Engineering Economic Analysis

Problems 293

SUMMARY

In this chapter, we have looked at four new analysis techniques.

PROBLEMS

Future worth: When the comparison between alternatives will be made in the future,

the calculation is called future worth. This is very similar to present worth, which

is based on the present, rather than a future point in time.

Benefit-cost ratio analysis:This technique is based on the ratio of benefi,tsto costs

using either present worth or annual cash flow calculations. The method is graph-

ically similar to present worth analysis. When neither input nor output is fixed,

incremental benefit-cost ratios (~B/ ~C) are required. The method is similar in

this respect to rate of return analysis. Benefit-cost ratio analysis is often used at

the various levels of government.

Paybackperiod: Here we definepayback as the period of time required for the prQfit

or other benefits of an investment to equal the cost of the investment. Although

simple to use and simple to under~tand, payback is a poor analysis technique

for ranking alternatives. While it provides a measure of the speed of the re-

turn of the investment, it is not an accurate measure of the profitability of an.

investment.

Sensitivity and breakeven analysis:These techniques are used to see how sensitive

a decision is to estimates for the various parameters. Breakeven analysis is dOJ?e

to locate conditions under which the alternatives are equivalent. This is often

presented in the form of breakeven charts. Sensitivity analysis is an examination

of a range of values for some parameters to determine their effect on a particular

decision.

9-1 For a 12% interest rate, compute the value ofFin the
following diagram.

9-2 ComputeFfor the following diagram.

200

f

r -2-3-t-'

1

0-1 t

100

100 100 100

t t t

0-1-2-3-4-5-6

i=lO% + + +

F^100100 F

I

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