T7 P2 Economic Analyses

Economic Estimation WAG = wild a… guess SWAG = sophisticated WAG WAGNER = WAG not easily refuted

Present Worth Analysis “Lump sum” future costs Annualized costs

Example - PW Analysis A firm needs to expand its manufacturing capacity. The present facility could be expanded to meet the needs at a cost of $1.2 million. Waste treatment costs for the expanded facility would be about $184,000 per year. An entirely new facility that would reduce waste production could be built for approximately $3.35 million. The new facility would have an estimated annual waste treatment cost of $56,000. Assume a 20-year useful life for the facilities and a zero salvage value for both. If the prevailing interest rate is 10%, which alternative is preferable?

Benefit/Cost Analysis B = benefits C = costs D = disbenefits or negative benefits

Example - B/C Analysis

Cost Effectiveness Analysis Method: –Identify factors –Assign weights –Assign relative effectiveness score –Calculate effectiveness = (weighted sum of option) – (weighted sum of do-nothing option) –Plot cost vs. effectiveness

Example – CE Analysis A manufacturing plant is faced with the loss of a hazardous waste disposal site. It is evaluating three strategies. –Ship waste to a distant site. –Construct major in-plant changes to reduce hazardous waste generation. –Rebuild the plant using a new process that does not generate hazardous waste.

Example continued FactorWeight Effectiveness Presen t ABC Short-term liability2-3-2 Long-term liability Compliance Production impact PR Regulatory impact1-3-20

Example continued

Payback Period