University of Bahrain

College of Engineering
Department of Mechanical Engineering

CHAPTER 5 MENG 300

S2 , 2022 / 2023

Present Worth
Analysis
Dr. Saraa Al -asadi
s a l a s a d i@u o b .e d u .b h

b y Q a s Al a s a d i
Purpose Learning Sections
Outcomes

CONTENT
Chapter Tutorial
Summary Session
Purpos e
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Purpose

Utilize different
present worth
techniques to
evaluate and select
alternatives .
Le arning
Outcome s
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Page 02 of 15
 Learning Outcomes
TOPIC SECTION OUTCOME
Identify mutually exclusive and
Formulating
alternatives
5.1 independent projects; define revenue and
cost alternatives.

PW of equal - life 5.2

Select the best of equal - life alternatives
alternatives using present worth analysis.

PW of different - Select the best of different - life

life alternatives
5.3 alternatives using present worth analysis.

FW analysis 5.4 Select the best alternative using future

worth analysis.

Select the best alternative using

CC analysis 5.5 capitalized cost (CC) analysis.
 5.1
Formulating
Alte rnative s

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5.1 Formulating Alternatives

Mutually exclusive alternatives : Only one of the proposals can be

selected. For terminology purposes, each viable proposal is
called an alternative.
Independent projects : More than one proposal can be selected.
Each viable proposal is called a project.

The DN alternative or project means that the current approach is

maintained; nothing new is initiated. No new costs, revenues, or
savings are generated.
Mutually exclusive alternatives compete with one another and
are compared pairwise.

Independent projects are evaluated one at a time and compete

only with the DN project.
 5.1 Formulating Alternatives

Mutually exclusive alternatives: Only one of the proposals can be selected. For
terminology purposes, each viable proposal is called an alternative.

Independent projects: More than one proposal can be selected. Each viable
proposal is called a project.

The DN alternative or project means that the current approach is maintained;

nothing new is initiated. No new costs, revenues, or savings are generated.

Mutually exclusive alternatives compete with one another and are compared
pairwise.

Independent projects are evaluated one at a time and compete only with the
DN project.
5.1 Formulating Alternatives

Each alternative generates cost (cash outflow) and

Revenue revenue (cash inflow) estimates, and possibly
savings, also considered cash inflows . Revenues
can vary for each alternative .

Each alternative has only cost cash flow estimates .

Cost Revenues or savings are assumed
alternatives ; thus they are not dependent
equal for all
upon the
alternative selected . These are also referred to as
service alternatives .
 5.2
Pre s e nt Worth
Analys is of Equal- Life
Alte rnative s
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 5.2 Present Worth Analysis of Equal-Life
Alternatives

If the alternatives have the same capacities for the same time
period (life), the equal - service requirement is met. Calculate the
PW value at the stated MARR for each alternative.
One If PW <= 0 , the requested MARR is met or exceeded and the
alternative alternative is economically justified.

Two or more Select the alternative with the PW that is numerically largest, that is,
alternatives less negative or more positive. This indicates a lower PW of cost for
cost alternatives or a larger PW of net cash flows for revenue
alternatives.
One or more
independent
Select all projects with PW >= 0 at the MARR.
projects
 5.2 Present Worth Analysis of Equal-Life
Alternatives
If the alternatives One Two or more
have the same One or more
alternative alternatives
capacities for the independent
same time period projects
(life), the equal - If PW >= 0 , the Select the alternative
service requirement is requested with the PW that is Select all
met. Calculate the PW MARR is met numerically largest, projects with
value at the stated or exceeded that is, less negative or PW >= 0 at
MARR for each and the more positive. This the MARR.
alternative. alternative is indicates a lower PW of
economically cost for cost
justified. alternatives or a larger
PW of net cash flows
for revenue
alternatives.
 5.2 Present Worth Analysis of Equal-Life
Alternatives
Exa m p le 5 .1
A university lab is a research contractor to NASA for in-space fuel cell systems that
are hydrogen- and methanol-based. During lab research, three equal-service
machines need to be evaluated economically. Perform the present worth analysis
with the costs shown below. The MARR is 10% per year.
 5.2 Present Worth Analysis of Equal-Life
Alternatives
Exa m p le 5 .1

PwE = −4500 − 900(P∕A,10%,8) + 200(P∕F,10%,8)

= $−9208

PwG = −3500 − 700(P∕A,10%,8) + 350(P∕F,10%,8)

= $−7071

PwS = −6000 − 50(P∕A,10%,8) + 100(P∕F,10%,8)

= $−6220

The solar-powered machine is selected since the PW of its

costs is the lowest; it has the numerically largest PW value.
 5.2 Present Worth Analysis of Equal-Life
Alternatives Exe rc is e 1
A firm is considering which of two mechanical devices to install to reduce costs. Both devices
have useful lives of 5 years and no salvage value. Device A costs €1000 and can be expected
to result in €300 savings annually. Device B costs €1350 and will provide cost savings of
e300 the first year but will increase €50 annually, making the second-year savings €350, the
third-year savings €400, and so forth. With interest at 7%, which device should the firm
purchase?

De vic e A De vic e B

Device B is selected
, due to numerically
largest PW value.
PWA = −1,000 +300(P∕A,7%,5) PWA = −1,350 + [300(P∕A,7%,5) + 50(P∕G,7%,5)]
= € 230.059 = € 262.392
 5.2 Present Worth Analysis of Equal-Life
Alternatives Exe rc is e 2
A firm is trying to decide which of two weighing scales it should install to check a package-
filling operation in the plant. The ideal scale would allow better control of the filling operation,
hence less overfilling. If both scales have lives equal to the 6-year analysis period, which one
should be selected? Assume an 8% interest rate.

Atla s To m

Pw = −2,000 +450(P∕A,8%,6) +100(P∕F,8%,6) Pw = −3,000 +600(P∕A,8%,6) +700(P∕F,8%,6)

= € 143.3128 = € 214.8465 selected
 5.3
Pre s e nt Worth
Analys is of Diffe re nt-
Life Alte rnative s
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 5.3 Present Worth Analysis of Different-Life
Alternatives
The PW of the alternatives must be compared over the same number of years
and must end at the same time to satisfy the equal - service requirement.

Compare the PW of alternatives over a period of time equal to the

LCM least common multiple (LCM) of their estimated lives.

Compare the PW of alternatives using a specified study

Study period of n years. This approach does not necessarily
consider the useful life of an alternative.
Period
The study period is also called the planning horizon
 5.3 Present Worth Analysis of Different-Life
Alternatives
The assumptions when using the LCM approach
are that
The service provided will
be needed over the
1 entire LCM years or
more.

The selected alternative

can be repeated over
each life cycle of the
LCM in exactly the same
manner.
2 3 Cash flow estimates are
the same for each life
cycle.
 5.3 Present Worth Analysis of Different-Life
Alternatives
Exa m p le 5 .3
National Homebuilders, Inc. plans to purchase new cut-and-finish equipment. Two
manufacturers offered the following estimates

a) Determine which vendor should be selected on the basis of a PW comparison, if

the MARR is 15% per year.
b) National Homebuilders has a standard practice of evaluating all options over
a 5-year period. If a study period of 5 years is used and the salvage values are
not expected to change, which vendor should be selected?
5.3 Present Worth Analysis of Different-Life
Alternatives Exa m p le 5 .3 a )

PwA = −15,000 − 15,000(P∕F,15%,6)

+1000(P∕F,15%,6)−15,000(P∕F,15%,12)
+ 1000(P∕F,15%,12) + 1000(P∕F,15%,18)
−3,500(P∕A,15%,18)

= $−45,036

PwB = −18,000 − 18,000(P∕F,15%,9)

+2000(P∕F,15%,9)+ 2000(P∕F,15%,18)
− 3100(P∕A,15%,18)

= $−41,384 selected
 5.3 Present Worth Analysis of Different-Life
Alternatives Example 5.3 a) Easier way to solve the LCM
Machine A
Apply LCM

−27,813.3618 −27,813.3618 −27,813.3618

Pw = −27,813.3618 −27,813.3618 (P/F, 15%,6) −27,813.3618 (P/F, 15%,12)

PW = −27,813.3618
= $ −45,036.3618

Machine B
Apply LCM

−32,223.3853 −32,223.3853

Pw = −32,223.3853 −32,223.3853 (P/F, 15%,9) selected

PW = −32,223 .3853 = $ −41,383.2826
 5.3 Present Worth Analysis of Different-Life
Alternatives Exa m p le 5 .3 b )

Ma c h in e A Ma c h in e B

PwB = −18,000 − 3100(P∕A,15%,5)

PwA = −15,000 − 3500(P∕A,15%,5) + 2000(P∕F,15%,5)
+ 1000(P∕F,15%,5)
= $−27,397
= $−26,236 selected

Notice that our selection has become the other machine

 5.3 Present Worth Analysis of Different-Life
Alternatives
Exe rc is e 1
A diesel manufacturer is considering the two alternative production machines
graphically depicted in Figure 5-1. Specific data are as follows:

The manufacturer uses an interest rate of 8% and wants to use the PW method to
compare these alternatives over an analysis period of 10 years.
 5.3 Present Worth Analysis of Different-Life
Alternatives
Exe rc is e 1
Alte rn a tive 1

Pw1 = −50,000
+( 10,000 - 50,000)(P∕F,8%,7)
+ 20,00(P∕F,8%,10)

= $ −64,075.7461 selected

Alte rn a tive 2
Pw2 = −75,000
+15,000 (P∕F,8%,10)

= $ −68,052.0977
 5.4
Future Worth
Analys is
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 5.4 Future Worth Analysis
Exa m p le 5 .5
A British food distribution conglomerate purchased a Canadian food store chain for
£75 million 3 years ago. There was a net loss of £10 million at the end of year 1
of ownership. Net cash flow is increasing with an arithmetic gradient of £+5 million
per year starting the second year, and this pattern is expected to continue for the
foreseeable future. Because of the heavy debt financing used to purchase the
Canadian chain, the international board of directors expects a MARR
of 25% per year from any sale.

(a) The British conglomerate has just been offered £159.5 million by a French
company wishing to get a foothold in Canada. Use FW analysis to determine if
the MARR will be realized at this selling price.

(b) If the British conglomerate continues to own the chain, what selling price must
be obtained at the end of 5 years of ownership to just make the MARR
 5.4 Future Worth Analysis
Exa m p le 5 .5

a) b)

FW3 = −75(F/P, 25%,3) −10(F/P, 25%,2) FW5 = −75(F/P, 25%,5) −10(F/A, 25%,5)
- 5(F/P, 25%,1) + 159.5 + 5(A/G, 25%,5)(F/A, 25%,5)

= £−8.86 million = £−246 .81 million

 5.5
Capitalize d Cos t
Analys is
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 5.5 Capitalized Cost Analysis
Key words Capitalized
Permeant
perpetual
CC Cost

Analysis
𝐀𝐀
is the present worth of a method for P=
project that has a very long
𝐢𝐢
Let CC represent the
life (more than, say,
Government or capitalized cost
35 or 40 years) or when the
planning horizon is
public projects; 𝐀𝐀
considered very long or
Roads, dams, 𝐂𝐂𝐂𝐂 =
infinite .
bridges, 𝐢𝐢
project that
OR
CAPITALIZED COST Present 𝐀𝐀𝐀𝐀
worth of a project that
basically possess 𝐂𝐂𝐂𝐂 =
infinite life; 𝐢𝐢
lasts forever.
 5.5 Capitalized Cost Analysis
Exa m p le 5 .6
The Haverty County Transportation Authority (HCTA) has just installed a new
software to charge and track toll fees. The director wants to know the total
equivalent cost of all future costs incurred to purchase the software system. If the
new system will be used for the indefinite future, find the equivalent cost (a) now, a
CC value, and (b) for each year hereafter, an AW value. The system has an installed
cost of $150,000 and an additional cost of $50,000 after 10 years. The annual
software maintenance contract cost is $5000 for the first 4 years and $8000
thereafter. In addition, there is expected to be a recurring major upgrade cost of
$15,000 every 13 years. Assume that i = 5% per year for county funds.
 5.5 Capitalized Cost Analysis
Exa m p le 5 .6

a)
Pw = CC = −150,000 b)
- 5,000 (P/A, 5%,4) Aw = P x i = CC x i
- 8,000 / 0.05 (P/P ’,5%,4) = −346,997.809 x 0.05
- 50,000 (P/F, 5%,10)
- 15,000 (A/F, 5%,13) / 0.05 = $ - 17,350 forever

= $ −346,997.809
 5.5 Capitalized Cost Analysis
Exa m p le 5 .7
Our case study has progressed (in Example 5.4) to the point that the life of the seawater
option can be extended to 10 years with a major refurbishment cost after 5 years. This
extension is possible only one time, after which a new life cycle would commence. In $1
million units, the estimates and PW values (from Figure 5–3) are as follows:

If we assume that the UPW (ultrapure water) requirement will continue for the foreseeable
future, a good number to know is the present worth of the long-term options at the selected
MARR of 12% per year. What are these capitalized costs for the two options using the
estimates made thus far?
Sea Water CC = - 36.31× 𝟏𝟏𝟏𝟏𝟔𝟔 (A/P, 12%,10) / 0.12
It has an (n) period , CONVERT to = $ - 53.58 × 𝟏𝟏𝟏𝟏𝟔𝟔
infinity by CC = Aw / i Ground Water CC = - 33.16× 𝟏𝟏𝟏𝟏𝟔𝟔 (A/P, 12%,10) / 0.12
= $ - 48.91× 𝟏𝟏𝟏𝟏𝟔𝟔
 5.5 Capitalized Cost Analysis Exe rc is e 1
Compare the machines shown below on the basis of their
capitalized cost. Use i = 10% per year

Ma c h in e 1 Ma c h in e 2 It has an (n) period , CONVERT to

infinity by CC = Aw / i

Aw = - 20,000 (A/P, 10%,3) – 9000

+ 4000 (A/F, 10%,3)
= $ - 15,833.8369

Pw = CC = −150,000 - 7,000 / 0.1 CC = - 15,833.8369 / 0.1

= $ −170,000 = - 158,338.369 SELECTED
 5.5 Capitalized Cost Analysis
Exa m p le 5 .8
The Commissioners of several districts have mandated 100% recycling programs linked with a
comprehensive waste-to-energy (WtE) program. The goal is zero waste to the landfill by 2022.
Two options for the materials separation equipment are outlined below for a consortium of 32
districts within one state. The interest rate for state-mandated projects is 5% per year.

(a) Perform a capitalized cost analysis for a total of 10 recycling sites.

 5.5 Capitalized Cost Analysis
Exa m p le 5 .8
Op tio n C Op tio n P

It has an (n) period , CONVERT to

infinity by CC = Aw / i

Aw = - 275,000 (A/P, 5%,5) – 12,000

Pw = CC = −8× 𝟏𝟏𝟏𝟏𝟔𝟔 - 25,000 / 0.05 = $ - 75,518.0695 x 10 sites

= $ −8,500,000 selected CC = - 75,5180.695 / 0.05

= - 15,103,613.9
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