Session V Present Worth Analysis

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ENGINEERING ECONOMY
SESSION V
PRESENT WORTH
ANALYSIS
Blank & Tarquin: 5th Edition. Ch. 5 Authored By: Dr. Don Smith, Texas A&M University. 1
LEARNING OBJECTIVES
PURPOSE OF THIS CHAPTER
 FORMULATION OF MUTUALLY EXCLUSIVE
ALTERNITIVES
 PROPER COMPARISON/ANALYSIS OF
MUTUALLY EXCLUSIVE ALTERNATIVES
 PRESENT WORTH METHOD
 EXTENSIONS OF THE PRESENT WORTH
METHOD
CHAPTER TOPICS
Formulating Alternatives
PW of Equal-Life Alternatives
PW of Different-Life alternatives
Future Worth Analysis
Capitalized Cost Analysis
Payback Period
Life-Cycle Costs
PW of Bonds
Spreadsheet Applications
5.1 FORMULATING MUTUALLY EXCLUSIVE

ALTERNATIVES
Viable firms/organizations have the

capability to generate potential
beneficial projects for potential
investment
Two types of investment categories
 Mutually Exclusive Set
 Independent Project Set

ALTERNATIVES
Mutually Exclusive set is where a

candidate set of alternatives exist
(more than one)
Objective: Pick one and only one from
the set.
Once selected, the remaining
alternatives are excluded.
5.1 INDEPENDENT PROJECT SET
Given a set of alternatives (more than

one)
The objective is to:
 Select the best possible combination of
projects from the set that will optimize a
given criteria.
 Subjects to constraints
 More difficult problem than the mutually
exclusive approach

ALTERNATIVES
Mutually exclusive alternatives compete

with each other.
Independent alternatives may or may
not compete with each other
The independent project selection
problem deals with constraints and may
require a mathematical programming or
bundling technique to evaluate.
5.1 Type of Alternatives
Revenue/Cost – the alternatives consist

of cash inflow and cash outflows
 Select the alternative with the maximum
economic value
Service – the alternatives consist mainly
of cost elements
 Select the alternative with the minimum
economic value (min. cost alternative)
5.1 Evaluating Alternatives
Part of Engineering Economy is the

selection and execution of the best
alternative from among a set of
feasible alternatives
Alternatives must be generated
from within the organization
 One of the roles of engineers!
5.1 Evaluating Alternatives
In part, the role of the engineer to

properly evaluate alternatives from
a technical and economic view
Must generate a set of feasible
alternatives to solve a specific
problem/concern
5.1 Alternatives
Do
Nothing
Analysis
Alt.
1
Selection
Problem Alt.
2
Alt. Execution
m
5.1 Alternatives: The Selected Alternative
Problem Alt.
Execution
Selected
Audit and Track
Selection is dependent upon the data, life,

discount rate, and assumptions made.
5.2 Present Worth Approach Equal-Lifes
Simple – Transform all of the current

and future estimated cash flow back to
a point in time (time t = 0)
Have to have a discount rate before the
analysis in started
Result is in equivalent dollars now!
5.2 THE PRESENT WORTH METHOD
A process of obtaining the

equivalent worth of future cash
flows to some point in time
– called the Present Worth
At an interest rate usually equal to or

greater than the Organization’s
established MARR.
P(i%) = P( + cash flows) +

P( - cash flows)
OR, . . .
P(i%) = P(+) – P(-).
If P(i%) > 0 then the project is

deemed acceptable.
If P(i%) < 0 – the project is usually
rejected.
If P(i%) = 0 Present worth of costs = Present

worth of revenues – Indifferent!
If the present worth of a project turns out to =

“0,” that means the project earned exactly the
discount rate that was used to discount the cash
flows!
The interest rate that causes a cash flow’s NPV

to equal “0” is called the Rate of Return of the
cash flow!
For P(i%) > 0, the following holds true:
A positive present worth is a dollar

amount of "profit" over the minimum
amount required by the investors
(owners).
5.2 THE PRESENT WORTH METHOD –

Depends upon the Discount Rate Used
The present worth is purely a

function of the MARR (the
discount rate one uses).
If one changes the discount rate, a
different present worth will result.
For P(i%) > 0, the following

holds true:
Acceptance or rejection of a
project is a function of the timing
and magnitude of the project's
cash flows, and the choice of the
discount rate.
5.2 PRESENT WORTH: Special

Applications
Present Worth of Equal Lived

Alternatives
Alternatives with unequal lives: Beware
Capitalized Cost Analysis
Require knowledge of the discount rate
before we conduct the analysis
5.2 PRESENT WORTH: Equal Lives
Present Worth of Equal Lived

Alternatives – straightforward
Compute the Present Worth of each

alternative and select the best, i.e.,
smallest if cost and largest if profit.
5.2 Equal Lives – Straightforward!
Given two or more alternatives with

equal lives….
Alt. 1
Alt. 2 N = for all

alternatives
Alt. N
Find PW(i%) for each alternative then compare
5.2 PRESENT WORTH: Example
Consider: Machine A Machine B

First Cost $2,500 $3,500
Annual Operating Cost 900 700
Salvage Value 200 350
Life 5 years 5 years
i = 10% per year
Which alternative should we select?
5.2 PRESENT WORTH: Cash Flow Diagram

F5=$200
MA
0 1 2 3 4 5
A = $900
$2,500
F5=$200
MB
0 1 2 3 4 5
$3,500 A = $700
Which alternative should we select?
5.2 PRESENT WORTH: Solving
PA = 2,500 + 900 (P|A, .10, 5) –

200 (P|F, .01, 5)
= 2,500 + 900 (3.7908) - 200 (.6209)
= 2,500 + 3,411.72 - 124.18 = $5,788
PB = 3,500 + 700 (P|A, .10, 5) –

350 (P|F, .10, 5)
= 3,500 + 2,653.56 - 217.31 = $5,936
SELECT MACHINE A: Lower PW cost!
5.3 PRESENT WORTH: Different Lives
Present Worth of Alternatives with

Different Lives
Comparison must be made over equal

time periods
 Compare over the least common multiple,

LCM, for their lives
5.3 PRESENT WORTH: Unequal Lives
Present Worth of Alternatives with

Different Lives
Remember – if the lives of the
alternatives are not equal, one must
create or force a study period where
the life is the same for all of the
alternatives
5.3 Present Worth with Unequal Lives: The Rule
In an analysis one cannot effectively

compare the PW of one alternative with
a study period different from another
alternative that does not have the same
study period.
This is a basic rule!
5.3 PRESENT WORTH: Lowest Common

Multiple of Lives
If the alternatives have different study

periods, you find the lowest common
life for all of the alternatives in
question.
Example: {3,4, and 6} years. The
lowest common life is 12 years.
Evaluate all over 12 years for a PW
analysis.
5.3 PRESENT WORTH: Example Unequal

Lives
EXAMPLE
Machine A Machine B
First Cost $11,000 $18,000
Annual Operating Cost 3,500 3,100
Salvage Value 1,000 2,000
Life 6 years 9 years
i = 15% per year

Note: Where costs dominate a problem it is customary to assign a
positive value to cost and negative to inflows
5.3 PRESENT WORTH: Example Unequal

Lives
A common mistake is to
compute the present
worth of the 6-year
project and compare it to
the present worth of the
9-year project.
NO! NO! NO!
5.3 PRESENT WORTH: Unequal Lives
Machine A F6=$1,000
0 1 2 3 4 5 6
A 1-6
=$3,500 F6=$2,000
$11,000
0 1 2 3 4 5 6 7 8 9
A 1-9
Machine B
=$3,100
i = 15% per year

$18,000
LCM(6,9) = 18 year study period will apply for present worth
5.3 Unequal Lives: 2 Alternatives
Machine A
6 years 6 years 6 years
Cycle 1 for A Cycle 2 for A Cycle 3 for A
Machine B
9 years 9 years
Cycle 1 for B Cycle 2 for B
18 years
i = 15% per year

LCM(6,9) = 18 year study period will apply for present worth
5.3 Example: Unequal Lives Solving
LCM = 18 years
Calculate the present worth of a 6-year cycle

for A
PA = 11,000 + 3,500 (P|A, .15, 6) –

1,000 (P|F, .15, 6)
= 11,000 + 3,500 (3.7845) – 1,000 (.4323)
= $23,813, which occurs at time 0, 6 and 12
5.3 Example: Unequal Lives
Machine A
0 6 12 18
$23,813 $23,813 $23,813
PA= 23,813+23,813 (P|F, .15, 6)+

23,813 (P|F, .15, 12)
= 23,813 + 10,294 + 4,451 = 38,558
5.3 Unequal Lives Example: Machine B
Calculate the Present Worth of a 9-year

cycle for B
F6=$2,000
0 1 2 3 4 5 6 7 8 9
A 1-9
=$3,100
$18,000
5.3 9-Year Cycle for B
Calculate the Present Worth of a 9-year cycle

for B
PB = 18,000+3,100(P|A, .15, 9) –
1,000(P|F, .15, 9)
= 18,000 + 3,100(4.7716) - 1,000(.2843)
= $32,508 which occurs at time 0 and 9
5.3 Alternative B – 2 Cycles

Machine A: PW =$38,558
0 9 18
$32,508 $32,508
PB = 32,508 + 32,508 (P|F, .15, 9)

= 32,508 + 32,508(.2843)
PB = $41,750
Choose Machine A
5.3 Unequal Lives – Assumed Study

Period
Study Period Approach

 Assume alternative: 1 with a 5-year life
 Alternative: 2 with a 7-year life
Alt-1: N = 5 yrs LCM = 35 yrs
Alt-2: N= 7 yrs
Could assume a study period of, say, 5 years.
5.3 Unequal Lives – Assumed Study

Period
Assume a 5-yr. Study period

Estimate a salvage value for the 7-year
project at the end of t = 5
Truncate the 7-yr project to 5 years
Alt-1: N = 5 yrs Now, evaluate both

over 5 years using
Alt-2: N= 7 yrs the PW method!
5.4 FUTURE WORTH APPROACH
FW(i%) is an extension of the present

worth method
Compound all cash flows forward in
time to some specified time period
using (F/P), (F/A),… factors or,
Given P, the F = P(1+i)N
5.4 Applications of Future Worth
Projects that do not come on line until

the end of the investment period
 Commercial Buildings
 Marine Vessels
 Power Generation Facilities
 Public Works Projects
Key – long time periods involving
construction activities
5.4 Future Worth Example (Figure 5.3)
See Example 5.3

Calculate the Future Worth of
determining the selling price in order to
earn exactly 25% on the investment
Draw the cash-flow diagram!!
5.5 CAPITALIZED COST
CAPITALIZED COST- the present worth

of a project that lasts forever.
Government Projects
Roads, Dams, Bridges (projects that
possess perpetual life)
Infinite analysis period
5.5 Derivation for Capitalized Cost
Start with the closed form for the P/A factor
 (1  i )  1  N
P  A N 
 i (1  i ) 
Next, let N approach infinity and divide the
numerator and denominator by (1+i)N
5.5 Derivation - Continued
Dividing by (1+i)N yields

 1 
1 
 (1  i ) N 
P  A 
 i 
 
Now, let n approach infinity and the
right hand side reduces to….
5.5 Derivation - Continued
1  A
P  A  
i  i
Or,
CC(i%) = A/i
Assume you are called on to maintain a

cemetery site forever if the interest rate
= 4% and $50/year is required to
maintain the site.
1 2 3 4 5 .. ………………….. N=inf.
A=$50/yr
P=?
Find the PW of an infinite annuity flow

P0 = A[P/A,i%,N]
1 2 3 4 5 ..
………………….. N=inf.
A=$50/yr
Find the PW of an infinite annuity flow

P=?
 (1  i ) N  1 
P  A N 
, let N  
 i (1  i ) 
P0=A(1/i)
 (1  i )  1  1 N
lim N   N 

 i (1  i )  i
P0 = $50[1/0.04]
P0 = $50[25] = $1,250.00
Invest $1,250 into an account that
earns 4% per year will yield $50 of
interest forever if the fund is not
touched and the i-rate stays constant.
5.5 CAPITALIZED COST: Endowments
Assume a wealthy donor wants to endow a

chair in an engineering department.
The fund should supply the department with
$200,000 per year for a deserving faculty
member.
How much will the donor have to come up
with to fund this chair if the interest rate =
8%/yr.
5.5 CAPITALIZED COST: Endowed Chair
The department needs $200,000 per year.
P = $200,000/0.08 = $2,500,000
If $2,500,000 is invested at 8% then the

interest per year = $200,000
The $200,000 is transferred to the department,

but the principal sum stays in the investment to
continue to generate the required $200,000
5.5 Capitalized Cost Example
EXAMPLE
Calculate the Capitalized Cost of a
project that has an initial cost of
$150,000. The annual operating cost is
$8,000 for the first 4 years and $5000
thereafter. There is an recurring
$15,000 maintenance cost each 15
years. Interest is 15% per year.
5.5 Cash Flow Diagram
“i”=15%/YR
0 1 2 3 4 5 6 7 15 30 ………
$4,000
$8,000
$15,000 $15,000 $15,000 $15,000
$150,000
N=
How much $$ at t = 0 is required to fund this

project?
The capitalized cost is the total amount of $ at t
= 0, when invested at the interest rate, will
provide annual interest that covers the future
needs of the project.
5.5 CAPITALIZED COST - Example

Continued
1. Consider $4,000 of the $8,000 cost

for the first four years to be a one-time
cost, leaving a $4,000 annual operating
cost forever.
P0= 150,000 + 4,000 (P|A, .15, 4) =
2.855
$161,420
5.5 CAPITALIZED COST - Continued
Recurring annual cost is $4,000 plus the

equivalent annual of the 15,000 end-of-
cycle cost.
…….
0 15 30 45 60 ……..
Take any 15-year period and find the equivalent

annuity for that period using the F/A factor.
5.5 CAPITALIZED COST: One Cycle
Take any 15-year period and find the equivalent

annuity for that period using the F/A factor
…….
0 15 30 45 60 ……..
$15,000
A for a 15-year period
2. Recurring annual cost is $4,000 plus

the equivalent annual of the 15,000
end-of-cycle cost.
A= 4,000 + 15,000 (A|F, .15, 15)
= 4,000 + 15000 (.0210) = $5,315
Recurring costs = $5,315/i =
5,315/0.15 =$3,443/yr
Capitalized Cost = 161,420 + 5315/.15

= $196,853
Thus, if one invests $196,853 at time t
= 0, then the interest at 15% will
supply the end-of-year cash flow to
fund the project so long as the principal
sum is not reduced or the interest rate
changes (drops).
5.6 Payback Period Analysis
Two forms for this method

 Discounted Payback Period (uses an interest
rate)
 Conventional Payback Period (does not use
an interest rate)
Payback is the period of time it takes for
the cash flows to recover the initial
investment.
5.6 Payback Period Analysis
Discounted Payback Approach

Find the value of np such that:
t np
0   P   NCFt ( P / F , i, t )
t 1
5.6 Payback Period Analysis - Example
Example 5.8 i = 15%
Machine 1: N=7
Machine 2: N=14
5.6 Payback Period Analysis - Example 5.8

Tabular Format: Machine 1
5.6 Payback Period Analysis- Machine A
Payback
is
between
6 and 7
yeas
(6.57 yrs)
PW(15%)= +$481.00
5.6 Non-Discounted Analysis – Machine A
At a “0”
interest rate
the PB time
is seen to
equal 4
years!
5.6 Payback for Machine B at 15%, N = 14 yrs
Payback for B is
between 9 and
10 years!
Longer time
period to
recover the
investment.
9.52 years
5.6 Payback at “0”% for Machine B
Payback for B at
0% is 6 years!
5.6 Payback for Example 5.8
Discounted
 Machine A: 6.57 years
 Machine B: 9.52 years
Undiscounted
 Machine A: 4.0 years
 Machine B: 6.0 years
Go with Machine A – lower time period
payback to recover the original
investment
5.6 Payback Method Summarized
Payback is only a rough estimator of

desirability
Use as an initial screening method
Avoid using this method as a primary
analysis technique for selection projects
Totally avoid the no-return payback
period
5.6 Payback Method Summarized
The “No-return” method

 Does not employ the time value of money
 Disregards all cash flows past the payback
time period
 If used, can lead to conflicting selections
when compared to more technically correct
methods like present worth!
5.7 Life Cycle Costs (LCC)
Extension of the Present Worth method

Used for projects over their entire life
span where cost estimates are
employed
Used for:
 Military/Defense Projects
 New Product Lines
 Large construction projects
5.7 Life Cycle Defined – Detailed Phases
Needs Assessment Phase

Conceptual Design Phase
Detailed Design Phase
Production/Construction Phase
Operation – (upgrading to extend)
Phase
Retirement/Disposal Phase
The life can be for years into the future
5.7 Life Cycle: Two General Phases
Cost-$
Cumulative Life Cycle
Costs
Acquisition Phase Operation Phase

TIME
5.7 Life-Cycle Costs: Impact of Design

Changes
Cost of a design change tends to

multiply by 10 with each phase
Any design changes that might occur
late in the life cycle drastically increase
the total life cycle costs!
5.7 Life-Cycle Costs: Acquisition Phase

Rule: About 80% of LCC are locked in
by the end of the Acquisition Phase.
Emphasis is on good design!
Costs - $
Needs Assessment Conceptual Design Detailed Design
Acquisition Phase
5.7 Life-Cycle Costs – Purpose
Make explicit as possible the

relationship of costs over the total life
span of a product/system
Design Process Objective
 Minimize the life-cycle costs
 And meet other performance requirements
 By making correct trade-offs between costs
in the acquisition phase and costs during
the operations phase
5.7 Life-Cycle Costs – Warning
Beware of introducing certain cost-

cutting measures in the acquisition
phase and early production phase
Such cost-cutting measures could
impact the future operations and
degrade safety or require modifications
later on
These cost-cutting measures can be
misleading and dangerous!
5.7 Life-Cycle Costs – Warning
Engineers have a ethical and moral

responsibility to ensure that designs
are:
 Economically sound
 Functional
 Safe
 Perform as expected
5.8 Present Worth of Bonds
Bonds represent a source of funds for

the firm.
Bonds are sold (floated) by investment
banks for firms in order to raise
additional debt capital
A bond is similar to an IOU
Bonds are evidence of Debt
5.8 Bond Types – Treasury Bonds
Treasury bonds
 Issued by Federal Government
 Full backing of the Government
 1 year or less; 2-10 year issues; and 10-30
year issues
 Conservative-type investment
5.8 Bond Types – Municipal Bonds
State and Municipal Bonds

 Issued by states and local governments
 Generally tax-exempt by the Federal
Government
 Used to finance state and local projects
 Backed by future tax and user fees to pay
the interest and face value
5.8 Bond Types – Mortgage Bonds
Mortgage Bonds
 Issued by Corporations
 Secured by the firm’s assets
 Money received by the firm is used to fund
projects
 Referred to a Debt Capital
 Buyers of these bonds are not owners – they
are lenders to the firm
5.8 Bond Types – Debentures
Debenture Bond
 Issued by Corporations
 Not backed by specific assets
 Backing – good faith of the firm
 Pays higher interest rates
 Higher risks involved
 Bond interest rate may “float”
 Could be convertible to common stock
5.8 Present Worth of Bonds – Overview
Investment Bankers
The Firm Sell the Bonds to

The lending public
Commissions/Fees
Proceeds from
The sale
Bondholders
5.8 Bonds – Basics
Bonds are negotiable instruments

Can be traded by the current
bondholder
Source of funds to the firm
Debt capital
Bondholders are loaning $$ to the firm
Earn periodic interest
Sell the bonds at any time
5.8 Bonds – Firm’s View
Firm authorizes a bond sale

Bonds are sold by an outside agency
Firm pays a commission to the selling
agency
The firm receives the proceeds from the
sale
This is now DEBT capital to the firm
5.8 Bond Basics – Continued
The bondholders are not owners

They are lendors
The firm pays periodic interest
payments to the current bond holders
At the end of the bond’s life, the bonds
are redeemed (bought back) from the
current bond holder
5.8 Bond Basics - Continued
The bond itself is just a piece of paper

Evidence of the debt the firm has
incurred
The firm may be able to “call” the bonds
back by paying the current bondholder a
calculated sum
5.8 Bonds – Notation
P0 – The time t = 0 selling price of the

bond – the cost to the buyer of the bond
V – The face value of the bond
 The value printed on the bond
 Face values are usually:
 $100, $1,000, $5,000, $10,000 increments
N – The life of the bond in years

r – The nominal annual bond interest
rate
5.8 Bonds – Notation and Example
Given the nominal annual bond interest

rate, the payment frequency of the
interest (monthly, quarterly semi-
annually, etc.) is also stated
Example:
 V = $5,000 (face value)
 r = 4.5% per year paid semiannually
 N = 10 years
5.8 Bonds – Example – Continued
The interest the firm would pay to the

current bondholder is calculated as:
0.045
I  $5, 000( )  $5, 000(0.0225)
2
I  $112.50 every 6 months
The bondholder, buys the bond and will receive
$112.50 every 6 months for the life of the bond
5.8 Bonds – Example 5.11
Given
 V = $10,000 (Face value of the bond)
 r = 4.5% paid semiannually
 N = 10 years or 20 interest periods
 $I/6 months = $5,000(0.045/2) = $112.50
paid to the current bondholder
Bonds are bought at sold in a bond market. Thus

the price of the bond is subject to the pressures of
the bond market.
5.8 Example 5.11
Key Point – The purchase price of the

bond can be considered a value that is
determined by a willing buyer and a
willing seller.
Assume the potential buyer of this bond
requires a interest rate of no less than
8%/year compounded quarterly.
5.8 Example 5.11 – Continued
The purchaser will consider this bond if

he/she can earn 8%/yr c.q.
What is fixed?
 The future interest payments are fixed
 The future face value of the bond in fixed
What can vary?
 The purchase price such that the buyer can
earn at least the 8%/yr c.q.
5.8 Example 5.1 – Continued
8% c.q is the same as

 0.08/4 = 0.02 = 2% per quarter.
 Bond interest flows every 6 months
 Need an effective 6-month rate
 The effective 6-month rate is then
 (1.02)2 – 1 – 0.0404 = 4.04%/6 months
 This is the potential buyer’s required
interest rate
5.8 Example 5.11 – Solving
The objective is to determine the

purchase price of this bond discounted
at the buyer’s required rate of 4.04%
per 6 months
Draw the cash-flow diagram
Work the problem with N = 20 (not 10)
 We have 20 interest payments (every 6
months) = 10 years
5.8 Example 5.11 – Cash-Flow Diagram

$5,000
i=4.04%/6 months
A = 112.50/6 months
0 1 2 3 4 …. ….. 19 20
Find the PW(4.04%) of the future cash

P=?? flows to the potential bond buyer
5.8 Example 5.11 – Solving
P = $112.50(P/A,4.04%,20)
+ $5,000(P/F,2%,40)
P = $3,788
IF the buyer can buy this bond for
$3,788 or less, he/she will earn at least
the 8% c.q. rate.
Summary: Present Worth
• Present Worth is the basic analysis approach

for most engineering economy studies.
• It also forms a basis for the Internal Rate of
Return method to be presented later
• Requires knowledge of the discount rate as part
of the analysis
Summary: Present Worth
• PW represents a family of methods

• Annual worth
• Future Worth
• Capitalized Cost
• Life-cycle cost analysis – application
• Bond Problems – application
End of Chapter 5 Lecture Set

Session V Present Worth Analysis

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5.1 FORMULATING MUTUALLY EXCLUSIVE

Viable firms/organizations have the

5.1 FORMULATING MUTUALLY EXCLUSIVE

Mutually Exclusive set is where a

5.1 INDEPENDENT PROJECT SET

Given a set of alternatives (more than

5.1 FORMULATING MUTUALLY EXCLUSIVE

Mutually exclusive alternatives compete

5.1 Type of Alternatives

Revenue/Cost – the alternatives consist

5.1 Evaluating Alternatives

Part of Engineering Economy is the

5.1 Evaluating Alternatives

In part, the role of the engineer to

5.1 Alternatives: The Selected Alternative

Audit and Track

Selection is dependent upon the data, life,

5.2 Present Worth Approach Equal-Lifes

Simple – Transform all of the current

5.2 THE PRESENT WORTH METHOD

A process of obtaining the

– called the Present Worth

At an interest rate usually equal to or

5.2 THE PRESENT WORTH METHOD

P(i%) = P( + cash flows) +

5.2 THE PRESENT WORTH METHOD

If P(i%) > 0 then the project is

If P(i%) = 0 Present worth of costs = Present

5.2 THE PRESENT WORTH METHOD

If the present worth of a project turns out to =

The interest rate that causes a cash flow’s NPV

5.2 THE PRESENT WORTH METHOD

For P(i%) > 0, the following holds true:

A positive present worth is a dollar

5.2 THE PRESENT WORTH METHOD –

The present worth is purely a

5.2 THE PRESENT WORTH METHOD

For P(i%) > 0, the following

5.2 PRESENT WORTH: Special

Present Worth of Equal Lived

5.2 PRESENT WORTH: Equal Lives

Present Worth of Equal Lived

Compute the Present Worth of each

5.2 Equal Lives – Straightforward!

Given two or more alternatives with

Alt. 2 N = for all

Find PW(i%) for each alternative then compare

5.2 PRESENT WORTH: Example

Consider: Machine A Machine B

i = 10% per year

Which alternative should we select?

5.2 PRESENT WORTH: Cash Flow Diagram

5.2 PRESENT WORTH: Solving

PA = 2,500 + 900 (P|A, .10, 5) –

PB = 3,500 + 700 (P|A, .10, 5) –

5.3 PRESENT WORTH: Different Lives

Present Worth of Alternatives with

Comparison must be made over equal

 Compare over the least common multiple,

5.3 PRESENT WORTH: Unequal Lives

Present Worth of Alternatives with

5.3 Present Worth with Unequal Lives: The Rule