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7-Evaluating A Single Project
7-Evaluating A Single Project
Engineering Economy
✔ Topic 7 – Annuity
✔ Topic 8 – Gradient
Engineering Economy
Minimum Attractive Rate of Return
Engineering Economy
How to Use MARR
Engineering Economy
Methods to Evaluate Profitability
Engineering Economy
Methods to Evaluate Liquidity
Engineering Economy
Present Worth (PW) Method
Engineering Economy
Present Worth (PW) Method
Engineering Economy
Present Worth (PW) Method
Engineering Economy
Sample Problem - Present Worth
Engineering Economy
Sample Problem - Present Worth
Engineering Economy
Future Worth (FW) Method
Engineering Economy
Sample Problem - Future Worth
Engineering Economy
Sample Problem - Future Worth
FW(20%)= -100,000(F/P,20%,5)+(40,0005,000)(F/A,20%,5)
+20,000 = $31,624.
Engineering Economy
Annual Worth (AW) Method
Engineering Economy
Capital Recovery (CR)
Engineering Economy
Sample Problem - Annual Worth
Engineering Economy
Sample Problem - Annual Worth
Engineering Economy
Practice Problem
Engineering Economy
Try to Solve: Reminder: Show your work below and put the answer in the yellow box. Draw
your cashflow. No rounding in between solutions and final answer round in two decimal places.
1. A project has a capital investment of $55,000 and returns $20,000 per year
for 4 years. At a 10% MARR, is this a good investment? Use PW to evaluate
this project.
0 1 3 4
Internal Rate of Return (IRR)
Engineering Economy
Cont
Start trial-and-error
PW(20%)=12,709. Therefore, iI > 20%. (Remember
the inverse relation between PW and i)
PW(25%)=679.5. Therefore, iI > 25%.
PW(30%)=-9,368.48. Therefore, iI < 30%.
Use linear interpolation to find iI: 25% < iI < 30%.
i% PW
25% 679.50
i’ 0 i’ = 25.38%
30% -9368.48
Engineering Economy
External Rate of Return (ERR)
Engineering Economy
Advantages of ERR over IRR
Engineering Economy
Sample Problem - ERR
Consider a project that has the following cash flows
over a study period of 5 years:
Initial investment: $100,000
Annual revenues: $40,000
Annual expenses: $5,000
Salvage value: $20,000
ε = MARR: 20%.
Engineering Economy
Sample Problem - ERR
For the cash flows given below, find the ERR
when the external reinvestment rate is ε = 12%
(equal to the MARR).
Year 0 1 2 3 4
Cash Flow -$15,000 -$7,000 $10,000 $10,000 $10,000
Expenses
Revenue
Solving, we find
Engineering Economy
Practice Problem
Proposal A
Investment cost $10,000
Expected life 5 years
Market (salvage) value a –$1,000
Annual receipts $8,000
Annual expense $4,000
Engineering Economy
Practice Problem
Engineering Economy
Payback Period
Engineering Economy
Payback Period
Payback is simple to calculate.
The payback period is the smallest value of θ (θ ≤ N)
for which the relationship below is satisfied.
Engineering Economy
Problems w/ Payback period method.
Engineering Economy
Sample – Payback Period
End of Net Cash Cumulative Cumulative
Year Flow PW at 0% PW at 6%
Finding the simple and
discounted payback 0 -$42,000 -$42,000 -$42,000
period for a set of cash
flows. 1 $12,000 -$30,000 -$30,679
Engineering Economy