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ENGR 3360U Winter 2014

Unit 5

Present Worth Analysis

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-01

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Unit 5 Present Worth Analysis

Change Record

2014!01 !nitial Creation

"e#t Cha$ter 5

2014!0152 %r& '&(& )ennett* P&Eng&* P(P ENGR 3360U Eng Eco

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Co+rse ,+tline

1& Engineering Econo-ics

2& General Econo-ics

1& (icroecono-ics

2& (acroecono-ics

3& (oney and the )an. o/Canada

3& Engineering Esti-ation

4& !nterest and E+ialence

5& Present Worth Analysis

6& Ann+al Cash lo

& Rate o/ Ret+rn Analysis

& Pic.ing the )est Choice

& ,ther Choosing "echni+es

10& Uncertainty and Ris.

11& !nco-e and %e$reciation

12& A/terta# Cash los

13& Re$lace-ent Analysis

14& !n/lation15& (ARR 7election

16& P+8lic 7ector !ss+es

1& What Engineering sho+ld .no

a8o+t Acco+nting

1& Personal Econo-ics /or the

Engineer

2014!01 %r& '&(& )ennett* P&Eng&* P(P ENGR 3360U Eng Eco13

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Econo-ics in the World

Al$ha8et so+$

Where is the econo-y headed9

:

W

;

<

2014!01 %r& '&(& )ennett* P&Eng&* P(P ENGR 3360U Eng Eco0&14

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Unit 5 Road (a$

5&1 !ntrod+ction to Present Worth

5&2 E+al ;ies

5&3 Une+al ;ies

5&4 Ca$itali=ed Cost Analysis

5&5 Pay8ac. Period Analysis

5&6 ;i/e Cycle Costing5& )onds


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5&1 !ntrod+ction to Present Worth

> Ass+-$tions> End o/ Period Conention

? All cash /lo a-o+nts are calc+lated as a-o+nts at the end o/ each $eriod@> Now = end of period 0 (beginning of period 1)> Future amounts happen at the end of the period specified

> No 7+n. Costs ? ,nly the c+rrent sit+ation and the $otential /+t+re is considered

"o ie$oints ? !nestor and )orroer at so-e interest rateB ? Conentional ass+-$tionre+ired -oney is o8tained at interest rate i


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Econo-ic R+les

> Alternaties are D+dged 8ased on econo-ice//iciency&

> "y$ically /ollos these r+les@

Situation Rule

1& i#ed !n$+t (a#i-i=e ,+t$+t

2& i#ed ,+t$+t (ini-i=e !n$+t

3& Neither in$+t or o+t$+t /i#ed(a# o+t$+t?in$+tB


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or-+lating (+t+ally E#cl+sie Alternaties

,ne o/ the i-$ortant /+nctions o/ /inancial

-anage-ent and engineering is the creation o/

alternatiesF

!/ there are no alternaties to consider then therereally is no $ro8le- to sole

Gien a set o/ /easi8leF alternaties* engineering

econo-y atte-$ts to identi/y the 8estF econo-ica$$roach to a gien $ro8le-

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"y$es o/ Econo-ic ProDects

(+t+ally e#cl+sie alternatiesro- a set o/ /easi8le alternaties* $ic. one and only one to

e#ec+te

(+t+ally e#cl+sie alternaties co-$ete against each other

!nde$endent $roDectsro- a set o/ /easi8le alternaties select as -any as can 8e

/+nded in the c+rrent $eriod

"he %o NothingF %NB alternatie sho+ld alays

8e considered

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Cash lo "y$es /or ProDects

Reen+e ? each alternatie generates costs andreen+es oer the esti-ated li/e o/ the $roDect&

Criterion@ 7elect the alternatie that -a#i-i=esthe econo-ic -eas+re o/ -erit

7erice ? each alternatie has only c+rrent and/+t+re costs oer the esti-ated li/e o/ the $roDect&

Criterion@ 7elect the alternatie that -ini-i=es theecono-ic -eas+re o/ -erit* hich is a cost8ased-eas+re

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Present Worth "echni+es

> "hree $otential analysis $eriods are $ossi8le hen co-$aring alternaties@

? E+al lies

? Not e+al lies ? !n/inite analysis $eriod

> Present orth re+ires that the analysis is-ade 8eteen e+al ti-e $eriods


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Present Worth

Find PW at a stated interest rate, which is usuallyequal to or greater than the organization’s

established MARR

A process of obtaining the equivalentworth of future cash ows !A"# to so$e

point in ti$e%– called the Present Worth Method

3360 Unit 05.1 2014-I-01

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