Engineering Fundamentals: An Introduction to Engineering, 4th ed.c

672 Chapter 20 Engineering Economics

We can use Table 20.8 to look up the interest – time factor values, which leads to

Therefore, if today, you put aside $8271.32 in an account that pays 8% interest, you can with-

draw $1000 in the next four years, and $3000 in five years, and $5000 in seven years.

20.9 Choosing the Best Alternatives–Decision Making

Up to this point, we have been discussing general relationships that deal with money, time, and

interest rates. Let us now consider the application of these relationships in an engineering set-

ting. Imagine that you are assigned the task of choosing which air-conditioning unit to purchase

for your company. After an exhaustive search, you have narrowed your selection to two alter-

natives, both of which have an anticipated 10 years of working life. Assuming an 8% interest

rate, find the best alternative. Additional information is given in Table 20.10. The cash-flow dia-

grams for each alternative are shown in Figure 20.6.

Here we will discuss three different methods that you can use to choose the best econom-

ical alternative from many options. The three methods are commonly referred to as (1) pres-

ent worth (PW) or present cost analysis, (2) annual worth (AW) or annual cost analysis, and

(3) future worth (FW) or future cost analysis. When these methods are applied to a problem,

they all lead to the same conclusion. So in practice, you need only apply one of these methods

to evaluate options; however, in order to show you the details of these procedures, we will apply

all of these methods to the preceding problem.

Present Worth or Present Cost Analysis With this approach you compute the total present

worth or the present cost of each alternative and then pick the alternative with the lowest present

PW$8271.32

PW 1100021 3.31212684 2  1300021 0.68058320 2  1500021 0.58349040 2

1 P /F, 8%, 7 2 0.58349040

1 P /F, 8%, 5 2 0.68058320

1 P /A, 8%, 4 2 3.31212684

TABLE 20.10 Data to Be Used in Selection of an Air-Conditioning Unit

Criteria Alternative A Alternative B

Initial cost $100,000 $85,000

Salvage value after 10 years $10,000 $5000

Operating cost per year $2500 $3400

Maintenance cost per year $1000 $1200

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