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Project
Evaluation
Methods
Present
Worth
Method
Future
Worth
Method
Annual
Worth
Method
Internal
Rate of
Return
Method
External
Rate of
Return
Method
Payback
Period
Method
BenefitCost
Analysis
Learning Objectives
1.
2.
3.
4.
Evaluate the economic viability of projects using the Equivalent Worth Methods
Evaluate the economic viability of projects using the Rate of Return Methods
Calculate the payback period of projects
Perform Benefit-Cost analysis
Rate of Return
Methods
Present
Worth
Method
Internal Rate
of Return
Method
Future Worth
Method
External Rate
of Return
Method
Payback
Period Method
Benefit-Cost
Analysis
Annual Worth
Method
CHE40: ENGINEERING ECONOMY
A project your firm is considering for implementation has these estimated costs and revenues: an
investment cost of $50,000; maintenance costs that start at $5,000 at EOY 1 and increase by $1,000 for
each of the next 4 years; savings of $20,000 per year from EOY 1 to EOY 10; and finally a resale value of
$35,000 at EOY 10. If the project has a 10-year old life and the firms MARR is 10% per year, what is the
present worth of the project? Is it a sound investment opportunity?
= +
1
=
* PW RC calculated from AW RC
What is the capitalized cost, when the interest rate is 10% per year, of $10,000 now, $1,500 per year,
starting in year 1 and continuing forever and $10,000 in year five, repeating every 5 years?
A small company purchased now for $23,000 will lose $1,200 each year the first 4 years. An additional
$8,000 invested in the company during the 4th year will result in a profit of $5,500 each year from the
5th year through the 15th year. At the end of 15 years, the company can be sold for $33,000. Calculate
the future worth if MARR is 12%.
=
R Annual Revenues
E
Annual Expenses
CR Capital Recovery Amount: shows the loss in value of the asset and interest on
invested capital
= , %, ( , %,
I
Salvage Value
Your company is considering the introduction of a new product line. The initial investment required for
this project is $500,000, and annual maintenance costs are anticipated to be $35,000. Annual operating
costs will be directly proportional to the level of production at $7.50 per unit, and each unit of product
can be sold for $50. If the MARR is 15% and the project has a life of 5 years, what is the minimum
annual production level for which this project is economically viable?
Rate of Return
Methods
Present
Worth
Method
Internal Rate
of Return
Method
Future Worth
Method
External Rate
of Return
Method
Payback
Period Method
Benefit-Cost
Analysis
Annual Worth
Method
CHE40: ENGINEERING ECONOMY
10
In July of 2009, Taylor purchased 2,000 shares of XYZ common stock for $75,000. He then sold 1,000
shares of XYZ in July 2010 for $39 per share. The remaining 1,000 shares were finally sold for $50 per
share in July 2011. What was Taylors internal rate of return on this investment?
11
The prospective exploration for oil in the outer continental shelf by a small, independent drilling
company has produced a rather curious pattern of cash flows, as follows:
EOY 0
-$520,000
EOY 1-10
+$200,000
EOY 10
-$1,500,000
The $1,500,000 expense at the end of year 10 will be incurred by the company in dismantling the
drilling rig. The company expects to earn at least 20% per earn on invested capital. Use the ERR
method to determine the viability of this investment. The external reinvestment rate is 15%.
CHE40: ENGINEERING ECONOMY
12
A plasma arc furnace has an internal combustion temperature of 7,000C and is being considered for
the incineration of medical wastes at a local hospital. The initial investment is $300,000 and annual
revenues are expected to be $175,000 over the six-year life of the furnace. Annual expenses will be
$100,000 at the end of year one and will increase by $5,000 each year thereafter. The resale value of
the furnace after six years is $20,000. Determine the simple payback period and the discounted
payback period of the furnace. Use an interest rate of 10%.
CHE40: ENGINEERING ECONOMY
13
Rate of Return
Methods
Present
Worth
Method
Internal Rate
of Return
Method
Future Worth
Method
External Rate
of Return
Method
Payback
Period Method
Benefit-Cost
Analysis
Annual Worth
Method
CHE40: ENGINEERING ECONOMY
14
Benefit-Cost Analysis
Conventional B/C Ratio
&
=
Benefits, B
advantages
experienced by
the owner
Disbenefits,
D
disadvantages to
the owner
Costs, C
anticipated
expenditure less
any salvage
values
15
Project
Evaluation
Methods
Present
Worth
Method
Future
Worth
Method
Annual
Worth
Method
Internal
Rate of
Return
Method
External
Rate of
Return
Method
Payback
Period
Method
BenefitCost
Analysis
Learning Objectives
1.
2.
3.
4.
Evaluate the economic viability of projects using the Equivalent Worth Methods
Evaluate the economic viability of projects using the Rate of Return Methods
Calculate the payback period of projects
Perform Benefit-Cost analysis
16
Project Evaluation
Engr. Elisa G. Eleazar
17