Engineering Economic Analysis

150 PRESENTWORTH ANALYSIS

Allied

PW of cost=1600 - 325(P/F,7%, 5)=1600 - 325(0.7130)

= 1600 - 232 =$1368

Since it is only thedifferences between alternativesthat are relevant, maintenance co~ts

may be left out of.the economic analysis. Although the PWs of cost for all the alternatives are

nearly identical, we would, nevertheless, choose the one with minimum present worth of cost

unless there were other tangible or intangible differences that would change the decision. Buy the

Speedy equipment.

A finn is trying to decide which of two weighing scales it should install to check a package-filling

operation in the plant. The ideal scale would allow better control of the filling operation and result

in less overfilling. If both scales have lives equal to the 6-year analysis period, which on~ should

be selected? Assume an 8% interest rate.

Alternatives

Atlas scale

Tom Thumb scale

Cost

$2000

3000

Uniform

Annual Benefit

$450

600

End-of-Useful-Life

Salvage Value

$100

700

~OlUTION .'.

Atlas Scale

PW of benefits - PW of cost=450(P/A,8%, 6) + 100(P/F,8%, 6)- 2000

=450(4.623) + 100(0.6302) - 2000

=2080+ 63--'-'2000= $143

Tom Thumb Scale

PW of benefits - PW'of cost=600(P/A,8%, 6) +700(P /F, 8%"p)~ 3000

=600(4.623) + 700(0.6302) - 3000

= 2774 + 441 - 3000. $215

I

II

I

The salvage value of th~ scale, it .shol}ld be noted,!s ;sjmpLy tre<l,tedas..oanotherbenefit of.::

the alternative. Since the criterion is to maximize tbe"present worth of' benefits minus the present

worth of cost, the preferred alternative is the Tom Thumb scale.

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