Engineering Economic Analysis

286 OTHER ANALYSISTECHNIQUES

Consider a project that may be constructed to full capacity now or may be constructed in two

stages.

Construction Costs

Two-stage construction

Construct first stage now

Construct second stage

nyears from now

Full-capacity construction

Construct full capacity now

$100,000

120,000

140,000

Other Factors

1. All facilities will last for 40 years regardless of when they are installed; after 40 years,
   they will have zero salvage value.


2. The annual cost of operation and maintenance is the same for both two-stage construction
   and full-capacity construction.


3. Assume an 8% interest rate.

Plot "age when second stage is constructed" versus "costs for both alternatives." Mark the

breakevenpoint on your graph. What is the sensitivity of the decisionto second-stageconstruction

16 or more years in the future? '

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Since we are dealing with a common analysis period, the calculations J;Ilaybe either annual cost

or present worth. Present worth calculations appear simpler and are used here.

Construct Full Capacity Now

PW of cost= $140,000

Two-Stage Construction

First stage constructed now and the second stage to beconstructednyears hence...Compute the

PW of cost for several values ofn(years).

PW of cost=100,000 + 120,000(P IF,8%,n)

n=5

n= 10

n -20

n=30

PW 100,000+ 120,000(0.6806) -- $181,700

PW= 100,000+120,000(0.4632)' J55,600

PW 100,900 + 120,000(0.+145) --: 125,700

pw" .100,00.0-h;120,.000(0..0994,)...J.ll.,2iliL _ u ~.____'."-"_.~. <po ,', "'-"-'-"-"~''''~~ .. '," '--r:,: - -""---',.: :..,.".,..."--~ -' - - '_. 'M1!l't._ C!IIIii

These data are plotted in the form of a breakevell chart in Figure9..5.

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