All proposals
must offer at MARR
Least MARR
to be considered ROR on
Safe investment
0 1 2 3
R R R R R R R R R
I
E
0 1 2 3
PB = -I - E(P/A, iB, 36) + R(P/F, iB, 4) + R(P/F, iB, 8) + … + R(P/F, iB, 36) + SV(P/F, iB, 36)
Example:
Two types of production systems are being considered based on MARR of 12% per
year and the following characteristics:
system A system B
Initial cost Rp. 625.000.000,- Rp. 770.000.000,-
Monthly expenses Rp. 45.750.000,- Rp. 55.750.000,-
Monthly receipts Rp. 32.000.000,- Rp. 40.000.000,-
Salvage value Rp. 225.000.000,- Rp. 110.000.000,-
Life 2 tahun 4 tahun
I
E
0 1 2
System B:
R
SV
I
E
0 1 2 3 4
I I2
E1 E2
0 1 2 3 4
System B:
R
SV
I
E
0 1 2 3 4
I
E
0 1 2
System B:
R Estimated SV
I
E
0 1 2 3 4
A1 A2 A3
Electric Power Gas Power Solar Power
First Cost: -2500 First Cost: -3500 First Cost: -6000
Ann. Op. Cost: -900 Ann. Op. Cost: -700 Ann. Op. Cost: -50
Sal.Value: +200 Sal.Value: +350 Sal.Value: +100
Life: 5 years Life: 5 years Life: 5 years
0 1 2 3 4 5
-2500 A = -900/Yr.
FSV = 350
A2: Gas
0 1 2 3 4 5
A = -700/Yr.
-3500
FSV = 100
A3:Solar
0 1 2 3 4 5
A = -50/Yr.
-6000 i = 10%/yr and n = 5
4-16 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Calculate the Present Worth's
Location A Location B
First cost, $ -15,000 -18,000
Annual lease cost,
$ per year -3,500 -3,100
Deposit return,$ 1,000 2,000
Lease term, years 6 9
A
6 years 6 years 6 years
B
9 years 9 years
18 years
(1 i) 1 n
P A n
i(1 i)
On the right hand side, divide both
numerator and denominator by (1+i)n
1
1 (1 i ) n
P A
i
4-29 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
CC Derivation…
Repeating: 1
1 (1 i ) n
P A
i
If “n” approaches the above reduces
to:
A
P
i
4-30 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
CC Explained
0 1 2 3 4 ..... 9 10 11 ……..
$35,000/yr
i = 6%/year
$50 Million
$100,000
$2 Million
Truss Design:
/////
0 1 2 3 4 5 6 7/ 8 9 10 11 …..
A. Maint. = $20,000/yr
n=
Paint: -40,000 Paint: -40,000 Paint: -40,000
Truss Design:
/////
0 1 2 3 4 5 6 7/ 8 9 10 11 …..
A. Maint. = $20,000/yr
n=
Paint: -40,000 Paint: -40,000 Paint: -40,000
Truss Design:
/////
0 1 2 3 4 5 6 7/ 8 9 10 11 …..
A. Maint. = $20,000/yr
n=
Paint: -40,000 Paint: -40,000 Paint: -40,000
A2 = -$40,000(A/F,6%,3) = -$12,564/year
4-38 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Truss Bridge Alternative
3, A3 Annual Cost of Sandblasting
i = 6%/year
Truss Design:
/////
0 1 2 3 4 5 6 7/ 8 9 10 11 …..
A. Maint. = $20,000/yr
A3 = -$190,000(A/F,6%,10) =-$14,421
4-39 SI-4251 Ekonomi Teknik Muhamad Abduh, Ph.D.
Bridge Summary for CC(6%)
CC2 = (A1+A2+A3)/i
CC2 = -(20,000+12,564+14,421)/0.06
CC2 – $783,083
CCTotal = CC1 + CC2 =-40.783 million
3. Ganesha consulting firm is considering to build or lease an office space. For interest rate of 6% compounded semiannualy
compare and select alternative. build own lease
Construction cost Rp. 8.750.000.000,- -
Lease cost - Rp. 415.000.000,- / 3 years
Maintenance cost Rp. 110.000.000,- / year Rp. 75.000.000,- / year
Period ∞ 3 years