Engineering Economic Analysis

Applying Present Worth Techniques 153

Alternative 1

Salvage TerminalValueat

Value End of 10thYear

t t

0-1-2-3-4-5-6-7-8-9-10-11-12-13-14

1

Initial Replacement

1

!

Cost Cost II

I. 7-yearLife I 7-yearLife

I

Alternative 2

Terminal Value at

End of 10th Year

. t
0-1-2-3-4-5-6-7-8-9-10-11-12-13

1

1'

. Initial i
Cost II
13-year Life
lO-year Analysis Period
FIGURE 5.1 Superimposing a lO-year analysis period on 7- and 13-year alternatives.

A diesel manufacturer is considering the two alternative production machines graphically depicted

in Figure 5-1. Specific data are as follows.

Initial cost

Estimated salvage value at end of useful life

Useful life of equipment, in years

Alt. 1

$50,000

$10,000

7

Alt. 2

$75,000

$12,000

13

The manufacturer uses an interest rate of 8% and wants to use the PW method to compare these

alternatives over an analysis period of 10 yeats.

Estimated market value, end of lO-year.analysis period

Alt. 1

$20;000

Alt. 2

$15,000

SOLUTION

In this case, the decision maker is setting the analysis period at 10 years rather than acceptiug a

common multiple of the lives of the alternatives, or assuming that the period of needed service

is infinite (to be discussed in the next section). This is a legitimate approach-perhaps the diesel

manuf~cturer will be phasing out this model at the end of the 10-year period. In.any event, we

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