Engineering Economy IEN255 Chapter 5 - Annual Equivalent Worth Analysis  Another common method  Equal payments on an annual basis  Convert NPW to AE

Engineering Economy Annual Equivalent Worth Criterion  AE(I) = PW(I)(A/P,I,N) (5.1)

Engineering Economy Good or bad? (for revenue)  If AW(i) > 0, accept  If AW(i) = 0, indifferent  If AW(i) < 0, reject

Engineering Economy Cyclic flow pattern  figure 5.2

Engineering Economy Why do AE?  Consistency of report formats  Need for unit costs/profits  Unequal project lives  indefinite service period

Engineering Economy Capital vs Operating Costs  Operating Costs - incurred during operation (labor, matls, etc.) recurring costs  Capital Costs - purchasing assets (non-recurring)

Engineering Economy A Formula  CR(i) = I(A/P,i,N) - S(A/F,i,N) (5.2)  If I = initial cost and S = salvage value  we know that,  (A/F,i,N) = (A/P,i,N) - I  so rewriting,  CR(i) = I(A/P,i,N) - S[(A/P,i,N) - I]  and rearranging  CR(i) = (I-S)(A/P,I,N) +iS

Engineering Economy Example 5.3  figure 5.4

Engineering Economy Applications - Unit Profit/Cost Calculation  Determine the number of units to be produced each year over the life of the asset  Identify the cash flow series over life  calculate NPW  Divide equivalent AE by the number of units to be produced (if # varies each year, you need to convert them to equivalent annual units).

Engineering Economy Example 5.4

Engineering Economy Make or Buy  Determine the time span  determine the annual quantity of the part (or product)  Obtain the unit cost of purchasing the part from outside  determine (extra) equipment, labor, etc. required to make the part.  Estimate the cash flows with the make option  compute AE of producing the part over the time span  compute the unit cost  choose minimum cost

Engineering Economy Example 5.6

Engineering Economy Break even point (cost reimbursement)  unit of use calculation  depreciation - loss in value  figure 5.6

Engineering Economy Mutually exclusive projects  Analysis period equals project lives  Example 5.8  operating cost per kWh per unit  determine total input power for both motor types  determine total kWh per year for both motor types  determine annual energy costs for both motor types  determine capital costs for both motor types  determine total AE (= capital cost + annual energy cost)  then calculate unit cost per kWh based on output power  determine savings per operating hour for switching

Engineering Economy Break even

Engineering Economy Analysis periods differs from lives  Service of the selected alternative is required on a continuous basis  each alternative will be replace by an identical alternative  Iff these two criteria are true we can solve for only initial life span. (saves time from doing LCM)

Engineering Economy Example 5.9  Quick way for example 4.14  figure 5.8

Engineering Economy Design economics  AE(i) = a +bx +c/x (5.5)  minimize and (5.6)

Engineering Economy IEN255 Summer’99 Chapter 3, 4 & 5 Test #2  Test#2 Over Chapters 3 (commercial loans (3.6) and bonds (3.7)), 4, and 5.  Don’t forget chapter 5!!!!  1 hour and 30 minutes for the test  done at 3:30!