Engineering Economic Analysis

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178 ANNUAL CASH FLOW ANALYSIS

This chapter is devotedto annual cash flow analysis-the second of the three major analysis

techniques. As we've said, alternatives must be resolved into a fonn that allows them to be

compared. This means we must use the equivalence concept to convert from a cash flow

representing the alternative into some equivalent sum or equivalent cash flow.

With present worth analysis, we resolved an alternative into an equivalent cash sum.

This might have been an equivalent present worth of cost, an equivalent present worth of

benefit, or an equivalent net present worth. Here we compare alternatives based on their

equivalentannualcash flows.Depending on the particularsituation,we may wish to compute

the equivalent unifonn annual cost (EUAC),the equivalentunifonn annual benefit (EUAB),

or their difference (EUAB - EUAC).

To prepare for a discussion of annual cash flow analysis, we will review some annual

cash flow calculations, then examine annual cash flow criteria. Following this, we will

proceed with annual cash flow analysis.

ANNUAL CASH FLOW CALCULATIONS

Resolving a Present Cost to an Annual Cost

Equivalencetechniques were used in prior chaptersto convertmoney,at one point in time, to

some equivalent sum or series. In annual cash flow analysis, the goal is to convert money to

an equivalentunifonn annual cost or benefit.The simplestcase is to convert a present sumP

to a series of equivalentunifonn end-of-periodcash flows.This is illustrated in Example 6-1.

A student bought $1000 worth of home furniture. If it is expected to last 10 years, what will the

equivalent unifonn annual cost be if interest is 7%?

0-1-2-3-4-5--6-7-8-9-10

1!!!! n!==10years!!!!!

P= 1000 i=7%

SOLUTION'

Equivalent unifonn annual cost=P (A j P, i, n)

• 1000(Aj P,7%, 10)

= $142.40

Equivalentunifonn annual cost is $142.40.

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Treatment of Salvage Value..

When there is a salvage value, or future value at the end of the usefu1life of an asset, the

result is to decrease the equivalent unifonn annual cost.

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