Lectures 12 and 13
Lectures 12 and 13 CEE 270
Popular in System Analysis and Economic Civil Engineering
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This 9 page Class Notes was uploaded by Nathaniel Bautz on Friday March 6, 2015. The Class Notes belongs to CEE 270 at University of Massachusetts taught by Bernd Schliemann in Spring2015. Since its upload, it has received 39 views. For similar materials see System Analysis and Economic Civil Engineering in Civil and Environmental Engineering at University of Massachusetts.
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Date Created: 03/06/15
LECTURE 12 COMBINING FATORS PW ANALYSIS amp IRR 393 Chapter 11 Concepts gt Shifted uniform series factors gt Shifted series and single cash ows gt Formulate economic alternatives 393 Shifted Uniform Series gt A shifted uniform series starts at a time other than period 1 gt Shifted series usually require the use of multiple factors gt Remember I When using PA or AP factor PA is always one year ahead of first A I When using FA or AF factor FAis in same year as last A 393 Example 1 Using PA Factor Shifted Uniform Series The present werlhi efthe eeeh flew ethewe Iiielem at i 5 ie i 11 ile e 1T 2 3 4 5 E eetuel year e 1 e 4 quotIE Eerieeyeer 35 i 1 393 Example 2 Using FA Factor Shifted Uniform Series Haw mueh lmleney weule he eeeilehle in year in if 53 is depee i lfedi eeeh yer n yeere threugh 13 en iintereei rate ef per year CHE w 394 er is WT Ae uel year I I li ftf ti a Serieear A SEED 393 Shifted Series and Random Single Amounts gt For cash ow that include uniform series and randomly placed single amounts I Uniform series procedures are applied to the series amounts I Single amount formulas are applied to the onetime cash ows gt The resulting values are then combined per the problem statement 393 Example 3 Series and Random Single Amounts Find the present werth in year U fr the cash ewe ehewn using an intereet rete ef 5 perquot year FT iiiii reggae iiiiiiiiiii iiiiiii A Ereme 393 Formulating Alternatives gt Two types of economic proposals I Mutually Exclusive ME Alternatives Only one can be selected Compete against each other I Independent Projects More than one can be selected Compete only against DN gt Do Nothing DN An ME alternative or independent project to maintain the current approach no new costs revenues or savings 0 Formulating Alternatives gt Two types of cash ow estimates I Revenue Alternatives include estimates of costs cash out ows and revenues cash in ows I Cost Alternatives include only costs revenues and savings assumed equal for all alternatives also called service alternatives PW Analysis of Alternatives gt Convert all cash ows to PW using MARR gt Precede costs by minus sign receipts by plus sign 393 Example 5 Selection of Alternatives by PW Example 5 Fer th elternereee ehewn belewi which shield be eeleeted if they are mutually exelueive er lb iindeendernt Preeent Wert h A 3 125 C e Ejl gt Must compare alternatives for equal service ie alternatives must end at the same time gt Two ways to compare equal service I Least common multiple LCM of lives 39 Specified study period I The LCM procedure is used unless otherwise specified 393 Assumptions of LCM approach gt Service provided is needed over the LCM or more years gt Selected alternative can be repeated over each life cycle of LCM in exactly the same manner gt Cash ow estimates are the same for each life cycle ie change in exact accord With the in ation or de ation rate 393 Example 7 Different Life Alternatives Empere the meehleee l1ellelr eeeg ereeeet werth eee yeiie at i 5 per year ieeiuine e Meehiee F ireteeet Ewing Annuel LiEL lyeer g quotgm Life yeeire e 393 PW Evaluation Using a Study Period gt Short study periods are often defined by management When business goals are shortterm gt Study periods are commonly used in equipment replacement analysis gt Once a study period is specified all cash ows after this time are ignored gt Salvage value is the estimated market value at the end of study period 393 Example 8 EXAMPLE An imeeetment ref 24M in new eqluimelnt will generate imeeme at T per year tier y eereS at which time the machine can be eeldl fr en eetimeted 3 t the emeny e MA is 5 per green eheuld it buy the meehllne til tilentangl lt tlit hugger Ee l n Ill JEN Flats tr quott e tee fgjfett tee e t eei39e image a It L 77 le LECTURE 13 IRR BCR INCREMENTAL BCR ANALYSIS 393 Chapter 11 concepts Understanding meaning of ROR Calculate ROR for cash ow series Public vs private sector projects Calculate BCR for single projects Select better of two amp multiple alternatives using the incremental BCR method 393 Interpretation of ROR gt Rate paid on unrecovered balance of borrowed money such that final payment brings balance to exactly zero with interest considered 393 Why Incremental Analysis is Necessary gt Selecting the alternative with highest ROR may not yield highest return on available capital gt Must consider weighted average of total capital available gt Capital not invested in a project is assumed to earn at MARR 393 CF Classification and BC Relations gt Must identify each cash ow as either benefit disbenefit or cost I Benefit B Advantages to the public I Disbenefit D Disadvantages to the public I Cost C Expenditures by the government VVVVV 393 Example 1 BC Analysis Single Project A ood control project Will have a first cost of 14 million With an annual maintenance cost of 40000 and a 10 year life Reduced ood damage is expected to amount to 175000 per year Lost income to farmers is estimated to be 25000 per year At an interest rate of 5 per year should the project be underten r r v Wan quot ii i r L i on it L7 3 393 Defender Challenger amp DN Alternatives gt When selecting from two or more ME alternatives there is a I Defenderinplace system or currently selected alternative I Challenger alternative challenging the defender I Donothing status quo system 393 Alternative Selection Using Incremental BCR Method 2 ME Alternatives gt Procedure similar to ROR analysis for multiple alternatives 1 Determine equivalent total cost for each alternative 2 Order alternatives by increasing total cost 3 Identify B and D for each alternative if given or go to step 5 4 Calculate BCR for each alternative and eliminate all With BCR lt 10 5 Determine incremental costs and benefits for first two alternatives 6 Calculate ABCR if gt10 higher cost alternative becomes defender 7 Repeat steps 5 and 6 until only one alternative remains 393 Example 2 Incremental BC Analysis Carri are We alternativee ueini i 5 and aquot ratie Alternative r Fi rat east 3 200 i 540 M n caste Myear 4530 Beaefita Efyear 1 1 3300 1 5001 is benefits E wear 20 ii iii Life 1years i E Iii 393 Example 3 ABC Analysis Selection required Must EEIEEE me ref twat alternawea using I and ECE Alternative First 1151 Sa l M mite Efyear 45p 35113 ena ts Hearquot 1 I S E lh 39 t p imam E ii i Life yEailri 1 E 393 BC Analysis of Independent Projects gt Independent projects comparison does not require incremental analysis gt Compare each alternative s overall BCR With DN option
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