Variations in Present Worth

Analysis
Lecture No. 17
Chapter 5
Contemporary Engineering Economics
Copyright © 2016

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 Future Worth Criterion
Given
$47,309
Cash flows and MARR (i)
Find
The net equivalent worth at
a specified period other
than the “present,”
commonly at the end of the $35,560 $37,360 $31,850 $34,400
project life 0
Decision Rule 1 2 3

Accept the project if the

equivalent worth is
positive. $76,000

Project life
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 Excel Solution
A B C
1 Period Cash Flow
2 0 ($76,000)
3 1 $35,650
4 2 $37,360
5 3 $31,850
6 4 $34,400 =FV(12%,4,0,-B7)

7 PW(12%) $30,145
8 FW(12%) $47,434

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 FW Calculation with the Cash Flow
Analyzer

Payback
Period
Project
Cash Net
Flows Present
Worth

Net
Future
Worth

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Example 5.6: Future Equivalent at an
Intermediate Time

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Example 5.8:
Project’s Service
Life is Extremely
Long

o Q1: Was Bracewell's

$800,000 investment a
wise one?

o Q2: How long does he

have to wait to recover
his initial investment,
and will he ever make
a profit?

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Mr. Bracewell’s Hydroelectric Project
−$1,101K + $1, 468 K
V1 + V2 =
= $367 K > 0
V2 = 120 K ( P / A,8%,50)
= $1, 468 K

−$50 K ( F / P,8%,9) − $50 K ( F / P,8%,8)

V1 =
 − $100 K ( F / P,8%,1) − 60 K
= −$1,101K

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Find P for a Perpetual Cash Flow
Series, A

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 Capitalized Equivalent Worth
A
Principle: PW for a
project with an
annual receipt of A
over infinite service

∞
0
life n

Equation
CE(i) = A(P/A, i, ∞) P=CE(i)
= A/i

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 Practice Problem
Given: i = 10%, N = ∞
Find: P or CE (10%)

$2,000
$1,000

0
10 ∞

P = CE (10%) = ?

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 Solution
$2,000
$1,000

0
10 ∞

$1,000 $1,000
+ CE(10%)
= (P / F ,10%,10)
0.10 0.10
P = CE (10%) = ? = $10,000(1 + 0.3855)
= $13,855

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 A Bridge Construction Project

• Construction cost = $2,000,000

• Annual maintenance cost = $50,000
• Renovation cost = $500,000 every 15 years
• Planning horizon = infinite period
• Interest rate = 5%

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 Cash Flow Diagram for the Bridge
Construction Project
Years
0 15 30 45 60

$50,000

$500,000 $500,000 $500,000 $500,000

$2,000,000

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 Solution
• Construction Cost
P1 = $2,000,000
• Maintenance Costs
P2 = $50,000/0.05 = $1,000,000
• Renovation Costs
P3 = $500,000(P/F, 5%, 15) • Total Present Worth
+ $500,000(P/F, 5%, 30) P = P1 + P2 + P3
+ $500,000(P/F, 5%, 45) = $3,463,423
+ $500,000(P/F, 5%, 60)
:
= {$500,000(A/F, 5%, 15)}/0.05
= $463,423

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 Alternate Way to Calculate P3

o Concept: Find the

effective interest Effective interest rate
rate per payment for a 15-year period
period.
o Interest rate: Find
the effective interest
rate for a 15-year 0 15 30 45 60
cycle.

i = (1 + 0.05)15 − 1
= 107.893%
$500,000 $500,000 $500,000 $500,000
o Capitalized
equivalent worth
P3 = $500,000/1.0789
= $463,423
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