Engineering Economic Analysis 9th Edition Chapter 6 ANNUAL CASH FLOW ANALYSIS Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 1 Annual Cash Flow Calculations Resolving a Present Cost to an Annual Cost • Simplest case is to convert the PV to a series of EUAW (equivalent uniform annual worth) cash flows – [previously A]. • A=p(a/p,i,n) • A is -PMT in Excel® • Where there is salvage value • A will be reduced • A = F(A/F,i,n) Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 2 Annual Cash Flow Four Essential Points 1. EUAW = PW(A/P,i,n) 2. EUAW is 1. Decreased by a cost 2. Increased by a benefit 3. In Excel® use “-PMT” to calculate EUAW 1. (remember the minus sign) 4. For an irregular cash flow over the analysis period, first determine the PW then convert to EUAW Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 3 Annual Cash Flow Analysis Fixed input Situation Criterion Amount of Maximize capital available EUAW fixed Fixed output $ amount of benefit is fixed Maximize EUAW Neither fixed Neither capital nor $ benefits are fixed Maximize EUAW Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 4 Analysis Period Considerations 1. Analysis period equal to alternative lives 2. Analysis period a common multiple of alternative lives 3. Analysis period for a continuing requirement 4. Some other period such as project life Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 5 Analysis Period Equal to Alternative Lives • Base the comparison on the life of the alternatives • This is the case we have most often considered in our examples • This is rarely the case in “real-life” organizations Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 6 Analysis Period a Common Multiple of Alternative Lives • When the lives of the equipment in the two alternatives varies, use a common multiple of the two lives. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 7 Analysis Period for a Continuing Requirement • Where the project will last forever (nothing does) use an infinite time period. • In most analyses, organizations often use a representatively long time period to get a reasonable estimate. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 8 Some Other Period Such As Project Life • Physical equipment usually has a useful life that is different from the project life. • In this case, use the project life as the analysis period. • This is the most common case in “real-life” organizations. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 9
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