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54 tayangan122 halamanekonomi teknik

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54 tayangan122 halamanengg econ

ekonomi teknik

© All Rights Reserved

Anda di halaman 1dari 122

Teguh Sasono

Ref: Sullivan, William G., Wicks & Koelling, Engineering Economy,

Pearson Education, Inc., 14th edition, 2009

1

Pengantar Ekonomi Teknik

dari usulan teknis proyek

Prinsip dan metodologi ekonomi teknik yang digunakan untuk

menganalisis alternatif pemanfaatan sumberdaya finansial,

khususnya dalam kaitannya dengan aset-aset fisik dan operasi

suatu organisasi.

Proses Pengambilan Keputusan yang rasional

Keputusan yang Ekonomis

Memprediksi masa depan (waktu dan ketidakpastian)

2

Pengambilan keputusan Rasional

1. Mengenali masalah

Saya memerlukan tempat tinggal sementara.

2. Mendefinisikan Goal atau tujuan

Saya akan mencari apartment yang indah dan tidak terlalu mahal.

3. Merangkai Data yang Relevan

Saya memerlukan informasi sewa, utilitas, umur apartemen, parkir, waktu

berkendaraan ke tempat belanja dan UF, tetangga , dan fasilitas (amenities) lain

yang diberikan (kolam renang, tenis meja, dsb.)

4. Mengidentifikasi alternatif yang layak (Feasible)

Saya menggunakan Yellow Pages, informasi dari teman, layanan menemukan

apartment, informasi dari UF, koran lokal, dan pengalaman pribadi untuk

mencari apartmen.

5. Memilih kriteria untuk menetapkan alternatif terbaik

Yang terpenting sewa plus biaya utiliti. Saya juga sangat peduli dengan waktu tempuh

berkendaraan ke UF, dan macam tetangganya.

3

Pengambilan Keputusan Rasional

6. Membangun Model

Saya akan menggunakan spreadsheet. Barisnya merupakan pilihan

apartemen, kolom berisi kriteria evaluai. Kemudian saya akan mencoba

mengisi interaksi antara apartemen dan kriteria.

Itu juga melibatkan penetapan aliran kas untuk analisis ekonomi teknik!

Saya akan mengisi estimasi biaya untuk spreadsheet dan tingkat fasilitas,

waktu berkendaraan, dsb.

Apartemen C terlihat yang termurah, tetapi saya tidak menyukai

tetangganya. Jika saya membayar Rp500 ribu per bulan lebih besar , akan

mendapatkan Apartmen B dan saya mendapatkan tetangga yang lebih

menyenangkan dan hanya 15-menit berkendaraan ke UF. Mungkin saya akan

memilih Apartemen B.

9. Mengaudit hasil (keputusan)

Apakah saya telah melakukan pilihan yang baik

Setelah tinggal di Apartemen B elama enam bulan, saya bahagia dengan

pilhan ini!

Tetapi ini benar-benar bukan kasus setiap hari!

4

Konsep Biaya dan Terminologi

FIXED, VARIABLE, AND INCREMENTAL COSTS

Fixed costs are those unaffected by changes in activity level

over a feasible range of operations for the capacity or

capability available.

- Typical fixed costs include insurance and taxes on

facilities, general management and administrative

salaries, license fees, and interest costs on borrowed

capital.

- When large changes in usage of resources occur, or when

plant expansion or shutdown is involved fixed costs will

be affected.

Variable costs are those associated with an operation that

vary in total with the quantity of output or other measures of

activity level.

- Example of variable costs include : costs of material and

labor used in a product or service, because they vary in

total with the number of output units -- even though

costs per unit remain the same.

Incremental Cost is the additional cost that results from

increasing the output of system by one/more units

5

RECURRING AND NONRECURRING COSTS

Recurring costs are repetitive and occur when a firm

produces similar goods and services on a continuing

basis.

- Variable costs are recurring costs because they

repeat with each unit of output .

- A fixed cost that is paid on a repeatable basis is

also a recurring cost: eg.: Office space rental

Nonrecurring costs are those that are not repetitive,

even though the total expenditure may be

cumulative over a relatively short period of time;

- Typically involve developing or establishing a

capability or capacity to operate;

- Examples are purchase cost for real estate upon

which a plant will be built, and the construction

costs of the plant itself; 6

DIRECT, INDIRECT AND STANDARD COST

Direct costs can be reasonably measured and allocated to a

specific output or work activity -- labor and material directly

allocated with a product, service or construction activity;

Indirect costs are difficult to allocate to a specific output or

activity -- costs of common tools, general supplies, and

equipment maintenance ;

Overhead consists of plant operating costs that are not direct

labor or material costs; indirect costs, overhead and burden

are the same;

Prime Cost is a common method of allocating overhead costs

among products, services and activities in proportion the sum

of direct labor and materials cost ;

Standard Cost is a representative costs per unit of output that

are established in advance of actual production and service

delivery;

7

SOME STANDARD COST USES

delivery costs;

Measuring operating performance by

comparing actual cost per unit with the

standard unit cost;

Preparing bids on products or services

requested by customers;

Establishing the value of work-in-process and

finished inventories;

8

CASH COST VERSUS BOOK COST

cash and results in cash flow;

Book cost or noncash cost is a payment that

does not involve cash transaction; book costs

represent the recovery of past expenditures

over a fixed period of time;

Depreciation is the most common example of

book cost; depreciation is what is charged for

the use of assets, such as plant and

equipment; depreciation is not a cash flow;

9

SUNK COST AND OPPORTUNITY COST

past and has no relevance to estimates of

future costs and revenues related to an

alternative course of action;

An opportunity cost is the cost of the best

rejected ( i.e., foregone ) opportunity and is

hidden or implied;

10

LIFE-CYCLE COST

Life-cycle cost is

the summation of

all costs, both

recurring and

nonrecurring,

related to a

product,

structure, system,

or service during

its life span.

Life cycle begins

with the

identification of

the economic

need or want (the

requirement) and

ends with the

retirement and

disposal activities.

11

Accounting Fundamentals

The Accounting Equation

Asset Accounts = Liability Accounts + Owners Equity Accounts

Cash Short-term debt Capital Stock

Receivables Payables Retained earnings (income

Inventories Long-term debt retained in the firm)

Equipments

Buildings

Land

Cost Accounting Example

12

UTILITY AND DEMAND

consumers of a product or service place on

that product or service;

Demand is a reflection of this measure of

value, and is represented by price per

quantity of output;

13

PRICE Price equals some

constant value minus some multiple

a

of the quantity demanded:

p=a-bD

amount demanded);

b = slope of the demand function;

D = (a p) / b

QUANTITY ( OUTPUT )

PRICE

MR=0 MR = dTR / dD = a 2bD = 0

Total Revenue = p x D

TR = Max = (a bD) x D

=aD bD2

QUANTITY ( OUTPUT )

14

Marginal

( Incremental) Cost

Cost / Revenue

Profit is maximum where

Total Revenue exceeds

Total Cost by greatest amount

Maximum

Quantity ( Output )

Profit

Marginal Demand

Revenue

Ct

Cost / Revenue

Cf

Quantity ( Output )

D1 D* D2 Demand

15

D1 and D2 are breakeven points

PROFIT MAXIMIZATION D*

Occurs where total revenue exceeds total cost by

the greatest amount;

Occurs where marginal cost = marginal revenue;

Occurs where dTR/dD = d Ct /dD;

D* = [ a - b (Cv) ] / 2

Occurs where TR = Ct

( aD - D2 ) / b = Cf + (Cv ) D

- D2 / b + [ (a / b) - Cv ] D - Cf = 0

Using the quadratic formula:

D = - [ ( a / b ) - Cv ] + { [ (a / b ) - Cv ] 2 - ( 4 / b ) ( - Cf ) }1/2

------------------------------------------------------------------------

2/b

16

Example-1

switch.

CF = $73,000 per month,

cv = $83 per unit,

Price = p = $180 0.02 (D)

a) Determine the optimal volume for this product and

confirm that profit occurs,

b) Find the volumes at which breakeven occurs.

17

Solution-1

a) D* = (a cv)/(2b) = ($180 83)/(2(0.02))

= 2,425 units per month

The Conditions:

1. a cv = $180 83 = $97 > 0 o.k.

2. (TR CT) > 0 for D* = 2,425 units per month

($180(2,425) 0.02(2,425)2) ($73,000 + 83(2,425))= $44,612 o.k.

b) Total revenue = Total cost (breakeven point)

- bD2 + (a cv)D CF = 0

- 0.02D2 + ($180 - $83)D - $73,000 = 0

- 0.02 D2 + 97 D 73,000 = 0

D1,2

97 972 4 0.02 73,000 1/ 2

2 0.02

97 59.74 97 59.74

D1 932 units/month D2 3,918 units/month

0.04 0.04 18

COST ESTIMATING

Used to describe the process by which the

present and future cost consequences of

engineering designs are forecast

COST ESTIMATING USED TO

Provide information used in setting a selling price for

quoting, bidding, or evaluating contracts

Determine whether a proposed product can be made

and distributed at a profit (EG: price = cost + profit)

Evaluate how much capital can be justified for process

changes or other improvements

Establish benchmarks for productivity improvement

programs

19

Pendekatan Estimasi Biaya terintegrasi

rician detail setiap level elemen pekerjaan atau disebut

struktur elemen pekerjaan

2. Struktur biaya dan pendapatan (klasifikasi)

pengkategorian ini digunakan untuk estimasi aliran kas

pada setiap level WBS

3. Teknik Estimasi (model) merupakan model matematis

yang terpilih untuk estimasi biaya atau pendapatan

mendatang selama periode analisis

Dengan ketiga komponen dasar dan tahap prosedur

terintegrasi akan mampu memberikan pendekatan secara

terorganisasi dalam mengembangkan aliran kas suatu

alternatif projek 20

Pendekatan Terintegrasi untuk Pengembangan Aliran Kas Alternatif

21

Contoh WBS (3 level) Projek Bangunan Komersial

22

COST ESTIMATION TECHNIQUES

1. A dimensionless number that shows how prices / costs vary

with time -- a measurement of inflation or deflation

2. Changes usually occur as a result of:

technological advances

availability (scarcity) of labor and materials

changes in consumer buying patterns

3. It establishes a reference from some base time period (i.e., a

base year)

4. When compared to a current-year index measures the amount

(%) change from the base period

23

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

Index

A dimensionless number that shows how prices / costs vary with

time -- a measurement of inflation or deflation

Changes usually occur as a result of:

- technological advances

- availability (scarcity) of labor and materials

- changes in consumer buying patterns

It establishes a reference from some base time period (i.e., a base

year)

When compared to a current-year index measures the amount (%)

change from the base period

IN = Index for some current year, N

Ik = Index for some base year, k

Ck = cost of some item during base year

CN = Ck ( IN / Ik )

CN = cost of the item during the current year

Also referred to as the ratio technique

24

Example

A certain index for the cost of purchasing and installing utility

boilers is keyed to 1984, where its baseline value was arbitrarily set

at 100. Company XYZ installed a 50,000-lb/hr boiler for $525,000 in

1996 when the index had a value of 468. The same company must

install another boiler of the same size in 2003. The index 2003 is

542. What is the approximate cost of the new boiler?

1984 100 -

1996 468 $525,000

2003 542 ?

25

Indexes for multiple items

W1 C n 1 / C k 1 W2 C n 2 / C k 2 W M C nM / C kM

In Ik

W1 W2 W M

Cnm = unit cost (or price) of the mth item in year n

Ckm = unit cost (or price) of the mth item in year k

Wm = weight assigned to the mth item

Ik = composite index value in year k

26

Examples-3

Based on the following data, develop a weighted index for the price

of gasoline in 2002, when 1986 is the reference year having an

index value of 99.2. The weight placed on regular unleaded gasoline

is three times that of either premium or unleaded plus, because

roughly three times as much regular unleaded is sold compared

with premium or unleaded plus.

Price (Cents/Gal) in Year

1986 1992 2002

Premium 114 138 120

Unleaded plus 103 127 109

Regular unleaded 93 117 105

I 2002

1120 / 114 1109 / 103 3105 / 93

99.2 109

11 3

If I2004 estimated to be 189 then:

Premium: 120 cents/gal (189/109) = 208 cents/gal

Unleaded plus: 109 cents/gal (189/109) = 189 cents/gal

27

Regular unleaded: 105 cents/gal (189/109) = 182 cents/gal

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

Per unit factor

Cost / price per : kWh, MWh

inch, cm, foot, yard,

meter, mile, km

second, hour, day

pound, ton, kg

person, family

28

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

The Factor Technique

An extension of the unit method

Sum of products of component quantities and

corresponding unit costs plus component costs estimated

directly

C = S dCd + S mfmUm

C = cost being estimated

Cd = cost of d estimated directly

fm = cost per unit of m

Um = number of units of m

29

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

The Power-Sizing Technique

Also referred to as exponential model

Used for costing plants and equipment

Recognizes that cost varies as some power of the change in

capacity or size

Example

(CA / CB) = (SA / SB)X

CA = CB(SA / SB)X

CA = Cost of plant A CB = Cost of plant B

SA = Size of plant A SB = Size of plant B

X = cost-capacity factor (reflects economies of scale)

- Eg. X=0.68 for nuclear gnerating plants and 0.79 for fossil-fuel

generating plans

30

Example-4

Suppose that an aircraft manufacturer desires to make a

preliminary estimate of the cost of building a 600-MW fossil-fuel

plant for the assembly of its new long-distance aircraft. It is known

that a 200-MW plant cost $100 million 20 years ago when the

approximate cost index was 400, and that cost index is now 1,200.

The cost capacity factor for a fossil-fuel power plant is 0.79.

Year Power Cost index Cost

1989 200 MW 400 $100 m

2009 600 MW 1,200 ?

Cost capacity factor X = 0.79

CA = $300 m (600/200 )0.79 = $714 m

31

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

Learning curve is a mathematical model that explains

increased worker efficiency and improved performance

from repetitive production

Also experience curve or manufacturing progress function

Zu = Kun

u = the output unit number

Zu = # resource units to produce output unit u

K = # resource units to produce 1st output unit

s = learning-curve slope parameter expressed as a decimal,

(eg. s=0.9)

n = log s / log 2 = the learning curve exponent

32

TECHNIQUES FOR ESTIMATING COSTS / REVENUES

produce one unit of production

Time or resources needed to

Learning and Improvement

33

Capital

more wealth; Comprise of

Equity capital is that owned by individuals who have invested their

money or property in a business project or venture in the hope of

receiving a profit.

Debt capital, often called borrowed capital, is obtained from

lenders (e.g., through the sale of bonds) for investment.

Financing Definition Instrument Description

financing money pay

principle &

interest;

financing ownership of shares of

company; stock for

ownership of

company;

34

The Time Value of Money

Interest: The fee that a borrower pays to a lender for the use of his or her money.

Interest Rate: The percentage of money being borrowed that is paid to the lender

on some time basis.

How interest determined:

Money Supply

Interest

MS3 MS1 MS2

Rate

i3

ie

i2

Money Demand

Quantity of Money 35

SIMPLE INTEREST

The total interest earned or charged is linearly

proportional to the initial amount of the loan

(principal), the interest rate and the number of interest

periods for which the principal is committed.

When applied, total interest I may be found by

I = ( P ) ( N ) ( i ), where

P = principal amount lent or borrowed

N = number of interest periods ( e.g., years )

i = interest rate per interest period

36

COMPOUND INTEREST

Whenever the interest charge for any interest period is

based on the remaining principal amount plus any

accumulated interest charges up to the beginning of

that period.

Period Amount Owed Interest Amount Amount Owed

Beginning of for Period at end of

period ( @ 10% ) period

1 $1,000 $100 $1,100

2 $1,100 $110 $1,210

3 $1,210 $121 $1,331

37

ECONOMIC EQUIVALENCE

Established when we are indifferent between a

future payment, or a series of future payments,

and a present sum of money .

Considers the comparison of alternative options,

or proposals, by reducing them to an equivalent

basis, depending on:

interest rate;

amounts of money involved;

timing of the affected monetary receipts and/or

expenditures;

manner in which the interest , or profit on invested

capital is paid and the initial capital is recovered.

38

ECONOMIC EQUIVALENCE FOR FOUR REPAYMENT PLANS

OF AN $8,000 LOAN

Plan #1: $2,000 of loan principal plus 10% of BOY principal paid at the end of year;

interest paid at the end of each year is reduced by $200 (i.e., 10% of remaining

principal) Interest Total money

Amount owned of the Principal Total end of

Year accrued of the owned at end

beginning year (BOY) Payment year payment

year year

1 8,000 800 8,800 2,000 2,800

2 6,000 600 6,600 2,000 2,600

3 4,000 400 4,400 2,000 2,400

4 2,000 200 2,200 2,000 2,200

20,000 2,000

Total interest paid ($2,000) is 10% of total dollar-years ($20,000)

Plan #2: $0 of loan principal paid until end of fourth year; $800 interest paid at

the end of each year

Amount owned of Interest Total money Total end of

Principal

Year the beginning year accrued of owned at end year

Payment

(BOY) the year year payment

1 8,000 800 8,800 2,000 2,800

2 8,000 800 8,800 2,000 2,800

3 8,000 800 8,800 2,000 2,800

4 8,000 800 8,800 2,000 2,800

32,000 3,200 39

CASH FLOW DIAGRAMS / TABLE NOTATION

i = effective interest rate per interest period

N = number of compounding periods (e.g., years)

P = present sum of money; the equivalent value of one or

more cash flows at the present time reference point

F = future sum of money; the equivalent value of one or

more cash flows at a future time reference point

A = end-of-period cash flows (or equivalent end-of-period

values ) in a uniform series continuing for a specified

number of periods, starting at the end of the first period

and continuing through the last period

G = uniform gradient amounts -- used if cash flows increase

by a constant amount in each period

40

CASH FLOW DIAGRAMS / TABLE NOTATION

3 5

A = $2,524

1

1 2 3 4 5=N

2 4

P =$8,000 i = 10% per year

1

Time scale with progression of time moving from left to

right; the numbers represent time periods (e.g., years,

months, quarters, etc...) and may be presented within a

time interval or at the end of a time interval.

2

Present expense (cash outflow) of $8,000 for lender.

Interest rate of loan. 41

amount to be determined.

RELATING PRESENT AND FUTURE EQUIVALENT

VALUES OF SINGLE CASH FLOWS

Finding future value when given present value

F = P ( 1+i ) N

(1+i)N single payment compound amount factor

functionally expressed as F = ( F / P, i%,N )

predetermined values of this are presented in column 2

of Appendix C of text.

P

N=

0

42

F=?

RELATING A UNIFORM SERIES (ORDINARY ANNUITY) TO

PRESENT AND FUTURE EQUIVALENT VALUES

Finding F given A: Finding P given A:

Finding future equivalent Finding present equivalent

income (inflow) value given a income (inflow) value given a

series of uniform equal series of uniform equal

Payments Payments

(1+i)N-1 (1+i)N-1

F=A P=A

i i(1+i)N

uniform series compound uniform series compound

amount factor in [ ] amount factor in [ ]

functionally expressed as functionally expressed as

F = A ( F / A,i%,N ) P = A ( P / A,i%,N )

predetermined values are predetermined values are

in column 4 of Appendix C in column 5 of Appendix C

of text of text

F=? 1 2 3 4 5 6 7 8

A=

1 2 3 4 5 6 7 8 43

A= P=?

Interest Factors Relationships

1

A / P , i%, N

P / A, i%, N

1

A / F , i%,N

F / A, i%,N

F / A, i%,N P / A, i%,N F / P , i%,N

N

P / A, i%, N P / F , i%, k

k 1

N

F / A, i%, N F / P , i%, N k

k 1

A / F , i%,N A / P , i%,N i

44

Deferred Annuities (Uniform Series)

F7 = A(F/A, i%, 4)

P3 = A(P/A, i%, 4)

A

0 1 2 3 4 5 6 7

i = interest rate

P=?

P = F7 (P/F, i%, 7) = A (F/A, i%, 4) (P/F, i%, 7)

45

Equivalence Calculations Involving Multiple Interest Formulas

P0

$1,000

$600

$400 $400 $400 $400

$200

0 1 2 3 4 5 6 7

+ 400 (P/A, i%, 4) (P/F, i%, 3)

46

Equivalence Calculations Involving Multiple Interest Formulas

$1,000 F7

$600

$400 $400 $400 $400

$200

0 1 2 3 4 5 6 7

+ 400 (F/A, i%, 4)

47

Equivalence Calculations Involving Multiple Interest Formulas

P0

$1,000 F7

$600

A

$400 $400 $400 $400

$200

0 1 2 3 4 5 6 7

A = P0 (A/P, i%, 7)

A = F7 (A/F, i%, 7)

48

Example-5

Pa Pb =?

i = 10%

=?

Pa = Pb

Pa = 2H (P/A, 10%, 4) + H (P/A, 10%, 3) (P/F, 10%, 5)

Pb = Q (P/F, 10%, 2) Q (P/F, 10%, 7)

Pa = Pb

Pa = 7.8839 H

Q = 25.172 H

Pb = 0.31329 Q

49

RELATING A UNIFORM GRADIENT OF CASH FLOWS TO ANNUAL AND PRESENT

EQUIVALENTS

Find the present equivalent value when given the

uniform gradient amount

1 (1 + i ) N-1 N

P=G -

i i (1 + i ) N (1 + i ) N

Functionally represented as P = G ( P / G, i%,N )

The value shown in{ } is the gradient to present

equivalent conversion factor and is presented in

column 8 of Appendix C (represented in the above

50

parenthetical expression).

Cash Flow Diagram for a Uniform Gradient

Increasing by G Dollars per period

per period

(N-2)G

(N-3)G

3G

2G

G

1 2 3 4 N-2 N-1 N

End of Period

51

RELATING A UNIFORM GRADIENT OF CASH FLOWS TO ANNUAL AND PRESENT

EQUIVALENTS

Find the annual equivalent value when given the

uniform gradient amount

1 N

A= G -

i (1 + i ) N - 1

Functionally represented as A = G ( A / G, i%,N )

The value shown in [ ] is the gradient to uniform

series conversion factor and is presented in column

9 of Appendix C (represented in the above

52

parenthetical expression).

53

Nominal and Effective Interest Rates

Let:

P = $1,000

i = 6% per 6 months, (r = 12% per year compounded

semiannually)

F = ? After one year

F6months = $1,000 (1 + 0.06) = $1,060

F12months = $1,060 (1 + 0.06) = $1,123.60

F12months = $1,000 (1 + 0.12 / 2)2

F = P (1 + r/M)M = P (1 + i)

(1 + r/M)M = 1 + i i = (1 + r/M)M - 1

i = effective interest rate

r = nominal interest rate

M = number of compounding periods

54

MINIMUM ATTRACTIVE RATE OF RETURN

(MARR)

An interest rate used to convert cash flows into

equivalent worth at some point(s) in time

Usually a policy issue based on:

- amount, source and cost of money available for

investment

- number and purpose of good projects available for

investment

- amount of perceived risk of investment

opportunities and estimated cost of administering

projects over short and long run

- type of organization involved

MARR is sometimes referred to as hurdle rate 55

Minimum Attractive Rate of Return MARR

Cost of Capital = Cost of Equity + Cost of Debt

Weighted Average Cost of Capital WACC

= Cost of Equity ( Equity ) + Cost of Debt ( Debt)

Debt 30 8 2.4

Equity 70 12 8.4

10.8

56

CAPITAL RATIONING

MARR approach involving opportunity cost viewpoint

Exists when management decides to restrict the total

amount of capital invested, by desire or limit of

available capital

Select only those projects which provide annual rate

of return in excess of MARR

As amount of investment capital and opportunities

available change over time, a firms MARR will also

change

57

FINDING PRESENT WORTH

Discount future amounts to the present by using the interest rate

over the appropriate study period

N

PW = S

k=0

Fk ( 1 + i ) - k

i = effective interest rate, or MARR per compounding period

k = index for each compounding period

Fk = future cash flow at the end of period k

N = number of compounding periods in study period

interest rate is assumed constant through project

The higher the interest rate and further into future a cash flow

occurs, the lower its PW

The project (Alternative) is acceptable for investment when:

PW 0

The better alternative is that of higher PW

58

Example-6

increase the productivity of certain manual welding operation.

The investment cost is $25,000 and the equipment will have the

market value of $5,000 at the end of a study period of five years.

Increased productivity attributable to the equipment will amount

to $8,000 per year after extra operating costs have been

subtracted from the revenue generated by the additional

production.

If the firms MARR (before income taxes) is 20% per year, is this

proposal a sound one?

Use the PW method.

59

Solution Example-6

$5,000

1 2 3 4 5=N

0

MARR = 20% per year

$25,000

PW = $25,000 + $8,000 (2.9906) + $5,000 (0.4019)

PW = $934.3 > 0

The project is acceptable

60

FUTURE WORTH METHOD (FW )

FW is based on the equivalent worth of all cash inflows

and outflows at the end of the planning horizon at an

interest rate that is generally MARR

The FW of a project is equivalent to PW

FW = PW ( F / P, i%, N )

If FW > 0, it is economically justified

N

FW ( i % ) = S Fk ( 1 + i ) N - k

k=0

i = effective interest rate

k = index for each compounding period

Fk = future cash flow at the end of period k

N = number of compounding periods in study period

61

ANNUAL WORTH METHOD ( AW )

AW is an equal annual series of dollar amounts, over a

stated period ( N ), equivalent to the cash inflows and

outflows at interest rate that is generally MARR

AW is annual equivalent revenues ( R ) minus annual

equivalent expenses ( E ), less the annual equivalent capital

recovery (CR)

AW ( i % ) = R - E - CR ( i % )

AW = PW ( A / P, i %, N )

AW = FW ( A / F, i %, N )

If AW > 0, project is economically attractive

AW = 0 : annual return = MARR earned

62

Example-7

Its annual maintenance expense has been $5,000 per year.

At the end of three years, you spent $9,000 on roof repairs.

At the end of five years (now), you sell the building for

$120,000.

During the period of ownership, you rented the building for

$10,000 per year paid at the beginning of each year.

Use the AW method to evaluate this investment when your

MARR is 12% per year.

63

Solution Example-7 $120,000

1 2 3 4 5=N

0

$5,000 $5,000 $5,000 $5,000 $5,000

$100,000

$9,000

AW = -90,000 (A/P, 12%, 5) + $5,000 + $110,000 (A/F, 12%, 5)

- 9,000 (P/F, 12%, 3) (A/P, 12%,5)

AW = -90,000 (0.2774) + $5,000 + $110,000 (0.1574)

- 9,000 (0.7118) (0.2774) = -$4429.08

64

INTERNAL RATE OF RETURN METHOD ( IRR )

IRR solves for the interest rate that equates the

equivalent worth of an alternatives cash inflows

(receipts or savings) to the equivalent worth of

cash outflows (expenditures)

Also referred to as:

investors method

discounted cash flow method

profitability index

IRR is positive for a single alternative only if:

both receipts and expenses are present in the cash flow

pattern

the sum of receipts exceeds sum of cash outflows

65

INTERNAL RATE OF RETURN METHOD ( IRR )

IRR isN

i %, using the following N

PW formula:

S

k=0

R k ( P / F, i %, k ) = S

k=0

E k ( P / F, i %, k )

R k = net revenues or savings for the kth year

E k = net expenditures including investment

costs for the kth year

N = project life ( or study period )

If i > MARR, the alternative is acceptable

To compute IRR for alternative, set net PW = 0

N N

PW = S R k ( P / F, i %, k ) - S E k ( P / F, i %, k ) = 0

k=0 k=0

i is calculated on the beginning-of-year unrecovered

investment through the life of a project

66

INTERPRETING IRR USING INVESTMENT-

BALANCE DIAGRAM

Investment Balance Diagram describes how much money is tied up in a project

and how the recovery of funds behaves over its estimated life.

P (1 + i)

[ P (1 + i) - (R1 - E1) ] (1 +i)

1 + i

Unrecovered 1 + i

Investment (R1 - E1) 1 + i

Balance, $ (R2 - E2)

(R3 - E3)

Initial investment

=P (RN-1 - EN-1) 1 + i

(RN - EN) $0

0 1 2 3 N

downward arrows represent annual returns (Rk - Ek) : 1 < k < N

dashed lines represent opportunity cost of interest, or interest on

BOY investment balance

IRR is value i that causes unrecovered investment balance to equal

0 at the end of the investment period. 67

Example-8

to increase the productivity of certain manual welding

operation.

The investment cost is $25,000 and the equipment will have

the market value of $5,000 at the end of a study period of

five years.

Increased productivity attributable to the equipment will

amount to $8,000 per year after extra operating costs have

been subtracted from the revenue generated by the

additional production.

If the firms MARR (before income taxes) is 20% per year, is

this proposal a sound one?

Use the IRR method.

68

Solution-8

$5,000

1 2 3 4 5=N

0

MARR = 20% per year

$25,000

i = 0% PW = -$25,000 + $8000 (5) + $5,000 (1) = $20,000

i = 10% PW = -$25,000 + $8000 (3.7908) + $5,000 (0.6209) = $8,430.90

i = 20% PW = -$25,000 + $8000 (2.9906) + $5,000 (0.4019) = $934.30

i = 25% PW = -$25,000 + $8000 (2.6839) + $5,000 (0.3277) = -$1,847.10

69

Solution-8

$934.30

20% 25%

IRR

$1847.10

IRR = 20% + 5% [934.30/(934.30 + 1847.10)]

IRR = 21.7% per year > 20% = MARR,

The project is acceptable

70

Solution-8

71

Solution-8 (Investment Balance Diagram)

72

PAYBACK PERIOD METHOD

Sometimes referred to as simple payout method

Indicates liquidity (riskiness) rather than profitability

Calculates smallest number of years ( ) needed for cash

inflows to equal cash outflows -- break-even life

ignores the time value of money and all cash flows

which occur after

S( Rk -Ek) - I > 0

k=1

If is calculated to include some fraction of a year, it is

rounded to the next highest year

73

PAYBACK PERIOD METHOD

should only be used with one of the other methods of

determining profitability

A discounted payback period ( where < N ) may be

calculated so that the time value of money is considered

S

k=1

( Rk - Ek ) ( P / F, i %, k ) - I > 0

i is the MARR

I is the capital investment made at the present time

( k = 0 ) is the present time

is the smallest value that satisfies the equation

74

Example-9 Payback Periode

Net Cash Cumulative

End of Year

Flow Cash Flow

0 -$25,000 -$25,000

1 8,000 -17,000

2 8,000 -9,000

3 8,000 -1,000

4 8,000 +7,000

5 13,000 +20,000

It ignores the cash flow that happened after the

payback period. 75

FEASIBLE DESIGN ALTERNATIVES

Alternatives may be mutually exclusive (i.e., choice if

one excludes the choice of any other alternative)

because :

The alternatives being considered may require

different amounts of capital investment

The alternatives may have different useful lives

The subject of this section will help:

analyze and compare feasible alternatives

select the preferred alternative

The cash-flow analysis methods used in this process:

Present Worth ( PW )

Annual Worth ( AW )

Future Worth ( FW )

Internal Rate of Return ( IRR )

76

INVESTMENT AND COST ALTERNATIVES

Alternative

A B (B-A)

PW(10%)B=-73.000+26.225(P/A. 10%, 4)=10.131

PW(10%)Diff=-13.000+4.225(P/A. 10%, 4)=393

77

RULE FOR CHOOSING AMONG

ALTERNATIVES

The alternative that requires the minimum investment and

produces satisfactory functional results will be chosen

unless the incremental capital associated with an

alternative having a larger investment can be justified with

respect to its incremental savings (or benefits ).

The alternative requiring the least investment is the base

alternative.

Rule ensures that as much capital as possible is invested at

a rate of return equal to or greater than the MARR.

78

ENSURING COMPARABLE BASIS FOR SELECTING

MUTUALLY-EXCLUSIVE ALTERNATIVES

Include any economic impacts of alternative differences

in estimated cash flows Two Rules:

Rule 1. When revenues and other economic benefits are

present, select alternative that has greatest positive

equivalent worth at i = MARR and satisfies project

requirements.

Rule 2. When revenues and economic benefits are not

present, select alternative that minimizes cost.

79

PLANNING HORIZON

The selected time period over which mutually exclusive

alternatives are compared -- study period

May be influenced by factors including:

service period required

useful life of the shorter-lived alternative

useful life of the longer-lived alternative

company policy

It is key that the study period be appropriate for the

decision situation under investigation

Useful life of an asset is the time period during which it

is kept in productive use in a trade or business.

80

REPEATABILITY ASSUMPTION

considered is either indefinitely long or equal to a

common multiple of the lives of the alternatives.

The economic consequences that are estimated to happen

in an alternatives initial useful life span will also happen in

all succeeding life spans (replacements)

Actual situations in engineering practice seldom meet both

conditions

81

REPEATABILITY ASSUMPTION

B A

N=4 N=3

A

3 6 9 N = 12

B

4 8 N = 12

82

Example-10

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 repeatability assumption.

A B

Capital investment $3,500 $5,000

Annual revenue 1,900 2,500

Annual expenses 645 1,020

Useful life (years) 4 6

Market value at end of useful life 0 0 83

Solution-10

A B

$1,255 $1,480

4 8 N = 12 6 N = 12

$3,500 (P/F, 10%, 4) $5,000 (P/F, 10%, 6)

$3,500 (P/F, 10%, 8) + $1,480 (P/A, 10%, 12)

+ $1,255 (P/A, 10%, 12)

PW(10%)A = $1,028 PW(10%)B = $2,262

PW(10%)A < PW(10%)B

Alternative B is desirable

84

COTERMINATED ASSUMPTION

A finite and identical study period is used for all

alternatives

This planning horizon, combined with appropriate

adjustments to the estimated cash flows, puts the

alternatives on a common and comparable basis

Used when repeatability assumption is not

applicable

Approach most frequently used in engineering

practice

85

COTERMINATED ASSUMPTION

Guidelines when useful life(s) different in length than

study period

Useful life < study period

a. Cost alternatives -- each cost alternative must provide

same level of service as study period : 1) contract for

service or lease equipment for remaining time; 2)

repeat part of useful life of original alternative until

study period ends

b. investment alternatives -- assume all cash flows

reinvested in other opportunities at MARR to end of

study period

86

COTERMINATED ASSUMPTION

Guidelines when useful life(s) different in length than

study period

Useful life > study period

Truncate the alternative at the end of the study

period using an estimated market value. This

method assumes disposable assets will be sold at

the end of the study period at that value

87

COTERMINATED ASSUMPTION

Study Period = 7 years,

Study period = 4 years < Useful lives

Useful Life A < Study Period < Useful life B

SA SA

A A

N=4 N=5 N=5 N=7

SB SB

B B

N=4 N=7

Study period = 10 years, > Useful lives

A

N=5 N = 10

SB

B

N=8 N = 10 88

SELECT THE EQUIVALENT WORTH ALTERNATIVE WITH

THE GREATER WORTH

If : PWA (i) < PWB (i)

then

PWA (i) ( A / P,i,N ) < PWB (i) ( A / P,i,N )

and

AWA (i) < AWB (i)

similarly

PWA (i) ( F / P, i, N ) < PWB (i) ( F / P, i, N )

and

FWA (i) < FWB (i)

Select alternative B 89

RATE OF RETURN METHOD

RULES

1. Each increment of capital must justify itself by producing a

sufficient rate of return on that increment.

2. Compare a higher investment alternative against a lower

investment alternative only when the latter is acceptable.

3. Select the alternative that requires the largest investment

of capital as long as the incremental investment is justified

by benefits that earn at least the MARR. This maximizes

equivalent worth on total investment at i = MARR.

90

INCONSISTENT RANKING PROBLEM

Ranking errors can occur when a selection among

mutually exclusive alternatives is based wrongly on

maximization of IRR on the total cash flow, as opposed to

the PW of the total cash flow

When the MARR is less than the IRR of the difference

between alternative cash flows, an incorrect choice will be

made by selecting an alternative that maximizes the IRR of

its total cash flow, because

-- the IRR method assumes reinvestment of cash flows at the

calculated rate(s) of return

-- the PW method assumes reinvestment at the MARR

91

INCREMENTAL INVESTMENT ANALYSIS PROCEDURE

( Helps avoid incorrect ranking problem )

1. Order the feasible alternatives.

2. Establish a base alternative

a. Cost alternatives -- The first alternative is the base

b. Investment alternatives - If the first alternative is

acceptable, select as base. If the first alternative is not

acceptable, choose the next alternative

3. Use iteration to evaluate differences (incremental cash flows)

between alternatives until no more alternatives exist

a. If incremental cash flow between next alternative and

current alternative is acceptable, choose the next

b. Repeat, and select as the preferred alternative the last one

for which the incremental cash flow was acceptable

92

THREE ERRORS COMMON TO INCREMENTAL

INVESTMENT ANALYSIS PROCEDURE APPLIED TO IRR

1. the highest overall IRR on total cash flow

2. the highest IRR on an incremental capital

investment

3. the largest capital investment that has an IRR

greater than or equal to the MARR

Incremental analysis must be used with rate of return

methods to ensure the best alternative is selected

93

INCREMENTAL ANALYSIS PROCEDURE USED WITH

EQUIVALENT WORTH METHODS

Equivalent worth methods may also be applied using the

incremental analysis procedure to compare mutually exclusive

alternatives

Alternative ranking will be consistent with equivalent worth values

based on total investment of each alternative

Ranking will be consistent with ROR methods when using

incremental analysis

When equivalent worth of investment cash flow > 0 at i =

MARR, its IRR > MARR

Equivalent worth methods using incremental investment analysis can

be used as a screening method for the IRR method

94

IMPUTED MARKET VALUE TECHNIQUE

When current marketplace data is unavailable for an asset,

it is sometimes necessary to estimate the market value of

an asset

Referred to as an imputed or implied market value

Estimating is based on logical assumptions about the

remaining life for the asset

MVT = [ EW at the end of year T of remaining capital recovery

amounts ] + [ EW at the end of year T of original market

value at the end of useful life ]

T < useful life

EW is equivalent worth at i = MARR 95

COMPARING ALTERNATIVES USING THE

CAPITALIZED WORTH METHOD

Capitalized Worth (CW) method -- Determining the

present worth of all revenues and / or expenses over an

infinite length of time

Capitalized cost -- Determining the present worth of

expenses only over an infinite length of time

Capitalized worth or capitalized cost is a convenient basis

for comparing mutually exclusive alternatives when a

period of needed services is indefinitely long and the

repeatability assumption is applicable

96

CAPITALIZED WORTH METHOD

Capitalized worth of a perpetual series of end-of-

period uniform payments, A, with interest i% per

period:

A ( P /A, i%, )

8

CW = PWN --> = A ( P / A, i%, )

8

8

( 1+i )N - 1

= A lim ------------- = A(1/i)

N -->

8

i ( 1 + i )N

97

Example-11

A selection to be made between two structural designs.

Because revenues do not exist (or can be assumed to be

equal), only negative cash flow amounts (costs) and the

market value at the end of useful life are estimated, as

follows:

Structure M Structure N

Capital Investment $12,000 $40,000

Market Value 0 $10,000

Annual Expenses $2,200 $1,000

Useful life (years) 10 25

analysis, determine which structure is better if the MARR is

15% per year. 98

Solution-11

Structure M Structure N

Capital Investment $12,000 $40,000

Market Value 0 $10,000

Annual Expenses $2,200 $1,000

Useful life (years) 10 25

AW(15%)N = $40,000 (A/P, 15%, 25) + $10,000 (A/F, 15%, 25)

$1,000 = $7,141

CW(15%)N = AWN / i = $7,141 / 0.15 = $47,607

because it has the lesser negative value ($30,613).

99

THREE GROUPS OF MAJOR INVESTMENT

ALTERNATIVES

1. Mutually exclusive :

At most one project out of the group can be chosen

2. Independent :

The choice of a project is independent of the choice of any other

project in the group, so that all or none of the projects may be

selected or some number in between

3. Contingent :

The choice of the project is conditional on the choice of one or more

other projects

100

REPLACEMENT ANALYSIS

The evaluation of changes in economics of assets

associated with their use in an operating environment.

Considers asset

replacement

retirement

Augmentation

Physical Impairment (Deterioration)

Altered Requirements

Technology

Financing

101

PHYSICAL IMPAIRMENT

(DETERIORATION)

Efficiency loss resulting from continued use --

aging

Increased routine and corrective maintenance

costs

Greater energy requirements

Increased need for operator intervention

Unanticipated problems leading to equipment

deterioration

102

ALTERED REQUIREMENTS

Significant change in demand for related

products or services

Significant change in the composition or

design of associated products or services

May be considered a form of obsolescence

103

TECHNOLOGY

Impact of technological change varies with

associated industry

Technological changes typically reduce cost

per unit and improve quality of output

Results in earlier replacement of existing

assets with improved assets

May be considered a form of obsolescence

104

ECONOMIC LIFE

The period of time (years) that results in the minimum

Equivalent Uniform Annual Cost (EUAC) of owning and

operating an asset

EUAC is a term sometimes used to identify the annual worth

of a primarily cost cash flow pattern

Assuming good asset management, economic life should

coincide with time from date of acquisition to date of

abandonment, demotion in use, or replacement from

primary intended service

Sometimes called minimum-cost life or optimum

replacement interval

For a new asset, economic life can be computed if capital

investment, annual expenses, and year-by-year market

values are known or can be estimated

105

OWNERSHIP LIFE, PHYSICAL LIFE ,

&USEFUL LIFE

OWNERSHIP LIFE:

Period between date of acquisition and date of disposal

by a specific owner

A given asset may have different categories of use

during this period

PHYSICAL LIFE:

Period of time between original acquisition and final

disposal of an asset over its succession of owners

USEFUL LIFE:

The time period in years that an asset is kept in

productive service either in primary or backup mode

An estimate of how long an asset is expected to be used

in a trade or business to produce income

106

BEFORE-TAX ANALYSIS

Determining Present worth of total costs

PWk ( i%) = I - MVk (P / F, i%,k) + Sk Ej (P / F, i%, j)

j=1

Sum of

PW of initial capital investments occurring after time 0

PW of MV at end of year k

PW of annual expenses through year k

107

BEFORE-TAX ANALYSIS

Determining Present Worth of Marginal Costs

Marginal cost is the difference in present worth

of total cost for year k minus the present worth

of total cost for year k - 1

Total amount of this marginal cost is found by:

TCk(i%) = (PWk - PWk-1) (F / P, i%,k)

108

BEFORE-TAX ANALYSIS

Determining Present Worth of Marginal Costs

Simplification of Total calculation of marginal cost

TCk(i%) = MVk-1 - MVk + iMVk-1 + Ek

This is the sum of:

the loss in MV during year of extended service

the opportunity cost of capital invested in the asset at

the beginning of year k

the annual expenses incurred in year k

109

BEFORE-TAX ANALYSIS

The total marginal (Year-by-year) costs are

used to find the EAUC through each year K

The minimum EAUCk value during the useful

life of the asset, determines its before-tax

economic life

Before-tax economic life = N*

110

AFTER-TAX ANALYSIS

Extending the Before-Tax Analysis equation to account

for income tax effects:

PWk(i%) = I + Sk [ ( 1 - t ) Ej - tdj ] ( P / F, i%, j ) -

j=1

[ ( 1 - t )MVk + t ( BVk ) ] ( P / F, i%, k)

Equation finds PW of ATCF through year k by:

adding initial capital investment and sum of after-tax

PW of annual expenses through year k, including

adjustments for annual depreciation amounts

adjusting the total after-tax PW of costs by the after-

tax consequences of gain or loss on disposal of asset at

end of year k

111

AFTER-TAX ANALYSIS

Determining Present Worth of Marginal Costs

Total amount of this after-tax marginal cost:

TCk = ( PWk - PWk-1 ) ( F / P, i%, k )

Simplifying

TCk (i%) = (1 - t)(MVk-1 - MVk + iMVk-1 + Ek) + i (t)(BVk-1)

The economic life of the asset on an after-tax basis is N*AT

112

DETERMINING THE ECONOMIC LIFE OF A

DEFENDER

When major outlay for alteration or overhaul is required,

the life that will yield least EUAC is likely time to next

alteration or overhaul

When defender MV is 0 and operating expenses expected

to increase annually, the remaining life that will yield least

EAUC will be 1 year

When MVs are greater than 0 and expected to decline

from year to year, calculate remaining economic life in

same manner as for before-tax analysis

By using outsider viewpoint, the present realizable MV is

considered its investment value

113

EVALUATING PROJECTS WITH THE

BENEFIT / COST RATIO METHOD

BENEFITS, COSTS, AND DISBENEFITS

Benefits - The favorable consequences of the

project to the project sponsors (i.e., the public for

public projects)

Costs -- Monetary disbursements required (i.e., of

the government for public projects)

Disbenefits -- The negative consequences of the

project to the project sponsors

114

PRIVATE VERSUS PUBLIC PROJECTS

PURPOSE

Private Project -- Maximize profit, minimize costs

Public Project -- Offer social benefits (i.e., health,

employment ) without profit

CAPITAL SOURCES

Private Project -- Private investors and lenders

Public Project -- Taxation; Private Lenders

FINANCING

Private Project -- Individuals (for sole proprietorships and

partnerships); stocks and corporate bonds (for corporations)

Public Projects -- Direct taxes, Low, no-interest or private

loans, bonds, subsidies

115

PRIVATE VERSUS PUBLIC PROJECTS

MULTIPLE PURPOSES

More frequently for public projects ( i.e., reservoir for:

flood control, power source, irrigation, recreation)

PROJECT LIFE

Private Project -- 5 to 20 years;

Public Project -- 20 to 60 years

CAPITAL PROVIDER RELATIONSHIP TO PROJECT

Private Project -- Direct

Public Project -- Indirect or none

NATURE OF BENEFITS

Private Project -- Monetary or near monetary

Public Project -- Non-monetary; difficult to equate

to monetary terms

116

PRIVATE VERSUS PUBLIC PROJECTS

PROJECT BENEFICIARIES

Private Project -- Those undertaking project

Public Project -- General public

CONFLICT OF PURPOSES

More common for public projects (i.e., dam for flood control vs

environmental preservation)

CONFLICT OF INTERESTS

More common for public projects (i.e., intra-agency conflicts)

POLITICAL INFLUENCE

More common for public projects ( i.e., changing decision makers,

pressure groups, financial and residential restrictions)

EFFICIENCY MEASUREMENT

Private Project -- Rate of Return on capital

Public Project -- No direct comparison with private projects

117

BENEFIT / COST RATIO METHOD

The time-value of money must be considered to

account for the timing of cash flows (benefits)

occurring after inception of project

A ratio of discounted benefits to discounted costs

The ratio of equivalent worth (i.e., AW, PW or FW)

of benefits to the equivalent worth of costs

Also known as savings-investment ratio by some

governmental agencies

118

CONVENTIONAL BENEFIT / COST (B/C) RATIO WITH

PRESENT WORTH (PW)

PW (benefits of the proposed project) PW(B)

B/C = ---------------------------------------- = -------------

PW(total costs of the proposed project) I +PW(O&M)

where: PW() = present worth of ()

B = benefits of the proposed project

I = initial investment of the proposed project

O&M = operating and maintenance costs of the proposed project

AW(total costs of the proposed project) CR +AW(O&M)

where: AW() = annual worth of ()

B = benefits of the proposed project

CR = capital recovery amount (i.e., the equivalent annual cost of the

initial investment, I, including an allowance for salvage value, if any)

O&M = operating and maintenance costs of the proposed project

119

BENEFIT / COST ANALYSIS IN DETERMINING

ACCEPTABILITY OF A PROJECT

All of the preceding formulations for benefit / cost analysis

result in consistent acceptance or rejection:

B / C > 1.0 --- Project accepted

B / C = 1.0 --- Project accepted

B / C < 1.0 --- Project Rejected

Conventional B / C ratios for PW and AW formulations

result in the same numerical values

Modified B / C ratios for PW and AW formulations result in

the same numerical values (but not the same as the

conventional B / C ratios)

120

DISBENEFITS IN THE BENEFITS / COST (B / C)

RATIO

The traditional approach to incorporating

disbenefits into a benefit / cost analysis to reduce

the benefits by the amount of disbenefits (i.e., to

subtract disbenefits from benefits in the numerator

of the B/C ratio).

Alternatively, the disbenefits could be treated as

costs (i.e., add disbenefits to costs in the

denominator).

121

Terimakasih

122