A drafting company employs 10 drafters at $800/week each.

The CEO considers

three alternatives:

1.Buy 8 low-end workstations at $2 000 each. Give two drafters 1 years notice.
At the end of the year they each get $5 000 severance pay. Train the
remaining eight in AutoCAD. The first training course is available in a year,
and costs $2 000 per participant. After completing the course, each drafter
gets a $100/week raise.

2.Buy 5 high-end workstations at $5 000 each. All the drafters get a years notice
and $5 000 severance pay at the end of the year. Five new graduates are hired at
$1 200 per week. They are trained in Pro-Engineer; to keep current, they will
each need a $5 000 retraining session every six months.

3.Do nothing.

Any of these options would allow the company to service its current
customers. Any money saved can be invested at 10%, which is also the
cost of borrowing money. What should they do?
A drafting company employs 10 drafters at $800/week each. The CEO considers three alternatives:

1.Buy 8 low-end workstations at $2 000 each. Give two drafters 1 years notice. At the end of the year they each get
$5 000 severance pay. Train the remaining eight in AutoCAD. The first training course is available in a year, and
costs $2 000 per participant. After completing the course, each drafter gets a $100/week raise.

2. Buy 5 high-end workstations at $5 000 each. All the drafters get a years notice and $5 000 severance pay at the
end of the year. Five new graduates are hired at $1 200 per week. They are trained in Pro-Engineer; to keep current,
they will need a $5 000 retraining session every six months.

3. Do nothing.

Any of these options would allow the company to service its current customers. Any money saved can be
invested at 10%, which is also the cost of borrowing money. What should they do?

What time frame should we use?

How do we represent `Do nothing?

Sketch the cash-flow diagrams.

What non-monetary factors would matter?

Option 1

$40,000

$16000 $16 000

$10 000

PW = -16,000 (16,000+10,000)(P/F,0.1,1) + 40,000(P/A,0.1,N)(P/F,0.1,1)

 $40,000

P=F(P/F,i,1)

$16 000

$10 000

PW = -16,000 - .
 $40,000

26,000(P/F,i,1
)
PW = -16,000 26,000(P/F,i,1)
 P=40,000(P/A,i,4)

$40,000
P

PW = -16,000 26,000(P/F,i,1) +
 P=F(P/F,i,1)

P=40,000(P/A,i,4)

PW = -16,000 26,000(P/F,i,1) +
P=40,000(P/A,i,4)(P/F,i,1)

PW = -16,000 26,000(P/F,i,1) + 40,000(P/A,i,4)(P/F,i,1)

 Option 2 $100 000

$25 000
$50,000
$50 000

PW ($000) = - 25
 $100 000

P=F(P/F,i,1)

$50,000
$50 000

PW ($000) = - 25
 $100 000

$50,000

50,000(P/F,i,1)

PW ($000) = - 25 50(P/F,i,1)
 $50 000

PW ($000) = - 25 50(P/F,i,1) +
 P=50,000(P/A,i,4)

$50 000

PW ($000) = - 25 50(P/F,i,1) +
 P=50,000(P/A,i,4)(P/F,i,1)

PW ($000) = - 25 50(P/F,i,1) +
P=50,000(P/A,i,4)(P/F,i,1)

PW ($000) = - 25 50(P/F,i,1) + 50 (P/A,i,4)(P/F,i,1)

Some common variations on an annuity

1. Your generous uncle gives you your age in dollars every

birthday.
2. The cost of maintaining your car increases by $100 a
month.
There is one formula that fits both these cases:

A = G(A/G,i,N)

Take careful note of the starting time

 3G
2G

G
 4G
3G
2G

A=G(A/G,i,N)

A
P=A(P/A,i,N)

A
3. You get a regular salary and a $100 raise every year
(or a $100 cut every year)

We use the same formula, and add in your base salary:

A = A/ + G(A/G,i,N)
Sample problem: I get to choose between a job in industry
with a starting salary of $50,000 and $5,000 raises every
year.

Or a job in academia where I get $70,000 right away, but

never get a raise.

If I can invest all my income at 5% interest, how long will

it be before the present value of the industrial job exceeds
the present value of the academic job?
4. You get a regular salary and a 10% raise every year
(or a 10% cut every year)
 Too hard for Appendix A

Define a growth-adjusted interest rate io: io = (1+i)/(1+g) - 1

Then (P/A, g, i, N) = (P/A, io, N)/(1+g)

And if i = g, P =NA/(1+g)
Sample problem: I get to choose between a job
in industry with a starting salary of $50,000 and
5% raises every year

Or a job in academia where I get $70,000 right

away, but never get a raise.

If I can invest all my income at 10% interest, how

long will it be before the present value of the
industrial job exceeds the present value of
the academic job?
5. A generous but eccentric uncle gives you $1 000 every leap year

Several alternatives to find present worth:

a)Use (P/F, i, N) on each payment (tedious if there are a lot)

b)Use j = (1+ i)4 1 to get a quadrennial interest rate, then use (P/A, j, N

c)Use (A/F, i, 4) to turn the first payment to an annuity, then use (P/A,i,N)
Comparing projects based on Annual
Worth

If most of our cash flows are annual, its easier to convert one-time
expenses to their annual equivalent.

Also, you may want to know ``How much will I have to spend a
week? rather than ``What is the present worth of my annual salary?

Comparing projects on this basis will always give the same result as
comparison based on present worth or future worth.
 Example
A company wants to expand its capacity. It is considering two alternatives:

1.Construct a new building, at a cost of $2 000 000. Annual maintenance

costs will be $10 000. The building will need to be painted every 15 ye
at a cost of $15 000.

2. Construct a smaller new building now, and another, smaller one in 10 ye

The first building costs $1 250 000 to build and $5 000 a year to maintai
The addition will cost $1 000 000 to build, and once its built, the two
buildings together will cost $11 000 to maintain. Fifteen years after the
addition, and every fifteen years after that, the new buildings will be
painted at a cost of $15 000.

Assume an interest rate of 15%. Compare the annual cost of the two altern
Summary of comparison methods we know so far:
Present worth

Future worth

Annual worth

Still to come:

Rate of return

Cost/benefit

Payback period
 Comparing Alternatives
In comparing alternatives, any cost common to all the alternatives
can be ignored.

This will sometimes result in all the alternatives having negative

present worth. Dont worry just choose the least negative.

In many situations for example, Question 2.5 you will need to

be careful to set up the comparison fairly.
Study Period
The Chopper lawnmower costs $100, requires $10 in fuel every year,
and will last 4 years. The LawnBoy lawnmower costs $120, uses $15
in fuel every year, and lasts 6 years. If I expect to be cutting lawns
for the rest of my life, which is the better buy?

Either determine a salvage value:

PW(Chopper) = -100 - 10(P/A, i, 4)

PW(LawnBoy) = -120 - 15(P/A, i, 4) + S(P/F, i, 4)

Or consider the lowest common multiple of lives:

PW(Chopper) = -100 - 10(P/A, i, 12) 100(P/F,i,4) 100(P/F,i,8)

PW(LawnBoy) = -120 - 15(P/A, i, 12) - 120(P/F, i, 6)

 Sets of Alternatives
Alternatives may be independent, contingent, or exclusive

Independent: Buying socks and buying a tie

Contingent: Buying shoes and buying socks

Exclusive: Buying a Lamborghini and buying a Ferrari

In a complex situation, arrange the possibilities into mutually exclusive
subsets and pick the best subset.

Example: You can do A, B, C , D or E. If you do A, you cant do B. To do

D, you must do either B or C. If you do E, you must do A. You cant do
both B and C, and if you do D, you cant do E.

What are the possible subsets?

 Assignments
These appear weekly at

http://www.sfu.ca/~jones/ENSC201/index.html

They are due on Thursdays, the first one on Thursday September

12.

Majid will go through problems with slightly different numbers in the

Wednesday tutorial sessions, starting next Wednesday

Model answers will appear on the subsequent Friday.

Only three of these assignments will contribute to your final grade;

youll be warned of this in advance.