Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.1 Engineering Economic Analysis 9th Edition Chapter 6 ANNUAL CASH FLOW ANALYSIS

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.2 Annual Cash Flow Calculations Resolving a Present Cost to an Annual Cost Simplest case is to convert the PV to a series of EUAW (equivalent uniform annual worth) cash flows – [previously A]. A=p(a/p,i,n) A is -PMT in Excel ® Where there is salvage value A will be reduced A = F(A/F,i,n)

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.3 Annual Cash Flow Four Essential Points 1.EUAW = PW(A/P,i,n) 2.EUAW is 1.Decreased by a cost 2.Increased by a benefit 3.In Excel® use “-PMT” to calculate EUAW 1.(remember the minus sign) 4.For an irregular cash flow over the analysis period, first determine the PW then convert to EUAW

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.4 Annual Cash Flow Analysis SituationCriterion Fixed inputAmount of capital available fixed Maximize EUAW Fixed output$ amount of benefit is fixed Maximize EUAW Neither fixedNeither capital nor $ benefits are fixed Maximize EUAW

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.5 Analysis Period Considerations 1.Analysis period equal to alternative lives 2.Analysis period a common multiple of alternative lives 3.Analysis period for a continuing requirement 4.Some other period such as project life

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.6 Analysis Period Equal to Alternative Lives Base the comparison on the life of the alternatives This is the case we have most often considered in our examples This is rarely the case in “real-life” organizations

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.7 Analysis Period a Common Multiple of Alternative Lives When the lives of the equipment in the two alternatives varies, use a common multiple of the two lives.

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.8 Analysis Period for a Continuing Requirement Where the project will last forever (nothing does) use an infinite time period. In most analyses, organizations often use a representatively long time period to get a reasonable estimate.

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.9 Some Other Period Such As Project Life Physical equipment usually has a useful life that is different from the project life. In this case, use the project life as the analysis period. This is the most common case in “real-life” organizations.