Engineering Economic Analysis

320 UNCERTAINTY IN FUTURE EVENTS

PW '"" $590,915

7: Net Revenue

= $0

PW= $46,640

1: Build New

Product

4: Net Revenue

Year 1 '""$100K

8: Revenue

$100Klyear

PW== $1,067,000

5: Net Revenue

Year 1 ~ $200K Year 2...n

PW= $2,291,660

6: Net Revenue

Year 1= $4QOK

9: Net Revenue

I::'1:17'11 ~ $600K/year

fl:J#1First costpW1 = $2,120,800=$800K

(=0

FIGURE 10-5 Solved decision tree for new product.

(= 2, ...,00

I , : I. I I J I

I,

10: Net Revenue

= $400K/year

Example 10-10 is representative of many problems in engineering economy. The main

criteria is maximizing PW or minimizing EUAC. However, as shown in Example 10-11,

other criteria, such as risk, are used in addition to expected value.

i,

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Consider the economic evaluation of collision and comprehensive(fire, theft, etc.) insurance for

a car. This insurance is typically required by lenders, but once the car has been paid for, this

ihsurance is not required. (Liabilityinsuranceis'typically a legal requirement.)

Figure 10-6 begins with a decision node with two alternativesfor the next year. Insurance

~il1 ~ost $800 per year with.a $500 d~~~ctibleif a loss occurs.The other option i&to self.-insure,

whichmeans to go without buying cQ;u.1s1onana comprebensivein&urance.Tl1enif alosroc~ut=r;= l'.

L - - ......- .. ...- - - _III!I _III__~~'