Powerpoinr Ektek
Powerpoinr Ektek
Teguh Sasono
Ref: Sullivan, William G., Wicks & Koelling, Engineering Economy,
Pearson Education, Inc., 14th edition, 2009
1
Pengantar Ekonomi Teknik
3
Pengambilan Keputusan Rasional
6. Membangun Model
– “Saya akan menggunakan spreadsheet. Barisnya merupakan pilihan
apartemen, kolom berisi kriteria evaluasi. Kemudian saya akan mencoba
mengisi interaksi antara apartemen dan kriteria.
– Itu juga melibatkan penetapan aliran kas untuk analisis ekonomi teknik!
7
SOME STANDARD COST USES
8
CASH COST VERSUS BOOK COST
9
SUNK COST AND OPPORTUNITY COST
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 + Owner’s 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
13
PRICE Price equals some
constant value minus some multiple
a
of the quantity demanded:
p=a-bD
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 )
D’1 D* D’2 Demand
15
D’1 and D’2 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
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
• 24 ijin 10 s
19
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
20
Pendekatan Estimasi Biaya terintegrasi
22
Contoh WBS (3 level) Projek Bangunan Komersial
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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
24
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
25
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?
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
27
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
28
Regular unleaded: 105 cents/gal (189/109) = 182 cents/gal
TECHNIQUES FOR ESTIMATING COSTS / REVENUES
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
30
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
31
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
34
Capital
i3
ie
i2
Money Demand
Quantity of Money 36
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
37
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
38
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.
39
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 40
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
41
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.
A / F , i%,N A / P , i%,N i
45
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=?
P0
$1,000
$600
$400 $400 $400 $400
$200
0 1 2 3 4 5 6 7
47
Equivalence Calculations Involving Multiple Interest Formulas
$1,000 F7
$600
$400 $400 $400 $400
$200
0 1 2 3 4 5 6 7
48
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)
49
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
50
RELATING A UNIFORM GRADIENT OF CASH FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
3G
2G
G
1 2 3 4 N-2 N-1 N
End of Period
52
RELATING A UNIFORM GRADIENT OF CASH FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
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
55
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 56
Minimum Attractive Rate of Return MARR
57
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 firm’s MARR will also
change
58
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
59
Example-6
60
Solution Example-6
$5,000
1 2 3 4 5=N
0
MARR = 20% per year
$25,000
62
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
63
Example-7
64
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
1 2 3 4 5=N
0
MARR = 20% per year
$25,000
70
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
71
Solution-8
72
Solution-8 (Investment Balance Diagram)
73
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
74
PAYBACK PERIOD METHOD
78
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.
79
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.
80
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.
81
REPEATABILITY ASSUMPTION
82
REPEATABILITY ASSUMPTION
B A
N=4 N=3
A
3 6 9 N = 12
B
4 8 N = 12
83
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 84
Solution-10
A B
$1,255 $1,480
4 8 N = 12 6 N = 12
86
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
87
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
88
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 89
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 90
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.
91
INCONSISTENT RANKING PROBLEM (PR)
• 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
92
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
93
THREE ERRORS COMMON TO INCREMENTAL
INVESTMENT ANALYSIS PROCEDURE APPLIED TO IRR
94
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
95
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 96
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
97
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
98
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
100
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
101
REPLACEMENT ANALYSIS
The evaluation of changes in economics of assets
associated with their use in an operating environment.
Considers asset
• replacement
• retirement
• Augmentation
102
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
103
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
104
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
105
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
106
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
107
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
108
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)
109
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’
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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*
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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).
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Terimakasih
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