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By Muhammad Shahid Iqbal

Engineering Economics. By Muhammad Shahid Iqbal. Module No. 09 Future Worth Method. Introduction.

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By Muhammad Shahid Iqbal

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  1. Engineering Economics By Muhammad Shahid Iqbal Module No. 09 Future Worth Method

  2. Introduction • Besides the technical, manufacturing, and marketing decisions that are needed, an engineer must become familiar with the necessity of economic decision making. It is used to analyze the economics of a situation so that combined with all the other issues, an intelligent decision can be made. • Like most aspects of a decision making process, there are many alternatives to the economic decisions. • In this method of comparison, the future worth of various alternatives will be computed. • The alternative with the maximum future worth of net revenue or • With minimum future worth of cost will be selected as the best alternative for implementation.

  3. Revenue-Dominated cash flow analysis • Revenue-dominated cash flow analysis is given as: FW = - P(1 + i)n + R1(1 + i)n-1 + R2(1 + i)n-2 + ……………….+ Rj(1 + i)n-j +………….+ Rn + S P = Initial investment Rj = Net revenue at the end of jth year. S = Salvage value at the end of nth year. • In this formula expenditures are assigned negative sign and revenues are assigned positive signs. • If there are more alternatives which are to be compared, then FW amount computed and compared, the alternative with the maximum Future worth amount should be selected as the best alternative.

  4. Cost-Dominated cash flow analysis • Cost-dominated cash flow analysis is given as: FW = P(I + i)n + C1(1 +i)n-1 + C2(1 +i)n-2 + …….…+ Cj(1 +i)n-j +……….+ Cn - S P = Initial investment Cj = cost of operation &maintenance at the end of jth year. S = Salvage value at the end of nth year. • In this formula expenditures are assigned positive sign and revenue a negative sign. • If there are more alternatives which are to be compared, FW amounts are computed and compared, • the alternative with the minimum Future worth amount should be selected as the best alternative.

  5. Practice Questions Consider the following two mutually exclusive alternatives at i = 18%, select the best alternative based on future worth method of comparison.

  6. Practice Questions • A man owns a corner plot. He must decide which of the several alternatives to select in trying to obtain a desirable return on his investment. After much study and calculation, he decides that the two best alternatives are given in the following table: • Evaluate the alternatives based on the future worth method at i = 12%

  7. Practice Questions • The cash flows of two mutually exclusive alternatives are given as: all figures in (000) • Select the best alternative based on future worth method at i = 8%

  8. M/S Krishna Castings Ltd. is planning to replace its annealing furnace. It has received tenders from three different original manufacturers of annealing furnace. The details are as follows: Which is the best alternative based on future worth method at i = 20% Practice Questions

  9. A company must decide whether to buy machine A or machine B: At 12% interest rate, which machine should be selected? Practice Questions

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