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    Chapter 4 Evaluating A Single Project Part 1

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    Sarah Mae Wenceslao
    This document discusses methods for evaluating a single capital investment project, including present worth, future worth, annual worth, internal rate of return, external rate of return, payback period, and benefit-cost ratio. It provides examples of how to use the present worth, future worth, and annual worth methods to analyze whether a proposed equipment purchase that costs $250,000 and generates $80,000 in annual productivity gains over 5 years is economically justified given a required minimum attractive rate of return of 20%.

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    Chapter 4 Evaluating A Single Project Part 1

    Uploaded by

    Sarah Mae Wenceslao
    10 views16 pages
    This document discusses methods for evaluating a single capital investment project, including present worth, future worth, annual worth, internal rate of return, external rate of return, payback period, and benefit-cost ratio. It provides examples of how to use the present worth, future worth, and annual worth methods to analyze whether a proposed equipment purchase that costs $250,000 and generates $80,000 in annual productivity gains over 5 years is economically justified given a required minimum attractive rate of return of 20%.

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    Chapter 4 Evaluating a Single Project Part 1

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    This document discusses methods for evaluating a single capital investment project, including present worth, future worth, annual worth, internal rate of return, external rate of return, payback period, and benefit-cost ratio. It provides examples of how to use the present worth, future worth, and annual worth methods to analyze whether a proposed equipment purchase that costs $250,000 and generates $80,000 in annual productivity gains over 5 years is economically justified given a required minimum attractive rate of return of 20%.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    10 views16 pages

    Chapter 4 Evaluating A Single Project Part 1

    Uploaded by

    Sarah Mae Wenceslao
    This document discusses methods for evaluating a single capital investment project, including present worth, future worth, annual worth, internal rate of return, external rate of return, payback period, and benefit-cost ratio. It provides examples of how to use the present worth, future worth, and annual worth methods to analyze whether a proposed equipment purchase that costs $250,000 and generates $80,000 in annual productivity gains over 5 years is economically justified given a required minimum attractive rate of return of 20%.

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    You are on page 1of 16

    Evaluating a Single

    Project
    Introduction

    All engineering economy studies of capital projects


    should consider the return that a given project will or
    should produce. The basic question that we want to
    answer is whether a proposed capital investment and its
    associated expenditures can be recovered by revenue
    (or savings) over time in addition to a return on the
    capital that is sufficiently attractive in view of the risks
    involved and the potential alternative uses.
    Methods for Economic Evaluation

     Present Worth (PW) method


     Future Worth (FW) method $ ≥0
     Annual Worth (AW) method
     Internal Rate of Return (IRR) method
    i ≥ MARR
     External Rate of Return (ERR) method
     Payback Period n that is favorable for
    the investor as their
     Benefit-Cost Ratio
    period of capital
    recovery
    ratio of benefit and cost, B-C
    ratio ≥ 1
    PRESENT WORTH (PW) METHOD

    PW (%) = PW inflows – PW outflows

    PW0 (%)
    PW DECISION RULE
    If PW (i = MARR) ≥ 0, the project is economically justifiable.
    Sample Problem

     A piece of new equipment has been proposed by an


    engineer to increase the productivity of a certain manual
    welding operation. The investment cost is Php250,000
    and the equipment will have a market value of Php50,000
    at the end of the study period of 5 years. Increased
    productivity attributable to the equipment will amount to
    Php80,000 per year after operating costs have been
    subtracted from the revenue generated by the additional
    production. If the firm’s MARR is 20% per year, is this
    proposal a sound one? Use PW method in your analysis
    Ans: PhP 9,342.85
    FUTURE WORTH (FW) METHOD

    FW (%) = FW inflows – FW outflows

    FWn (%)
    FW DECISION RULE
    If FW (i = MARR) ≥ 0, the project is economically justifiable.
    Sample Problem

     A piece of new equipment has been proposed by an


    engineer to increase the productivity of a certain manual
    welding operation. The investment cost is Php250,000
    and the equipment will have a market value of Php50,000
    at the end of the study period of 5 years. Increased
    productivity attributable to the equipment will amount to
    Php80,000 per year after operating costs have been
    subtracted from the revenue generated by the additional
    production. If the firm’s MARR is 20% per year, is this
    proposal a sound one? Use FW method in your analysis
    Ans: PhP 23,248
    ANNUAL WORTH (AW) METHOD

    AW (%) = AW inflows – AW outflows


    AW DECISION RULE
    If AW (i = MARR) ≥ 0, the project is economically justifiable.
    Sample Problem

     A piece of new equipment has been proposed by an


    engineer to increase the productivity of a certain manual
    welding operation. The investment cost is Php250,000
    and the equipment will have a market value of Php50,000
    at the end of the study period of 5 years. Increased
    productivity attributable to the equipment will amount to
    Php80,000 per year after operating costs have been
    subtracted from the revenue generated by the additional
    production. If the firm’s MARR is 20% per year, is this
    proposal a sound one? Use AW method in your analysis
    Ans: PhP 3,124.06
    ASSIGNMENT

     An initial capital of Php1,000,000 was put up for a new


    business that will produce an annual income of
    Php600,000 for 5 years and will have a salvage value of
    Php20,000 at the time. Annual expenses for its operation
    (salaries and wages, insurance, taxes) and maintenance
    amounts to Php300,000. If money is worth 10%
    compounded annually, is this investment profitable or not?
    Use PW, FW and AW methods.

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