1 / 11

# EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz - PowerPoint PPT Presentation

Chapter 6 - Annual Worth Analysis Click here for Streaming Audio To Accompany Presentation (optional). EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz Industrial & Manufacturing Engineering Department Cal Poly Pomona. EGR 403 - The Big Picture.

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

## PowerPoint Slideshow about ' EGR 403 Capital Allocation Theory Dr. Phillip R. Rosenkrantz' - senwe

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

### Chapter 6 - Annual Worth AnalysisClick here for Streaming Audio To Accompany Presentation (optional)

EGR 403 Capital Allocation Theory

Dr. Phillip R. Rosenkrantz

Industrial & Manufacturing Engineering Department

Cal Poly Pomona

• Framework:Accounting& Breakeven Analysis

• “Time-value of money” concepts - Ch. 3, 4

• Analysis methods

• Ch. 5 - Present Worth

• Ch. 6 - Annual Worth

• Ch. 7, 8 - Rate of Return (incremental analysis)

• Ch. 9 - Benefit Cost Ratio & other techniques

• Refining the analysis

• Ch. 10, 11 - Depreciation & Taxes

• Ch. 12 - Replacement Analysis

EGR 403 - Cal Poly Pomona - SA8

Annual Cash Flow CalculationsResolving a Present Cost to an Annual Cost

• A is -PMT in EXCEL.

• To duplicate the A/P factor, put the value for P in place of PV in the PMT fields:

• PMT(rate, nper, pv, fv, type)

• (fv and type are 0)

• To duplicate the A/F factor, put the value for F in place of FV in:

• PMT(rate, nper, pv, fv, type)

• (pv and type are 0)

• Simplest case is to convert the PV to an A-series (annual worth):

• A = P(A/P, i, n)

• Where there is salvage value:

• A = F(A/F, i, n)

See Examples 6 -1 & 2

EGR 403 - Cal Poly Pomona - SA8

Annual Cash FlowFour Essential Points

• EUAC = PWC(A/P, i, n)

• EUAB = PWB(A/P, i, n)

• EUAW = EUAB - EUAC

• EUAW is

• Decreased by a cost.

• Increased by a benefit.

• In MS Excel use “-PMT” to calculate EUAW

(remember the minus sign)

• For an irregular cash flow over the analysis period first determine the PW then convert to EUAW.

EGR 403 - Cal Poly Pomona - SA8

Criterion

Fixed input

Amount of capital available fixed

Maximize EUAB

Fixed output

\$ amount of benefit is fixed

Minimize EUAC

Neither fixed

Neither capital nor \$ benefits are fixed

Maximize EUAW

Annual Cash Flow Analysis

EGR 403 - Cal Poly Pomona - SA8

These two examples further illustrate:

• The equivalency of PW and EUAW.

• Example 6-5 (Example 5-1)

• Example 6-6 EUAW

EGR 403 - Cal Poly Pomona - SA8

• Analysis period equal to alternative lives.

• Analysis period a common multiple of alternative lives.

• Analysis period for a continuing requirement.

• Some other period such as project life.

EGR 403 - Cal Poly Pomona - SA8

Analysis Period Equal to Alternative Lives.

• Base the comparison on the life of the alternatives.

• This is the case we have most often considered in our examples.

• This is rarely the case in ‘real’ life organizations.

EGR 403 - Cal Poly Pomona - SA8

• When the lives of the equipment in the two alternatives varies, use a common multiple of the two lives.

• Example 6-7

• However, calculations are simplified. You only need to use one useful life to get the EUAW.

EGR 403 - Cal Poly Pomona - SA8

• Where the project will last forever (nothing does) use an infinite time period.

• In most analyses organizations often use a representatively long time period to get a reasonable estimate.

• Example 6-9: Alt A has infinite analysis period. Use A = P i

EGR 403 - Cal Poly Pomona - SA8

Some Other Period Such AsProject Life.

• Most often physical equipment has a useful life that varies from the project life.

• In this case use the project life as the analysis period.

• This is the most common case in ‘real’ organizations.

EGR 403 - Cal Poly Pomona - SA8