1. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.1 Engineering Economic Analysis 9th Edition Chapter 5 PRESENT WORTH ANALYSIS

2. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.2 Where we are going in this chapter: Understanding economic criteria Applying present worth techniques Assumptions in solving economic analysis problems Where we have been: Equivalence concept Cash flows Compound interest factors Jerome P. Lavelle: In general I like this type of slide, it provides a map of the material in terms of past coverage and future materials. My only comment is that if we chose to use this approach as a first slide, we need to do it for all chapters. Also, I believe that we need “chapter learning objectives” incorporated into all of the chapter slides (however, we don’t yet have these for any chapters). Given all of this, and for consistency sake, I would say for now we need to eliminate this slide. Jerome P. Lavelle: In general I like this type of slide, it provides a map of the material in terms of past coverage and future materials. My only comment is that if we chose to use this approach as a first slide, we need to do it for all chapters. Also, I believe that we need “chapter learning objectives” incorporated into all of the chapter slides (however, we don’t yet have these for any chapters). Given all of this, and for consistency sake, I would say for now we need to eliminate this slide.

3. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.3 Economic Criteria SituationCriterion Fixed inputMaximize output Fixed outputMinimize input Neither fixedMaximize difference (output-input) Projects are judged against an economic criterion.

4. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.4 Economic Criteria Restated Present Worth Techniques SituationCriterion Fixed inputAmount of capital available fixed Maximize present worth of benefits Fixed output$ amount of benefit is fixed Maximize present worth of costs Neither fixedNeither capital nor $ benefits are fixed Maximize net present worth (NPV)

5. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.5 Economic Criteria - Example Purchasing Building Space AltSituationExampleCriterion AFixed input $150,000 max Maximum square feet of building for the price BFixed output 20,000 ft 2 building available Negotiate for minimum cost/ft 2 CNeither fixed $150,000 max 15-20,000 ft 2 required Simultaneously negotiate for maximum building size & minimum cost/ft 2

6. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.6 Applying Present Worth Techniques Analysis period must be considered Useful life of the alternative equals the analysis period Alternatives have useful lives different from the analysis period The analysis period is infinite, n =  Jerome P. Lavelle: Would it be useful to have a slide that demonstrates the mechanics of calculating the PW by hand using the tabled factors and equations too? Jerome P. Lavelle: Would it be useful to have a slide that demonstrates the mechanics of calculating the PW by hand using the tabled factors and equations too?

7. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.7 Useful Lives Equal the Analysis Period 1.Require a project to last five years. 2.The equipment and tooling will last five years. 3.Calculate the PW or NPW over a five year span and junk the equipment and tooling at the end of the five years. Examples 5-1, 2, 3, & 4

8. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.8 Useful Lives Different From the Analysis Period 1.Require a project to last 10 years. 2.The equipment and tooling will last five years. 3.Calculate the PW or NPW over a 10 year span. 1.Purchase new equipment and tooling twice, at the beginning of year one and six. 2.Junk the equipment and tooling at the end of each five year period. Jerome P. Lavelle: We need a slide that mentions the Repeatability Assumption for handling these problems – definition and parameters Jerome P. Lavelle: We need a slide that mentions the Repeatability Assumption for handling these problems – definition and parameters Based on example 5-3

9. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.9 Infinite Analysis Period Capitalized Cost For: n =  A = Pi Then: Capitalized cost P = A/i This requires first computing the future cost into an equivalent A. Examples 5 - 5 & 6

10. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.10 Multiple Alternatives Where more than one alternative exists, we generally want to compare the alternatives in a single table. The goal is to develop a single table that automates as many of the calculations as possible. Jerome P. Lavelle: The text of this table is quite difficult to read, it seems some of the row widths need to be readjusted Jerome P. Lavelle: The text of this table is quite difficult to read, it seems some of the row widths need to be readjusted Examples 5 - 7, 8, 9 & 10

11. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.11 Assumptions in Solving Economic Analysis Problems End-of-year convention (simplifies calculations) Viewpoint (generally the firm) Sunk costs (past has no bearing) Borrowed money (consider investing only) Effect of inflation (prices are not stable) Income taxes (must be considered for realism) Jerome P. Lavelle: Should Assumptions slide come at the beginning of the chapter versus the end? In looking back over the chapter I think we need a few slides inserted on the theory or pedagogy involved in each case of the use of Present Worth. Jerome P. Lavelle: Should Assumptions slide come at the beginning of the chapter versus the end? In looking back over the chapter I think we need a few slides inserted on the theory or pedagogy involved in each case of the use of Present Worth.