need help do my exam inengineering economic
ma7ad_
park_6.pptxPark 6
Annual Equivalence Analysis
Annual Equivalence
Annual equivalence analysis is another method to compare alternatives.
Annual Equivalence calculates annual and unit costs for deciding among alternatives.
Annual-Equivalent Worth Criterion
The annual-equivalent worth criterion provides a basis for measuring investment worth by determining equal payments on an annual basis.
AE(i) = PW(i) (A/P,i,N)
(Factor Notation)
(A/P,i,N) equation: [(i(1+i)^N/((1+i)^N)-1]
=PMT(i%,N,-NPW) (Excel)
Benefits of AE Analysis
A life-cycle-cost analysis takes into account all future costs over the project’s useful life, not just lowest initial costs.
There may be a need to determine unit costs or profits for comparing alternatives and for decisions such as “make-or-buy” or rental.
AE analysis deals with complications such as unequal project lives.
Capital Costs vs Operating Costs
Capital costs are incurred by the purchase of assets to be used in production and service.
Since capital costs tend to be one-time costs (buying and selling), the one-time costs must be translated into its annual equivalent over the life of the project to do an AE cost analysis.
Capital cost is defined as the net cost of purchasing (after any salvage value adjustment) plus the interest over the life of the ownership.
Capital-Recovery Cost
A capital-recovery cost is a special name given to the annual equivalent of a capital cost, CR(i).
CR(i) = I(A/P,i,N) – S(A/F,i,N)
= (I – S) (A/P,i,N) + i*S
AE Operating Costs
Operating costs will incur by the operation of physical plants or equipment needed to provide service.
Equivalent present worth of operating costs needs to be found and spread over the asset life on an annual basis.
Annual equivalence cost =
Capital cost + operating cost
Annual-Worth Analysis
Annual-worth analysis can be used to analyze unit-profit or unit-cost calculations
Step 1: Determine the number of units to be produced or serviced each year over the life of the asset
Step 2: Identify the cash flow series associated with production or service over the life of the asset
Step 3: Calculate the present worth of the project’s cash flow series at a given interest rate, and determine the equivalent annual worth.
Step 4: Divide the equivalent annual worth over the number of units to be produced or serviced during each year.
Annual-Worth Analysis
Annual-worth analysis can also be used to help analyze “make-or-buy” decisions
Step 1: Determine the life span for which the part or product will be needed.
Step 2: Determine the required annual quantity of the part or product
Step 3: Obtain the unit cost of purchasing the part or product from the outside firm
Step 4: Determine the cost of equipment, manpower, and all other resources required to make the part or product
9
Annual-Worth Analysis
Annual-worth analysis can also be used to help analyze “make-or-buy” decisions (cont.)
Step 5: Estimate the net cash flows associated with the “make” option.
Step 6: Compute the annual equivalence cost of producing the part or product
Step 7: Compute the unit cost for making the part or product by dividing the annual equivalence cost by the required annual quantity.
Step 8: Choose the option with the smallest unit cost.
