Variations of Present Worth

Analysis

Lecture No.17
Chapter 5
Contemporary Engineering Economics
Copyright © 2006

Contemporary Engineering Economics, 4 th

edition, © 2007
Future Worth Criterion
 Given: Cash flows
and MARR (i)
 Find: The net
equivalent worth at a
specified period other
than “present”, $55,760
$24,400 $27,340
commonly the end of
project life 0
1 2 3
 Decision Rule: Accept
the project if the
$75,000
equivalent worth is
positive.
Project life
Contemporary Engineering Economics, 4 th
edition, © 2007
Example 5.6 Net Future Worth at the
End of the Project

Contemporary Engineering Economics, 4 th

edition, © 2007
Alternate Way of Computing the NFW

FW (15%) inflow  $24,400( F / P,15%,2)  $27,340( F / P,15%,1)

$55,760( F / P,15%,0)
 $119,470
FW (15%)outflow  $75,000( F / P,15%,3)
 $114,066
FW (15%)  $119,470  $114,066
 $5,404  0, Accept

Contemporary Engineering Economics, 4 th

edition, © 2007
Excel Solution:

A B C
1 Period Cash Flow
2 0 ($75,000)
3 1 $24,400
4 2 $27,340
5 3 $55,760
6 PW(15%) $3553.46
7 FW(15%) $5,404.38
=FV(15%,3,0,-B6)
Contemporary Engineering Economics, 4 th
edition, © 2007
 Solving Example 5.6 with Cash Flow
Analyzer

Payback
period

Project
Cash Net
Flows Present
Worth

Net
Future
Worth

Contemporary Engineering Economics, 4 th

edition, © 2007
Example 5.7 Future Equivalent at an
Intermediate Time

Contemporary Engineering Economics, 4 th

edition, © 2007
Example 5.9 Project’s Service Life is
Extremely Long
• Built a hydroelectric plant using his personal savings of $800,000

• Power generating capacity of 6 million kwhs

• Estimated annual power sales after taxes - $120,000

• Expected service life of 50 years

 Was Bracewell's $800,000 investment a wise one?

 How long does he have to wait to recover his initial investment,

and will he ever make a profit?
Contemporary Engineering Economics, 4 th
edition, © 2007
Mr. Bracewell’s Hydroelectric
Project V1  V2  $1,101K  $1, 468 K
 $367 K  0
V2  120 K ( P / A,8%,50)
 $1, 468 K

V1  $50 K ( F / P,8%,9)  $50 K ( F / P,8%,8)

  $100 K ( F / P,8%,1)  60 K
 $1,101K

Contemporary Engineering Economics, 4 th

edition, © 2007
How Would You Find P for a Perpetual
Cash Flow Series, A?

Contemporary Engineering Economics, 4 th

edition, © 2007
Capitalized Equivalent Worth

 Principle: PW for a project with an annual

receipt of A over infinite service life

Equation:
CE(i) = A(P/A, i, ) = A/i
A
0

P = CE(i)

Contemporary Engineering Economics, 4 th

edition, © 2007
Practice Problem
Given: i = 10%, N = ∞
Find: P or CE (10%)

$2,000
$1,000

0
10 ∞

P = CE (10%) = ?

Contemporary Engineering Economics, 4 th

edition, © 2007
Solution

$2,000
$1,000

0
10 ∞

P = CE (10%) = ?
$1,000 $1,000
CE (10%)   ( P / F,10%,10)
0.10 0.10
 $10,000(1  0.3855)
 $13,855
Contemporary Engineering Economics, 4 th
edition, © 2007
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%

Contemporary Engineering Economics, 4 th

edition, © 2007
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
Contemporary Engineering Economics, 4 th
edition, © 2007
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)
+ $500,000(P/F, 5%, 30)
+ $500,000(P/F, 5%, 45)
+ $500,000(P/F, 5%, 60)
.
= {$500,000(A/F, 5%, 15)}/0.05
= $463,423
 Total Present Worth
P = P1 + P2 + P3 = $3,463,423
Contemporary Engineering Economics, 4 th
edition, © 2007
Alternate way to calculate P3
 Concept: Find the effective interest rate per payment period

0 15 30 45 60

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

 Effective interest rate for a 15-year cycle

i = (1 + 0.05)15 - 1 = 107.893%

 Capitalized equivalent worth

P3 = $500,000/1.07893
= $463,423
Contemporary Engineering Economics, 4 th
edition, © 2007