IEN255 Chapter 5 Annual Equivalent Worth Analysis

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IEN255 Chapter 5 - Annual Equivalent Worth
Analysis

• Another common method
• Equal payments on an annual basis
• Convert NPW to AE

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Annual Equivalent Worth Criterion

• AE(I) PW(I)(A/P,I,N) (5.1)

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Good or bad? (for revenue)

• If AW(i) gt 0, accept
• If AW(i) 0, indifferent
• If AW(i) lt 0, reject

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Cyclic flow pattern

• figure 5.2

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Why do AE?

• Consistency of report formats
• Need for unit costs/profits
• Unequal project lives
• indefinite service period

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Capital vs Operating Costs

• Operating Costs - incurred during operation
  (labor, matls, etc.) recurring costs
• Capital Costs - purchasing assets (non-recurring)

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A Formula

• CR(i) I(A/P,i,N) - S(A/F,i,N) (5.2)
• If I initial cost and S salvage value
• we know that,
• (A/F,i,N) (A/P,i,N) - I
• so rewriting,
• CR(i) I(A/P,i,N) - S(A/P,i,N) - I
• and rearranging
• CR(i) (I-S)(A/P,I,N) iS

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Example 5.3

• figure 5.4

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Applications - Unit Profit/Cost Calculation

• Determine the number of units to be produced each
  year over the life of the asset
• Identify the cash flow series over life
• calculate NPW
• Divide equivalent AE by the number of units to be
  produced (if varies each year, you need to
  convert them to equivalent annual units).

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Example 5.4
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Make or Buy

• Determine the time span
• determine the annual quantity of the part (or
  product)
• Obtain the unit cost of purchasing the part from
  outside
• determine (extra) equipment, labor, etc.
  required to make the part.
• Estimate the cash flows with the make option
• compute AE of producing the part over the time
  span
• compute the unit cost
• choose minimum cost

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Example 5.6
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Break even point (cost reimbursement)

• unit of use calculation
• depreciation - loss in value
• figure 5.6

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Mutually exclusive projects

• Analysis period equals project lives
• Example 5.8
• operating cost per kWh per unit
• determine total input power for both motor types
• determine total kWh per year for both motor types
• determine annual energy costs for both motor
  types
• determine capital costs for both motor types
• determine total AE ( capital cost annual
  energy cost)
• then calculate unit cost per kWh based on output
  power
• determine savings per operating hour for switching

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Break even
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Analysis periods differs from lives

• Service of the selected alternative is required
  on a continuous basis
• each alternative will be replace by an identical
  alternative
• Iff these two criteria are true we can solve for
  only initial life span. (saves time from doing
  LCM)

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Example 5.9

• Quick way for example 4.14
• figure 5.8

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Design economics

• AE(i) a bx c/x (5.5)
• minimize and

(5.6)
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IEN255 Summer99 Chapter 3, 4 5 Test 2

• Test2 Over Chapters 3 (commercial loans (3.6)
  and bonds (3.7)), 4, and 5.
• Dont forget chapter 5!!!!
• 1 hour and 30 minutes for the test
• done at 330!