Engineering Economic Analysis

164 PRESENTWORTH ANALYSIS

SOLUTION.

It is easiest to calculate the yearly net revenue per unit before building the spreadsheet shown in

Figure 5-5. Those values are the yearly price minus the $120 of costs, which equals $80, $80,

$60, $40, and $20.

FIGURE 5-5 Present worth of a new product.

Summary

Present worth analysis is suitable for almost any economic analysis problem. But it is

particularly desirable when we wish to know the present worth of future costs and benefits.

And we frequently want to know the valuetoday of such things as income-producingassets,

stocks, and bonds.

For present worth analysis, the proper economic criteria are:

Fixed input

Fixed output

Neither input nor

output is fixed

Maximize the PW of benefits

Minimize the PW of costs

Maximize (PW of benefits- PW of costs)

or, more simply stated:

Maximize NPW

To make valid comparisons, we need to analyze each alternative in a problem over the same

analysis period or planning horizon. If the alternatives do not have equal lives, some

technique must be used to achieve a common analysis period. One method is to select an

of Alternative Lives Analysis Period a Common Multiple

is to select an analysis period and then compute end-of-analysis-period salvage values for

the alternatives.

Capitalized cost is the present worth of cost for an infinite analysis period(n=00).

Whenn= 00, the fundamental relationship isA=i P.Some form of this equation is used

whenever there is a problem with an infinite analysis period.

The numerous assumptions routinely made in solving economic analysis problems

include the following.

-- ----

A B C D E

1 12% i

(^2) Net Cash
(^3) Year Sales (M) Revenue Flow ($M)
4 0 -300
5 1 1.2^8096
6 2 3.5 80 280
7 3 7 60 420
8 4 5 40 200
9 5 3 20 60
(^10) D4+NPV(Al,D5:D9)= $469 Million