Engineering Economic Analysis 9 th Edition Chapter 6

Engineering Economic Analysis 9 th Edition Chapter 6 ANNUAL CASH FLOW ANALYSIS Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 1

Annual Cash Flow Calculations Resolving a Present Cost to an Annual Cost • Simplest case is to convert the PV to a series of EUAW (equivalent uniform annual worth) cash flows – [previously A]. • A=p(a/p, i, n) • A is -PMT in Excel® • Where there is salvage value • A will be reduced • A = F(A/F, i, n) Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 2

Annual Cash Flow Four Essential Points • EUAW = PW(A/P, i, n) • EUAW is • Decreased by a cost • Increased by a benefit • In Excel® use “-PMT” to calculate EUAW • (remember the minus sign) • For an irregular cash flow over the analysis period, first determine the PW then convert to EUAW Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 3

Annual Cash Flow Analysis Fixed input Fixed output Situation Amount of capital available fixed $ amount of benefit is fixed Criterion Maximize EUAW Neither fixed Neither Maximize capital nor $ EUAW benefits are Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. fixed 4

Analysis Period Considerations • Analysis period equal to alternative lives • Analysis period a common multiple of alternative lives • Analysis period for a continuing requirement • Some other period such as project life Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 5

Analysis Period Equal to Alternative Lives • Base the comparison on the life of the alternatives • This is the case we have most often considered in our examples • This is rarely the case in “real-life” organizations Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 6

Analysis Period a Common Multiple of Alternative Lives • When the lives of the equipment in the two alternatives varies, use a common multiple of the two lives. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 7

Analysis Period for a Continuing Requirement • Where the project will last forever (nothing does) use an infinite time period. • In most analyses, organizations often use a representatively long time period to get a reasonable estimate. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 8

Some Other Period Such As Project Life • Physical equipment usually has a useful life that is different from the project life. • In this case, use the project life as the analysis period. • This is the most common case in “real-life” organizations. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 9