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CE 203 Annual Cash Flow Analysis (EEA Chap 6)

CE 203 Annual Cash Flow Analysis (EEA Chap 6). Annual Cash Flow Analysis. Compare alternatives based on equivalent annual cash flow Convert amounts to Equivalent Uniform Annual Cost (EUAC)* Equivalent Uniform Annual Benefit (EUAB)

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CE 203 Annual Cash Flow Analysis (EEA Chap 6)

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  1. CE 203Annual Cash Flow Analysis(EEA Chap 6)

  2. Annual Cash Flow Analysis • Compare alternatives based on equivalent annual cash flow • Convert amounts to • Equivalent Uniform Annual Cost (EUAC)* • Equivalent Uniform Annual Benefit (EUAB) • Calculate Present Value (C5) and then annualize(often the best approach) EUAB/EUAC = P(A/P, i, n) * Also known as the capital recovery cost

  3. In-class example 6-1 a) What is the EUAC for a $25,000 car that is expected to last for 10 years assuming an interest rate of 6%? b) What is the EUAC for the same $25,000 car (6%, 10-year life) if it has a salvage value of $5000?

  4. Different approaches to EUAC • EUAC = P(A/P, I, n) - S(A/F, I, n) • EUAC = (P-S)(A/F, I, n) + Pi • EUAC = (P-S)(A/P, I, n) + Si See derivation on p 179-180

  5. Selection of alternative • Maximize EUAW = EUAB - EUAC • Choose method based on useful lives • Useful lives equal for alternatives • Useful lives not equal for alternatives • Infinite analysis period

  6. Case 1: If useful lives of alternatives and analysis period are all equal… … then choose the alternative with the highest (or least negative) EUAW Example: Alternatives for railroad/street intersections in downtown Ames Assume useful life for all alternatives is 25 years, i = 6%, yearly compounding 1. Street overpasses at Duff, Kellogg, and Clark 2. Train tunnel through downtown Ames 3. Current (do nothing)

  7. Costs/benefits estimates for various RR/street intersection alternatives for downtown Ames (assume 25-year useful life/analysis period) • Design, construction, loss of business • Maintenance, major refurbishing as noted • Time savings, better safety, increased business

  8. Annual Cash Flow evaluations for Costs/ Benefits of intersection alternatives

  9. Annual Cash Flow for RR/street intersection alternatives(benefits +, costs -) As before, “problem” is real, but estimates for costs and benefits are largely fabricated!ANALYSIS IS ONLY AS GOOD AS INPUT!!!

  10. Annual Cash Flow Analysis, if useful lives of alternatives not equal… … may or may not have to use least common multiple analysis period, depending on assumptions about “replacements” for alternatives with shorter useful lives …

  11. In-class Example 6-2 Given Alternative A with a useful life of 12 years and Alternative B with a useful life of 6 years. Alternative B has an initial cost of $5,000 and a salvage value of $1,000. Calculate the EUAC for Alternative B considering a single life and 12-year analysis period (i.e., two lives back to back). APR = 7%.

  12. Case 2: RR/street intersection problem useful lives of alternatives not equal… Example: Alternatives for railroad/street intersections in downtown Ames as for Case 1, but assume useful life for tunnel is 50 years and useful life for overpasses is 25 years, i = 6%, yearly compounding. … if overpass replacement is identical to original, can use useful life of each for comparison.

  13. Costs/benefits estimates for various RR/street intersection alternatives for downtown Ames (assuming 25-year useful life for overpasses, 50-year useful life for tunnel, 50-year analysis)

  14. Annual Cash Flow evaluations for Costs/ Benefits of intersection alternatives

  15. Annual Cash Flow for RR/street intersection alternatives (benefits +, costs -)* *For Case 2 (50-year useful life for train tunnel, 25-year useful life for street overpasses)

  16. Infinite Analysis Period • Calculate an annualized cost equivalent for each alternative. • In general… • Annualize periodic costs/benefits as before • Use A = P * i to convert present costs for alternatives with infinite lives to annualized values

  17. Costs/benefits estimates for various RR/street intersection alternativesassuming 25-year useful life for overpasses, infinite useful life for tunnel, infinite analysis period…

  18. Annual Cash Flow evaluations for Costs/Benefits of intersection alternatives

  19. Annual Cash Flow for RR/street intersection alternatives (benefits +, costs -)* *For Case 3 (infinite useful life for tunnel, 25-year useful life for street overpasses)

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