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Engineering Economy 8 Ans

This document discusses techniques for comparing mutually exclusive alternatives (MEAs) in engineering economy. It covers the repeatability assumption, where the study period is a multiple of the alternative lives and economic consequences repeat. It also covers the coterminated assumption, where a common finite study period is used and cash flows are adjusted as needed. Guidelines are provided for alternatives with lives shorter than, equal to, or longer than the study period. Sample problems demonstrate applying these techniques to select the best alternative.

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36 views31 pages

Engineering Economy 8 Ans

This document discusses techniques for comparing mutually exclusive alternatives (MEAs) in engineering economy. It covers the repeatability assumption, where the study period is a multiple of the alternative lives and economic consequences repeat. It also covers the coterminated assumption, where a common finite study period is used and cash flows are adjusted as needed. Guidelines are provided for alternatives with lives shorter than, equal to, or longer than the study period. Sample problems demonstrate applying these techniques to select the best alternative.

Uploaded by

gazzie ray
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Engineering Economy

Engineering Economy
 Topic 10 – Comparing of Alternatives

 Topic 10.1 – Repeatability Assumption

 Topic 10.2 – Co Terminated Assumption

 Topic 10.3 – Incremental Analysis

Engineering Economy
COMPARABLE BASIS FOR SELECTING
MUTUALLY-EXCLUSIVE
ALTERNATIVES (MEAs)
Include any economic impacts of alternative
differences in estimated cash flows – Two Rules:

Rule 1. When revenues and other economic benefits


are present, select alternative that has greatest
positive equivalent worth at i = MARR and
satisfies project requirements.

Rule 2. When revenues and economic benefits are


not present, select alternative that minimizes cost.

Engineering Economy
Basic types of alternatives

Cost Alternatives

Those alternatives with negative cash flows except


for a possible positive cash flow element from
disposal of assets at the end of the project’s useful
life.

Engineering Economy
Basic types of alternatives

Investment Alternatives

Those alternatives with initial (i.e., front-end) capital


investments(s) that produce positive cash flows from
increased revenue, savings through reduced costs,
or both.

Engineering Economy
Select the alternative that gives you the
most money!

For investment alternatives the PW of all cash flows


must be positive, at the MARR, to be attractive.
Select the alternative with the largest PW.

For cost alternatives the PW of all cash flows will be


negative. Select the alternative with the largest
(smallest in absolute value) PW.

Engineering Economy
Sample Problem - Cost alternative
Use an MARR of 12% and useful life of 4 years to
select between the cost alternatives below.

Alternative
C D
Capital investment -$80,000 -$60,000
Annual expenses -$25,000 -$30,000

Alternative D costs less than Alternative C, it has a


greater PW, so is better economically.
Engineering Economy
Practice Problem
Your local foundry is adding a new furnace. There are
several different styles and types of furnaces, so the
foundry must select from among a set of mutually exclusive
alternatives. Initial capital investment and annual expenses
for each alternative are given in the table below. None have
any market value at the end of its useful life. Using a
MARR of 15%, which furnace should be chosen?
Furnace
F1 F2 F3
Investment $110,000 $125,000 $138,000
Useful life 10 years 10 years 10 years
Total annual expenses $53,800 $51,625 $45,033

Engineering Economy
Using a MARR of 15%, which furnace
should be chosen?
Furnace
F1 F2 F3
Investment $110,000 $125,000 $138,000
Useful life 10 years 10 years 10 years
Total annual expenses $53,800 $51,625 $45,033

Engineering Economy
Study Period

A study period (or planning horizon) is the time period


over which MEAs are compared, and it must be
appropriate for the decision situation.

MEAs can have equal lives (in which case the study
period used is these equal lives), or they can have
unequal lives, and at least one does not match the
study period.

The equal life case is straightforward, and was used


in the previous two examples.

Engineering Economy
Alternatives with unequal lives

Repeatability assumption
• The study period is either indefinitely long or
equal to a common multiple of the lives of the
MEAs.
• The economic consequences expected
during the MEAs’ life spans will also happen
in succeeding life spans (replacements).

Coterminated assumption: uses a finite and


identical study period for all MEAs. Cash flow
adjustments may be made to satisfy alternative
performance needs over the study period.

Engineering Economy
Repeatability Assumption

1. The study period over which the alternatives are


being considered is either indefinitely long or
equal to a common multiple of the lives of the
alternatives.

2. The economic consequences that are estimated


to happen in an alternative’s initial useful life
span will also happen in all succeeding life
spans (replacements)

Engineering Economy
Cont.

Engineering Economy
Engineering Economy
Sample Problem - Repeatability

Engineering Economy
Engineering Economy
Engineering Economy
Coterminated Assumption

1. A finite and identical study period is used for all


alternatives
2. This planning horizon, combined with appropriate
adjustments to the estimated cash flows, puts the
alternatives on a common and comparable basis
3. Used when repeatability assumption is not
applicable
4. Approach most frequently used in engineering
practice

Engineering Economy
Coterminated Assumption
Guidelines when useful life(s) different in
length than study period
Useful life < study period

1. Cost alternatives -- each cost alternative must


provide same level of service as study period : 1)
contract for service or lease equipment for
remaining time; 2) repeat part of useful life of
original alternative until study period ends

2. Investment alternatives -- assume all cash flows


reinvested in other opportunities at MARR to end of
study period

Engineering Economy
Coterminated Assumption
Guidelines when useful life(s) different in
length than study period
Useful life > study period

Truncate(shorten) the alternative at the end of the


study period using an estimated market value. This
method assumes disposable assets will be sold at
the end of the study period at that value

Engineering Economy
IMPUTED MARKET VALUE
TECHNIQUE

1. When current marketplace data is unavailable for


an asset, it is sometimes necessary to estimate
the market value of an asset
2. Referred to as an imputed or implied market value
3. Estimating is based on logical assumptions about
the remaining life for the asset
MVT = [ EW at the end of year T of remaining capital
recovery amounts ] + [ EW at the end of year
T of original market value at the end of use ful
life ]
T < useful life
EW is equivalent worth at i = MARR
Engineering Economy
Engineering Economy
Engineering Economy
Sample Problem –Repeatability
and Coterminated

Engineering Economy
Cont.

Engineering Economy
Engineering Economy
Engineering Economy
Engineering Economy
Sample Problem –Repeatability
and Coterminated

Engineering Economy
Sample Problem –Repeatability
and Coterminated

Engineering Economy
Cont.

Engineering Economy

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