By Muhammad Shahid Iqbal Module No. 09 Future Worth Method Engineering Economics

Introduction  Besides the technical, manufacturing, and marketing decisions that are needed, an engineer must become familiar with the necessity of economic decision making. It is used to analyze the economics of a situation so that combined with all the other issues, an intelligent decision can be made.  Like most aspects of a decision making process, there are many alternatives to the economic decisions.  In this method of comparison, the future worth of various alternatives will be computed.  The alternative with the maximum future worth of net revenue or  With minimum future worth of cost will be selected as the best alternative for implementation.

Revenue-Dominated cash flow analysis  Revenue-dominated cash flow analysis is given as: FW = - P(1 + i) n + R1(1 + i) n-1 + R2(1 + i) n-2 + ……………….+ Rj(1 + i) n-j +………….+ Rn + S P = Initial investment R j = Net revenue at the end of jth year. S = Salvage value at the end of nth year.  In this formula expenditures are assigned negative sign and revenues are assigned positive signs.  If there are more alternatives which are to be compared, then FW amount computed and compared, the alternative with the maximum Future worth amount should be selected as the best alternative.

 Cost-dominated cash flow analysis is given as: FW = P(I + i) n + C 1 (1 +i) n-1 + C 2 (1 +i) n-2 + …….…+ C j (1 +i) n-j +……….+ Cn - S P = Initial investment C j = cost of operation &maintenance at the end of jth year. S = Salvage value at the end of nth year.  In this formula expenditures are assigned positive sign and revenue a negative sign.  If there are more alternatives which are to be compared, FW amounts are computed and compared,  the alternative with the minimum Future worth amount should be selected as the best alternative. Cost-Dominated cash flow analysis

Practice Questions Consider the following two mutually exclusive alternatives at i = 18%, select the best alternative based on future worth method of comparison. End of the year Alternative A B

 A man owns a corner plot. He must decide which of the several alternatives to select in trying to obtain a desirable return on his investment. After much study and calculation, he decides that the two best alternatives are given in the following table:  Evaluate the alternatives based on the future worth method at i = 12% Practice Questions Build Gas StationSoft Ice Cream Stand First cost20,00,00036,00,000 Ann. Property Tax80,0001,50,000 Annual Income8,00,0009,80,000 Life of building20 Salvage value00

Practice Questions  The cash flows of two mutually exclusive alternatives are given as: all figures in (000)  Select the best alternative based on future worth method at i = 8% Option A Option B

M/S Krishna Castings Ltd. is planning to replace its annealing furnace. It has received tenders from three different original manufacturers of annealing furnace. The details are as follows: Which is the best alternative based on future worth method at i = 20% 123 Initial cost80,00,00070,00,00090,00,000 Life (years)12 Annual Operation & Maintenance cost 8,00,0009,00,0008,50,000 Salvage value after 12 years 5,00,0004,00,0007,00,000 Practice Questions

 A company must decide whether to buy machine A or machine B:  At 12% interest rate, which machine should be selected? Machine AMachine B Initial cost4,00,0008,00,000 Life (years)44 Annual Operation & Maintenance cost 40,0000 Salvage value2,00,0005,50,000