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CHAPTER VI
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. Don Smith, Texas A&M University.
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Selecting Alternatives by
Annual Worth
AW analysis for a permanent
investment
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. D
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6.1 AW Calculations
AW = PW(A/P,i%,n)
AW = FW(A/F,i%,n)
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Cycle
1
Cycle
2
Cycle
K
AW assumes repeatability of
CFs
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. D
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9-year Project
9-year Project
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6.1 Example
Consider a project with $3,000
annual operating cost and a $5,000
investment required each 5 years. i
= 10%0
1
2
3
4
5
$5,000
1-5
$3,000
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0
5
$5,00
0
10
1-10
= $3,000
$5,000
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6.1 Advantages of AW
Applicable to a variety of
engineering economy studies
Asset Replacement
Breakeven Analysis
Make or Buy Decisions
Studies dealing with mfg. Costs
Economic Value Added analysis
(EVA)
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6.1 AW Requirements
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Initial Investment - P
Estimated Future Salvage Value - S
Estimated life of the asset - N
Estimated operating costs and
timing
Operative interest rate i%
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1
N
3.
N-1
P0
Capital Recovery (CR) is the annualized
equivalent of the initial investment P 0 and
the annualized amount of the future
salvage value Fn
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. D
Copyright The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
Given:
0
N-1
P0
FN
Convert to:
0
1
N
P0
N-1
$A per year
(CRC)
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..
.
Invest P
P
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6.2 CR Explained
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6.2 CR - Explained
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6.2 CR - Explained
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6.2 CR - Explained
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Single Alternative
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S = +$1,500
A+ = $1,200/yr
1
5
-$650
-$700
-$750
P=23,000
-$800
-$850
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CR(10%) = -23,000(A/P,10%,5)
+
P=23,000
1,500(A/F,10%,5) = -$5,822
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5
$650
$700
$750
$800
$850
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=+550
= 550 90.50
= $459.50
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CR(10%) = -$5,822
Revenue/Cost Annual amount: $459.50
AW(10%) = -$5,822+$459.50
AW(10%) = $5,362.50
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EAC=A = P* i
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EXAMPLE
Two alternatives are considered for
covering a football field.
The first is to plant natural grass and
the second is to install AstroTurf.
Interest rate is 10%/year.
Assume the field is to last a long time.
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Alternative A:
Natural Grass Replanting will be
required each 10 years at a cost of
$10,000. Annual cost for maintenance
is $5,000. Equipment must be
purchased for $50,000, which will be
replaced after 5 years with a salvage
value of $5,000
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. D
Copyright The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
F5 = $5,000
Alternative A:
0
10
F5 = $5,000
A = $5,000
$10,000
P = $50,000+
$10,000
F5=$50,000
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Chapter 6: Summary.
Annual Worth is popular
Fairly simple to understand
Variant of the Present worth approach
Eliminates lowest common multiples of
lives when alternatives possess unequal
lives
Understood by decision makers
Consistent with present worth
Blank & Tarquin: 5th Edition. Ch. 6 Authored by: Dr. D
Copyright The McGraw-Hill Companies, Inc. Permission required for reproduction or display.