Scribd Logo
Upload

Welcome to Scribd!

  • 38 views

    Engg Econ Lecture 3.4 - Annual Worth

    Uploaded by

    Charles Demaala
    The document summarizes the annual worth method for evaluating engineering project economics. It describes how the annual worth is the equal annual cash flows that are equivalent to the actual project cash flows at the minimum attractive rate of return. It is calculated as the annual equivalent revenues minus annual equivalent expenses less the annual equivalent capital recovery. The capital recovery represents both the loss in asset value over time and interest on the capital invested. The annual worth method is relatively easy to interpret compared to other methods as it uses annual cash flows similar to income statements. A positive annual worth means the project returns more than the minimum rate of return and is economically attractive.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    Engg Econ Lecture 3.4 - Annual Worth

    Uploaded by

    Charles Demaala
    38 views23 pages
    The document summarizes the annual worth method for evaluating engineering project economics. It describes how the annual worth is the equal annual cash flows that are equivalent to the actual project cash flows at the minimum attractive rate of return. It is calculated as the annual equivalent revenues minus annual equivalent expenses less the annual equivalent capital recovery. The capital recovery represents both the loss in asset value over time and interest on the capital invested. The annual worth method is relatively easy to interpret compared to other methods as it uses annual cash flows similar to income statements. A positive annual worth means the project returns more than the minimum rate of return and is economically attractive.

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document summarizes the annual worth method for evaluating engineering project economics. It describes how the annual worth is the equal annual cash flows that are equivalent to the actual project cash flows at the minimum attractive rate of return. It is calculated as the annual equivalent revenues minus annual equivalent expenses less the annual equivalent capital recovery. The capital recovery represents both the loss in asset value over time and interest on the capital invested. The annual worth method is relatively easy to interpret compared to other methods as it uses annual cash flows similar to income statements. A positive annual worth means the project returns more than the minimum rate of return and is economically attractive.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    38 views23 pages

    Engg Econ Lecture 3.4 - Annual Worth

    Uploaded by

    Charles Demaala
    The document summarizes the annual worth method for evaluating engineering project economics. It describes how the annual worth is the equal annual cash flows that are equivalent to the actual project cash flows at the minimum attractive rate of return. It is calculated as the annual equivalent revenues minus annual equivalent expenses less the annual equivalent capital recovery. The capital recovery represents both the loss in asset value over time and interest on the capital invested. The annual worth method is relatively easy to interpret compared to other methods as it uses annual cash flows similar to income statements. A positive annual worth means the project returns more than the minimum rate of return and is economically attractive.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 23

    Engineering Economics

    Lesson 3
    Basic Economy Study Methods
    Sullivan, et al. (2015). Engineering Economy, 16th ed., Chapter 5 (pp. 186-239)
    Contents
    1. The Minimum Attractive Rate of Return
    2. The Present Worth Method
    3. The Future Worth Method
    4. The Annual Worth Method
    5. The Internal Rate of Return Method
    6. The External Rate of Return Method
    7. The Payback Period
    8. The Benefit/Cost Ratio Method
    Engineering Economics
    Lecture 3.4
    The Annual Worth Method
    Sullivan, et al. (2015). Engineering Economy, 16th ed., pp. 197-202
    The Annual Worth (AW) Method
    • The of a project is an equal annual series of peso amounts, for a
    stated study period, that is equivalent to the cash inflows and
    outflows at an interest rate that is generally the MARR.
    • Hence, the of a project is annual equivalent revenues or savings ()
    minus annual equivalent expenses (), less its annual equivalent
    capital recovery () amount, which is defined in Equation (5-5).
    • An annual equivalent value of , , and is computed for the study
    period, , which is usually in years.
    AW vs PW vs FW
    • In equation form, the , which is a function of , is

    • Also, we need to notice that the of a project is equivalent to its and .


    • That is, , and .
    • Hence, it can be easily computed for a project from these other
    equivalent values.
    • As long as the evaluated at the MARR is greater than or equal to zero,
    the project is economically attractive; otherwise, it is not.
    • An of zero means that an annual return exactly equal to the MARR
    has been earned.
    • Many decision makers prefer the method because it is relatively easy
    to interpret when they are accustomed to working with annual
    income statements and cash-flow summaries.
    The Capital Recovery (CR)
    • The amount for a project is the equivalent uniform annual cost of the
    capital invested.
    • It is an annual amount that covers the following two items:
    1. Loss in value of the asset
    2. Interest on invested capital (i.e., at the MARR)
    • Example:
    • Consider a device that will cost $10,000, last five years, and have a salvage
    (market) value of $2,000.
    • Thus, the loss in value of this asset over five years is $8,000.
    • Additionally, the MARR is 10% per year.
    The Capital Recovery (CR)
    • It can be shown that, no matter which method of calculating an
    asset’s loss in value over time is used, the equivalent annual amount
    is the same.
    • Ex. If a uniform loss in value is assumed ($8,000/5 years = $1,600 per
    year), the equivalent annual CR amount is calculated to be $2,310
    [Table 5-1].
    effective interest rate per interest period; number of interest periods; uniform series amount (occurs at the end of each interest period); future equivalent; present equivalent
    The Capital Recovery (CR)
    • There are several convenient formulas by which the amount (cost)
    may be calculated to obtain the result in Table 5-1.
    • Probably the easiest formula to understand involves finding the
    annual equivalent of the initial capital investment and then
    subtracting the annual equivalent of the salvage value.∗
    • Thus,
    ∗ In some cases, the
    investment will be
    spread over several
    periods. In such

    The Capital Recovery (CR) situations, I is the


    PW of all
    investment amounts.
    • Cont..
    The Equivalent Uniform Annual Cost
    (EUAC)
    • Recall:

    • When revenues are absent in Equation (5-4), we designate this metric


    as and call it “equivalent uniform annual cost.”
    • A low-valued is preferred to a high-valued .
    end

    You might also like