Ekonomi Teknik Kimia

JTK FT UGM 2015

Economic Criteria
Depending on the situation, the economic
criterion will be one of the following :
Situation
Criterion
For fixed input
Maximize output
For fixed output
Minimize input
Neither input or
Maximize
output fixed
(output input)

Applying Present Worth Techniques

Equivalence provides the logic by which we may
adjust the cash flow for a given alternative into
the same equivalent sum or series with
equivalent present consequences, then
compared it to chose the feasible alternatives.
In this case, the consequences of each
alternative must be considered for this period of
time whish is usually called the analysis period

Applying Present Worth Techniques

The tree criteria for economic efficiency are restated in

terms of present worth analysis:
Situation

Criterion

Fixed
input

Amount of money or
other input resources are
fixed

Maximize present worth of

benefits or other outputs

Fixed
output

There is a fixed task,

Minimize present worth of
benefits or other output to costs or other inputs
be accomplished

Neither
input nor
output is
fixed

Neither amount of money,

or other inputs nor
amount of benefits or
other outputs is fixed

Maximize (present worth of

benefits present worth of
costs), that is maximize net
present worth
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Three different analysis-period situations in economic

analysis problems

The useful life of each alternative equals the analysis

period

The alternatives have useful lives different from the

analysis period

There is an infinite analysis period, n =

Assumptions in solving economic analysis

problem(1)
End-of-year convention

The annual expense / revenue occur in end-of-year.

Example :
Tahun 0
1 Jan

(Akhir) Tahun 1
31 Des 1 Jan

(Akhir) Tahun 2
31 Des
A

A
P

Assumptions in solving economic analysis

problem(2)
Middle-of-period convention

The annual expense / revenue occur in middle-ofyear.

Example :
Tahun 0
1 Jan

Pertengahan
Pertengahan
Tahun 1
Tahun 2
31 Des 1 Jan
30 Juni
30 Juni
A

Akhir Tahun 2
31 Des

Useful lives equal the analysis period(1)

Example 1:
A firm is considering which of two mechanical
devices to install to reduce costs in a particular
situation. Both devices cost $1000 and have
useful lives of five years and no salvage value.
Device A can be expected to result in $300
savings annualy. Device B will provide cost
savings of $400 the first year but will decline
$50 annually, making the second year savings
$350, the third year savings $300, and so forth.
With interest at 7% which device should the firm
purchase ?
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Useful lives equal the analysis period(2)

The analysis period can conveniently be selected

as the useful life of the devices or 5 years.
Devices A
Devices B
A = 300

PW of benefits

400
350

300
250
200

PW of benefits

Useful lives equal the analysis period(3)

PW of benefits A = 300(P/A,7%,5) = 300(4,1)
= $1230
PW of benefits B = 400(P/A,7%,5) 50(P/G,7%,5)
= 400(4,1) 50(7,647)
= $1257,65
PW of benefits B > PW of benefits A,
therefore devices B preferred aternative
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Useful lives equal the analysis period(4)

Example

2:
Three mutually exclusive investment alternatives for
implementing an office automation plan in an
engineering design firm are being considered. Each
alternative meets the same service (support)
requirements, but differences in capital investment
amounts and benefits (cost saving) exist among
them. The study periods 10 years, and the useful
lives af all three alternatives are also 10 years.
Market values of all alternatives are assumed to be
zero at the end of their useful lives. If the firms MARR
is 10% per year, which alternaitve should be selected
in view of the following etimates ?
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Useful lives equal the analysis period(5)

Alternative

Capital
investment

$390.000

$920.000

$660.000

Annual cost
savings

$69.000

167.000

133.500

Solution :
PWA = -$390.000 + $69.000 (P/A, 10%, 10) = $33,977
PWB = -$920.000 + $167.000 (P/A, 10%, 10) = $106,148
PWC = -$660.000 + $133.500 (P/A, 10%, 10) = $160,304
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Useful lives different from the analysis

period(1)
Example

1:
A purchasing agent is considering the purchase
of some new equipment for the mailroom. Two
different manufacturers have provided quotations.
An analysis of the quotations indicates the
following :
Manufacturer Cost Useful life(year) salvage
value
Speedy
$ 1500
5
$ 200
Allied
$ 1600
10
$ 325
Assume 7% interest and equal maintenance
costs.

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Useful lives Different from the analysis

period(2)

If the allied equipment has a useful life of ten

years, and the speedy equipment will last five
years, one solution is to select a ten year analysis
period.
Assume the replacement speedy equipment will
also cost $1500 five years hence
Speedy 200
Allied
200

1500

1500

325

1600

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Useful lives Different from the analysis period(3)

PW of cost Speedy
= 1500 + (1500-200) (P/F,7%,5) 200(P/F,7%,10)
= 1500 + 1300(0,713) 200(0,5083)
= $ 2325,24
PW of cost Allied
= 1600 325(P/F,7%,10) = 1600 325(0,5083)
= $ 1434,803
PW of cost Allied < PW of cost Speedy ,
therefore Allied preferred aternative

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Useful lives Different from the analysis period(4)

Example

2:
The following data have been estimated for two mutually
exclusive investment alternatives, A and B associated with a
small engineering project for which revenues as well as
expenses are involved. They have useful lives of four and six
years, respectively. If the MARR = 10% per year, show which
alternative is more desirable by using equivalent worth methods.
Use the repeatability assumption.
A

Capital Investment

$3.500

$5.000

Annual Cash Flow

1.255

1.480

Useful Life (years)

Market value at end of useful

life

0
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Useful lives Different from the analysis period(5)

Solution :
The least common multiple of the useful lives of
alternatives A and B is 12 years.
PWA = -$3.500 - $3.500 [(P/F,10%,4) + (P/F,10%,8)]
+ $1.255 (P/A,10%,12)
= $1.028

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Infinite Analysis Period (1)

In governmental analysis, at times there are

circumstances where a service or condition is to be
maintained for an infinite period. We call this particular
analysis Capitalized Cost
Capitalized Cost, is the present sum of money that
would need to be set aside now, at some interest rate,
to yield the funds required to provide the service
indefinitely. Assume cost of maintenance is equal every
year.

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Infinite Analysis Period (2)

For one year period :

If iP is cost of maintenance every period,F = P +
iP, if iP adalah biaya perawatan untuk setiap
periode, maka di setiap periode terjadi
pengeluaran sebesar iP, sehingga untuk n =
dapat dinyatakan sebagai A = iP dan
Capitalized cost (P) = A / i.

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Infinite Analysis Period (3)

example

:
A city plans a pipeline to transport water from a distance
watershed area to the city. The pipeline will cost $8 million and
have an expected live of seventy years. The city anticipates it will
need to keep the water line in service indefinitely.
Compute the capitalized cost assuming 7% interest?

Solution :
Here we have renewals of the pipeline every seventy years

$ 8 juta

$ 8 juta

$ 8 juta

70 tahun

140 tahun

$ 8 juta

n=

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Infinite Analysis Period (4)

To compute the capitalized cost, it is necessary to

first compute an end-of-period disbursement A that
is equivalent to $8 million every seventy years
$ 8 juta
n = 70

A = F(A/F,i,n)

= $ 8 juta(A/F,7%,70)
= $ 8 juta( 0,00062) = $ 4960
Capitalized cost P = $ 8juta + A/i = $ 8juta +4960/0,07
= $ 8.071.000
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Present Worth analysis for multiple alternatif(1)

Example

:
An investor paid $8000 to a consulting firm to analyze
what he might do with a small parcel of land on the edge of town
that can be bought for $30.000. In their report, the consultants
suggested four alternatives :

Alternative
A: Do nothing

Total
investment

Annual
benefit

Terminal value at
end of 20 year

B: Vegetable Market

50000

5100

30000

C: Gas Station

95000

10500

30000

D:
Small Motel
350000
36000
Assuming
MARR is 10%, what
should the
investor do?

150000

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Present Worth analysis for multiple alternatif(2)

This Problem is one of neither fixed input nor fixed

output, so our criterion will be to maximize the present
worth of benefit minus the present worth of cost, or,
simply stated, maximize net present worth.

Alternative A : NPW = 0 (do nothing)

Alternative B (vegetable market) :
NPW = -50000 + 5100(P/A,10%,20) +30000(P/F,10%,20)
= -50000 + 5100(8,514) + 30000(0,1486)
= -2120,6

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Present Worth analysis for multiple alternatif(3)

Alternative C (gas station):
NPW = -95000 + 10500(P/A,10%,20) + 30000(P/F,10%,20)
= -1145
Alternative D (small motel) :
NPW = -350000 + 36000(P/A,10%,20) +
150000(P/F,10%,20)
= -21206
In this situation alternative A has NPW equal to zero, and
others alternative have negative NPW. We will select the
best alternatives, namely, the do nothing (alt. A).

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