTMENT BEFORE PAYBACK ARE
INCLUDED WITHOUT CONSIDERING DIFFERENCES IN THEIR TIMING.

3. ALL THE ECONOMIC CONSEQUENCES BEYOND THE PAYBACK PERIOD ARE COMPLETELY
IGNORED.

4. BEING AN APPROXIMATE CALCULATION, PAYBACK PERIODMAY ORMAY NOT SELECT THE

CORRECT ALTERNATIVE.
SENSITIVITY ANALYSIS
SENSITIVITY ANALYSIS

WHEN SMALL VARIATIONS IN A PARTICULAR ESTIMATE WOULD CHANGE WHICH ALTERNATIVE IS

SELECTED,

THE DECISION IS SAID TO BE SENSITIVE TO THE ESTIMATE. TO BETTER EVALUATE THE IMPACT OF
ANY PARTICULAR ESTIMATE,

WE COMPUTE “HOW MUCH A PARTICULAR ESTIMATE WOULD NEED TO CHANGE IN ORDER TO

CHANGE A PARTICULAR DECISION.” THIS IS CALLED SENSITIVITY ANALYSIS.
EXAMPLE 9.11
EXAMPLE 9.11 (CONT.)
SOLUTION
SOLUTION
SOLUTION
SOLUTION (CONT.)
CASE-2
A piece of property is purchased for $10,000 and yields a $1000
yearly net profit. The property is sold after 5 years. What is its
minimum price to breakeven with interest at 10%?