FAITH COLLEGES

COLLEGE OF ENGINEERING

ENGINEERING ECONOMICS
SUMMER 2020-2021

ENGR. KENT PATRICK FERRARO

 TOPIC 3
ECONOMIC STUDY
METHODS
COURSE OUTLINE - EXPANDED

• Economic Study Methods

❏ Minimum Attractive Rate of Return
❏ Basic Economic Methods:
➢ Present, Future and Annual Worth
➢ Internal and External Rate of Return
❏ Other Study Methods:
➢ Discounted Payback Period
➢ Benefit – Cost Ratio
WHY DO YOU
WANT TO
INVEST ?
INVESTMENT

An idea of giving up of something we value today

for the expectation of receiving something greater
in value in the future.
INVESTMENT

Engineers have major roles in decision making:

1. Estimating of expected costs of investment.
2. Examining of expected returns of investment.
3. Outweighing the expected costs and returns.
4. Analyzing different investment opportunities to
determine which is the best.
5. Adjusting to the changes affecting the
investment opportunities.
INVESTMENT OPPORTUNITIES

Engineers have referred investment opportunities

as projects and sometimes they are called
comparison methods such as:
1. Present Worth Method
2. Future Worth Method
3. Annual Worth Method
RELATIONS AMONG PROJECTS

Some entities such as companies or individuals,

concerned with projects are faced with large
number of investment opportunities at the same
time. In order to analyze these investment
opportunities to determine which is the best, we
need to distinguish the connections among
projects that cover all the possibilities.
MUTUALLY INDEPENDENT

If the expected costs of investment and expected

returns from investment of all available investment
opportunities do not depend on whether the other
one is chosen, projects are independent.
MUTUALLY EXCLUSIVE

If in the process of choosing one project from the

available projects, all other investment
opportunities are excluded.
EXAMPLE 1

FAITH Colleges wants to improve the Braveheart's

Area in front of the Mabini Building. The project
proposals are:
(1) replacing the walk path cement with outdoor
tiles;
(2) making the walk path in straight path;
(3) converting the side walk into garden;
(4) installing solar powered light posts.
EXAMPLE 1

Restrictions:
(1) The administration can only afford two of the
three combined projects together.
(2) The light post can be installed if the walk path
is replaced with outdoor tiles.
(3) The garden is possible only if the walk path is
already constructed in straight path.
 EXAMPLE 1
Investment
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Opportunities

Outdoor Tiles X X X X X X X X

Straight Path X X X X X X X X

Garden X X X X X X X X

Light Posts X X X X X X X X

FEASIBLE Y Y N N Y N Y Y N N Y Y N N N N
MARR

MARR stands for minimum acceptable rate of

return.
It is the interest rate that must be earned by the
project to be accepted.
This is minimum level set by the entities such as
corporations or individuals in order to decide
whether a project must be pursued or not.
35
33
31
29
25
20
15

1
PW and AW COMPARISONS

The methods of comparison between the present

worth (PW) and annual worth (AW) are based on
getting a comparable basis for the evaluation of
investment opportunities in terms of monetary
units.
PW @ MUTUALLY INDEPENDENT

PW = 0 marginally acceptable
PW > 0 very acceptable
PW < 0 not acceptable
EXAMPLE 2
Econ wants to invest in a computer rental services. The
initial material cost including internet, PCs, software,
and furniture is expected to be Php 100,000.00. The
annual revenue for ten years is expected to be Php
55,000.00. The annual operating cost is expected to be
Php 10,000.00. The salvage value for all the materials is
expected to be Php 30,000.00. The duration of this
project is about 10 years with MARR of 30%. Is this a
good project?
EXAMPLE 2
𝑃𝑊 = 𝑀𝐶 + 𝐴𝑅 + 𝐴𝐶 + 𝑆𝑉
𝑃𝑊 = −𝑀𝐶 + 𝐴𝑅 − 𝐴𝐶 + 𝑆𝑉
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1 −𝑛
𝑃𝑊 = −𝑀𝐶 + 𝑛
− 𝑛
+ 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖 𝑖 1+𝑖
55,000.00 1 + 0.30 10 − 1
𝑃𝑊 = −100,000.00 +
0.30 1 + 0.30 10
10,000.00 1 + 0.30 10 − 1 −10
− 10
+ 30,000.00 1 + 0.30
0.30 1 + 0.30
EXAMPLE 2
𝑃𝑊 = −𝑀𝐶 + 𝐴𝑅 − 𝐴𝐶 + 𝑆𝑉
𝑃𝑊 = − 100,000.00 + 170,034.67 − 30,915.39 + 2,176.14
𝑃𝑊 = Php 41,295.42

Yes, this project is feasible since the present worth of all cash
flows is more than 0. Econ will be able to recover the initial cost
of Php 100,000.00. Econ will be able to earn the required interest
rate of 30%.
EXAMPLE 3
Econ wants to invest in an online selling of personalized
digital alarm clocks. The initial cost for this project will
be Php 50,562.00. His annual revenue is expected to be
Php 20,000.00 while his annual cost is expected to be
Php 3,000.00. If the MARR is set to be 20.25% within 5
years into business, would this be an acceptable
project?
EXAMPLE 3
𝑃𝑊 = 𝐼𝐶 + 𝐴𝑅 + 𝐴𝐶
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑅 − 𝐴𝐶
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1
𝑃𝑊 = −𝐼𝐶 + 𝑛
−
𝑖 1+𝑖 𝑖 1+𝑖 𝑛
20,000.00 1 + 0.2025 5 − 1
𝑃𝑊 = −50,562.00 +
0.2025 1 + 0.2025 5
3,000.00 1 + 0.2025 5 − 1
−
0.2025 1 + 0.2025 5
EXAMPLE 3
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑅 − 𝐴𝐶
𝑃𝑊 = − 50,562 + 59,484.70 − 8,922.70
𝑃𝑊 = Php 0.00

The project is marginally acceptable.

EXAMPLE 4
Econ has shown a project portfolio of a company
encouraging for investors. He has read that the project
at MARR of 12%, the investment will be returned after 5
years. Investors are encouraged to invest Php 50,000.00
as the capital investment and the return is Php 33,000
per year. Should Econ invest to the project?
EXAMPLE 4
𝑃𝑊 = 𝐼𝐶 + 𝐴𝑅
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑅
𝐴 1+𝑖 𝑛−1
𝑃𝑊 = −𝐼𝐶 +
𝑖 1+𝑖 𝑛
33,000.00 1 + 0.12 5 − 1
𝑃𝑊 = −120,000.00 +
0.12 1 + 0.12 5
𝑃𝑊 = −120,000.00 + 118,957.61
EXAMPLE 4
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑅
𝑃𝑊 = − Php 1,042.39

The project is not profitable.

PW @ MUTUALLY EXCLUSIVE
EXAMPLE 5
Econ as part of the R&D team, has presented the
different possibilities for the sources of electricity for
the production machineries, using MARR of 5% at 6 yrs.
Investment Annual
Initial Cost Annual Cost Salvage Value
Opportunities Savings

Solar Energy 200,000.00 4,000.00 70,000.00 0

Mechanical Energy 50,000.00 15,000.00 50,000.00 7,000.00

Chemical Energy 150,000.00 20,000.00 75,000.00 6,000.00

EXAMPLE 5
Solar Energy: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1 −𝑛
𝑃𝑊 = −𝐼𝐶 − 𝑛
+ 𝑛
+ 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖 𝑖 1+𝑖
4,000.00 1 + 0.05 6 − 1
𝑃𝑊 = −200,000.00 − 6
+
0.05 1 + 0.05
70,000.00 1 + 0.05 6 − 1 −6
+ 0.00 1 + 0.05
0.05 1 + 0.05 6
EXAMPLE 5
Solar Energy: 𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −200,000.00 − 20,302.77 + 355,298.44 + 0.00
𝑃𝑊 = Php 134,995.68
EXAMPLE 5
Mechanical Energy: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1 −𝑛
𝑃𝑊 = −𝐼𝐶 − 𝑛
+ 𝑛
+ 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖 𝑖 1+𝑖
15,000.00 1 + 0.05 6 − 1
𝑃𝑊 = −50,000.00 − 6
+
0.05 1 + 0.05
50,000.00 1 + 0.05 6 − 1 −6
+ 7,000.00 1 + 0.05
0.05 1 + 0.05 6
EXAMPLE 5
Mechanical Energy: 𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −50,000.00 − 76,135.38 + 253,784.60 + 5,223.51
𝑃𝑊 = Php 132,872.73
EXAMPLE 5
Chemical Energy: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1 −𝑛
𝑃𝑊 = −𝐼𝐶 − 𝑛
+ 𝑛
+ 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖 𝑖 1+𝑖
20,000.00 1 + 0.05 6 − 1
𝑃𝑊 = −150,000.00 − 6
+
0.05 1 + 0.05
75,000.00 1 + 0.05 6 − 1 −6
+ 6,000.00 1 + 0.05
0.05 1 + 0.05 6
EXAMPLE 5
Chemical Energy: 𝑃𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝑃𝑊 = −150,000.00 − 101,513.84 + 380,676.91 + 4,477.29
𝑃𝑊 = Php 133,640.36
EXAMPLE 6
Solar 𝑃𝑊 = Php 134,995.68
Mechanical 𝑃𝑊 = Php 132,872.73
Chemical 𝑃𝑊 = Php 133,640.36

Solar energy is more profitable and has the greatest

present worth among the other investment
opportunities.
EXAMPLE 6
During the executive meeting, Econ presents the idea of
installing new equipment to replace the manual labor of
scanning and boxing of kimchi production costing Php
200,000 a year. The costs for having the new equipment
are as follows with a service life of 10 years.
Installation Cost Php 900,000.00
Annual Maintenance Php 30,000.00
Annual Utility Consumption Php 15,000.00
If the set MARR is 10%, which alternative is better?
EXAMPLE 6
Alternative 1: 𝑃𝑊 = 𝐿𝐶
𝑃𝑊 = −𝐿𝐶
𝐴 1+𝑖 𝑛−1
𝑃𝑊 = −
𝑖 1+𝑖 𝑛
200,000.00 1 + 0.10 10 − 1
𝑃𝑊 = −
0.10 1 + 0.10 10
𝑃𝑊 = −Php 1,228,913.42
EXAMPLE 6
Alternative 2: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝑀 + 𝐴𝑈𝐶
𝑃𝑊 = −𝐼𝐶 − 𝐴𝑀 − 𝐴𝑈𝐶
𝐴1 1 + 𝑖 𝑛 − 1 𝐴2 1 + 𝑖 𝑛 − 1
𝑃𝑊 = −𝐼𝐶 − 𝑛
−
𝑖 1+𝑖 𝑖 1+𝑖 𝑛
30,000.00 1 + 0.10 10 − 1 15,000.00 1 + 0.10 10 − 1
𝑃𝑊 = −900,000.00 − 10
−
0.10 1 + 0.10 0.10 1 + 0.10 10
𝑃𝑊 = − 900,000.00 − 184,337.01 − 92,165.51
PW = − Php 1,176,505.52
EXAMPLE 6
Alternative 1: 𝑃𝑊 = −𝐿𝐶
𝑃𝑊 = −Php 1,228,913.42
Alternative 2: 𝑃𝑊 = −𝐼𝐶 − 𝐴𝑀 − 𝐴𝑈𝐶
𝑃𝑊 = −Php 1,176,505.52

Alternative 2 is more attractive alternative than

Alternative 1.
AW COMPARISONS
EXAMPLE 1
Econ as part of the R&D team, has presented the
different possibilities for the sources of electricity for
the production machineries, using MARR of 5% at 6 yrs.
Investment Annual
Initial Cost Annual Cost Salvage Value
Opportunities Savings

Solar Energy 200,000.00 4,000.00 70,000.00 0

Mechanical Energy 50,000.00 15,000.00 50,000.00 7,000.00

Chemical Energy 150,000.00 20,000.00 75,000.00 6,000.00

EXAMPLE 1
Solar Energy: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐼𝐶 𝑖 1 + 𝑖 𝑛 𝑆𝑉 𝑖
𝐴𝑊 = − 𝑛
− 𝐴𝐶 + 𝐴𝑆 +
1+𝑖 −1 1+𝑖 𝑛−1
𝐴𝑊 = −39,403.49 − 4,000.00 + 70,000.00 + 0.00
𝐴𝑊 = Php 26,596.51
EXAMPLE 1
Mechanical Energy: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐼𝐶 𝑖 1 + 𝑖 𝑛 𝑆𝑉 𝑖
𝐴𝑊 = − 𝑛
− 𝐴𝐶 + 𝐴𝑆 +
1+𝑖 −1 1+𝑖 𝑛−1
𝐴𝑊 = −9,850.87 − 15,000.00 + 50,000.00 + 1,029.12
𝐴𝑊 = Php 26,178.25
EXAMPLE 1
Cehmical Energy: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐴𝑊 = −𝐼𝐶 − 𝐴𝐶 + 𝐴𝑆 + 𝑆𝑉
𝐼𝐶 𝑖 1 + 𝑖 𝑛 𝑆𝑉 𝑖
𝐴𝑊 = − 𝑛
− 𝐴𝐶 + 𝐴𝑆 +
1+𝑖 −1 1+𝑖 𝑛−1
𝐴𝑊 = −29,552.62 − 20,000.00 + 75,000.00 + 882.10
𝐴𝑊 = Php 26,329.48
EXAMPLE 1
Solar 𝐴𝑊 = Php 26,596.51
Mechanical 𝐴𝑊 = Php 26,178.25
Chemical 𝐴𝑊 = Php 26,329.48

Solar energy is more profitable and has the greatest

annual worth among the other investment opportunities.
EXAMPLE 2
During the executive meeting, Econ presents the idea of
installing new equipment to replace the manual labor of
scanning and boxing of kimchi production costing Php
200,000 a year. The costs for having the new equipment
are as follows with a service life of 10 years.
Installation Cost Php 900,000.00
Annual Maintenance Php 30,000.00
Annual Utility Consumption Php 15,000.00
If the set MARR is 10%, which alternative is better?
EXAMPLE 2
Alternative 1: 𝐴𝑊 = 𝐿𝐶
𝐴𝑊 = −𝐿𝐶
𝐴𝑊 = −𝐿𝐶
𝐴𝑊 = − Php 200,000.00
EXAMPLE 2
Alternative 2: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝑀 + 𝐴𝑈𝐶
𝐴𝑊 = −𝐼𝐶 − 𝐴𝑀 − 𝐴𝑈𝐶
𝐼𝐶 𝑖 1 + 𝑖 𝑛
𝐴𝑊 = − 𝑛
− 𝐴𝑀 − 𝐴𝑈𝐶
1+𝑖 −1
𝐴𝑊 = −146,470.86 − 30,000.00 − 15,000.00
𝐴𝑊 = − Php 191,470.86
EXAMPLE 2
Alternative 1: 𝐴𝑊 = −𝐿𝐶
𝐴𝑊 = −Php 200,000.00
Alternative 2: 𝐴𝑊 = −𝐼𝐶 − 𝐴𝑀 − 𝐴𝑈𝐶
𝐴𝑊 = −Php 191,470.86

Alternative 2 is more attractive alternative than

Alternative 1.
EXAMPLE 3
Nomix is considering two investment opportunities
involving on-grid and off-grid solar system for his house.
Battery
Investment Annual
Initial Cost Replacement End of Life
Opportunities Savings
every 2 years
On Grid System 280,000.00 100,000.00 0.00 8

Off Grid System 120,000.00 80,000.00 15,000.00 8

If Nomix uses a MARR of 7%, which grid system should be

continued?
EXAMPLE 3
On Grid System: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝐴𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐼𝐶 𝑖 1 + 𝑖 𝑛 𝐵𝑅 𝑖 1 + 𝑖 𝑛
𝐴𝑊 = − 𝑛
+ 𝐴𝑆 −
1+𝑖 −1 1+𝑖 𝑛−1
𝐴𝑊 = −46,890.97 + 100,000.00 − 0.00
𝐴𝑊 = Php 53,109.03
EXAMPLE 3
Off Grid System: 𝐴𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝐴𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐼𝐶 𝑖 1 + 𝑖 𝑛 𝐵𝑅 𝑖 1 + 𝑖 𝑛
𝐴𝑊 = − 𝑛
+ 𝐴𝑆 −
1+𝑖 −1 1+𝑖 𝑛−1
𝐴𝑊 = −17,584.11 + 80,000.00 − 8,296.38
𝐴𝑊 = Php 54,119.51
EXAMPLE 3
On Grid System: 𝐴𝑊 = Php 53,109.03
Off Grid System: 𝐴𝑊 = Php 54,119.51

Off grid system is more profitable and has a better

return.
EXAMPLE 4
Nomix is considering two investment opportunities
involving on-grid and off-grid solar system for his house.
Battery
Investment Annual
Initial Cost Replacement End of Life
Opportunities Savings
every 2 years
On Grid System 280,000.00 100,000.00 0.00 8

Off Grid System 120,000.00 80,000.00 15,000.00 8

If Nomix uses a MARR of 7%, which grid system should be

continued?
EXAMPLE 4
Nomix is considering two investment opportunities
involving on-grid and off-grid solar system for his house.
Battery
Investment Annual
Initial Cost Replacement End of Life
Opportunities Savings
every 2 years
On Grid System 280,000.00 100,000.00 0.00 4

Off Grid System 120,000.00 80,000.00 15,000.00 8

If Nomix uses a MARR of 7%, which grid system should be

continued?
UNEQUAL LIVES COMPARISONS

(a) Repeated Life Method

The service life of each alternative will be
repeated to meet at a common point in the
timeline.
(b) Study Period Method
The time of required service or relative length
of time that is certain for the forecasts of costs
and benefits is taken into consideration.
EXAMPLE 4
Nomix is considering two investment opportunities
involving on-grid and off-grid solar system for his house.
Battery
Investment Annual
Initial Cost Replacement End of Life
Opportunities Savings
every 2 years
On Grid System 280,000.00 100,000.00 0.00 8

Off Grid System 120,000.00 80,000.00 15,000.00 4

If Nomix uses a MARR of 7%, which grid system should be

continued?
EXAMPLE 4
Using present worth for 8 years:
𝑃𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐴𝑆 1+𝑖 𝑛−1 𝐵𝑅 𝑖 1 + 𝑖 𝑛 1+𝑖 𝑛−1
𝑃𝑊 = −𝐼𝐶 + 𝑛
−
𝑖 1+𝑖 1+𝑖 𝑛−1 𝑖 1+𝑖 𝑛

𝑃𝑊 = −280,000.00 + 597,129.85 − 0.00

𝑃𝑊 = Php 317,129.85
EXAMPLE 4
Using present worth for 4 years:
𝑃𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐴𝑆 1+𝑖 𝑛−1 −𝑛
𝑃𝑊 = −𝐼𝐶 + 𝑛
− 𝐵𝑅 1 + 𝑖
𝑖 1+𝑖
𝑃𝑊 = −120,000.00 + 270,976.90 − 13,101.58
𝑃𝑊 = Php 137,875.32
EXAMPLE 4
On Grid System: 𝑃𝑊 = Php 317,129.85
Off Grid System: 𝑃𝑊 = Php 137,875.32

On grid system has a greater present worth value at its

8 years period than the off grid system at its 4 years
period. It would be unfair for the off grid system since it
has a shorter period time reference compared to the on
grid system with longer period time reference.
EXAMPLE 4
Using present worth for 8 years and repeat once:
𝑃𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐴𝑆 1+𝑖 𝑛−1 𝐵𝑅 𝑖 1 + 𝑖 𝑛 1+𝑖 𝑛−1
𝑃𝑊 = −𝐼𝐶 + 𝑛
−
𝑖 1+𝑖 1+𝑖 𝑛−1 𝑖 1+𝑖 𝑛

𝑃𝑊 = −280,000.00 + 597,129.85 − 0.00

𝑃𝑊 = Php 317,129.85
EXAMPLE 4
Using present worth for 4 years and repeat twice:
𝑃𝑊 = 𝐼𝐶1 + 𝐴𝑆1 + 𝐵𝑅1 + 𝐼𝐶2 + 𝐴𝑆2 + 𝐵𝑅2
𝑃𝑊 = −𝐼𝐶1 + 𝐴𝑆1 − 𝐵𝑅1 − 𝐼𝐶2 + 𝐴𝑆2 − 𝐵𝑅2
−𝑛
𝐴𝑆 1+𝑖 𝑛−1
𝑃𝑊 = −𝐼𝐶1 − 𝐼𝐶2 1 + 𝑖 +
𝑖 1+𝑖 𝑛
−𝐵𝑅1 1 + 𝑖 −𝑛 − 𝐵𝑅2 1 + 𝑖 −𝑛
EXAMPLE 4
𝑃𝑊 = −120,000.00 − 91,547.43 + 477,703.88
−13,101.58 − 9,995.13
𝑃𝑊 = Php 243,059.74
EXAMPLE 4
On Grid System: 𝑃𝑊 = Php 317,129.85
Off Grid System: 𝑃𝑊 = Php 243,059.74

Using the repeated life method, the difference between

the two alternatives becomes smaller.
EXAMPLE 4
Using annual worth comparison:
𝑃𝑊 𝑖 1 + 𝑖 𝑛
𝐴𝑊 =
1+𝑖 𝑛−1
On Grid System: 𝐴𝑊 = Php 53,109.03
Off Grid System: 𝐴𝑊 = Php 40,704.67
Using the annual worth, the difference between the two
alternatives becomes much more smaller.
EXAMPLE 4
Using annual worth comparison from the initial cost
without repeating the service life:
𝑃𝑊 𝑖 1 + 𝑖 𝑛
𝐴𝑊 =
1+𝑖 𝑛−1
On Grid System: 𝐴𝑊 = Php 53,109.03
Off Grid System: 𝐴𝑊 = Php 40,704.67
EXAMPLE 5
Battery
Investment Annual
Initial Cost Replacement End of Life
Opportunities Savings
every 2 years
On Grid System 280,000.00 100,000.00 0.00 8

Off Grid System 120,000.00 80,000.00 15,000.00 4

If Nomix uses a MARR of 7% and he is now uncertain with

the cost beyond the study period of 4 years, which grid
system should be continued if the estimated salvage value
is Php 100,000.
EXAMPLE 5
Off Grid System: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅
𝐴𝑆 1+𝑖 𝑛−1 −𝑛
𝑃𝑊 = −𝐼𝐶 + 𝑛
− 𝐵𝑅 1 + 𝑖
𝑖 1+𝑖
𝑃𝑊 = −120,000.00 + 270,976.90 − 13,101.58
𝑃𝑊 = Php 137,875.32
EXAMPLE 5
On Grid System: 𝑃𝑊 = 𝐼𝐶 + 𝐴𝑆 + 𝐵𝑅 + 𝑆𝑉
𝑃𝑊 = −𝐼𝐶 + 𝐴𝑆 − 𝐵𝑅 + 𝑆𝑉
𝐴𝑆 1+𝑖 𝑛−1 −𝑛 −𝑛
𝑃𝑊 = −𝐼𝐶 + 𝑛
− 𝐵𝑅 1 + 𝑖 + 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖
𝑃𝑊 = −280,000.00 + 338,721.13 − 0.00 + 76,289.52
𝑃𝑊 = Php 135,010.65
EXAMPLE 5
On Grid System: 𝑃𝑊 = Php 135,010.65
Off Grid System: 𝑃𝑊 = Php 137,875.32

Using the estimated salvage value, the off grid system is

now the preferred investment opportunity.
EXAMPLE 5
Finding the exact salvage value wherein alternatives are
in equal values. 𝑃𝑊(1) = 𝑃𝑊 2
𝑃𝑊(𝑜𝑓𝑓) = 𝑃𝑊(𝑜𝑛)
𝐴𝑆 1+𝑖 𝑛−1 −𝑛 −𝑛
𝑃𝑊 𝑜𝑓𝑓 = −𝐼𝐶 + 𝑛
− 𝐵𝑅 1 + 𝑖 + 𝑆𝑉 1 + 𝑖
𝑖 1+𝑖
−4
137,875.32 = −280,000.00 + 338,721.13 + 𝑆𝑉 1 + 0.07
𝑆𝑉 = Php 103,755.00
EXAMPLE 5
Estimated SV: 𝑆𝑉 = Php 100,000.00
Computed SV: 𝑆𝑉 = Php 103,755.00

Therefore:
(a) If the salvage value is lower than the computed
value, off grid system is the preferred project.
(b) If the salvage value is higher than the computed
value, on grid system is the preferred project.