Questions and Answers
What does MARR stand for in financial analysis?
The present worth method is used to convert future cash flows into their equivalent worth today.
True
What is the formula for calculating net cash flow?
net cash flow = cash inflow - cash outflow
The present worth analysis is often based on a rate referred to as the ______.
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Match the following terms with their definitions:
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Which of the following steps is NOT part of the Net – Present Worth Criterion?
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An investment is justified economically if it returns less than the MARR.
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What is the purpose of estimating cash outflows during the analysis process?
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What is the primary difference between Future Worth (FW) and Present Worth (PW) analysis?
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The least common multiple (LCM) is used for comparing alternatives that have different service lives.
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What is the future worth of Machine A after 6 years using an interest rate of 10%?
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The economic worth of perpetual projects or endowments is evaluated using the _____ of cash flows.
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Match the following terms with their definitions:
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When comparing Machine A and Machine B using future worth analysis, which machine was selected?
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Which alternative has the minimum present worth cost based on the analysis?
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Present Worth analysis can be used if the life spans of the alternatives are different.
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What is the annual cost of the Gas alternative?
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The _______________ analysis is best when a large percentage of costs are Maintenance and Operations.
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Match the alternative to its present worth value:
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In the context of the provided analysis, what is the significance of the interest rate?
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The Future Worth analysis focuses solely on costs incurred during the operation phase.
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What is the total present worth for the Solar alternative?
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Study Notes
Linear Programming and Present Worth Method
- A 0-1 Linear Programming model often includes constraints and an objective function.
- Model effectiveness is influenced by the defined conditions and constraints.
Minimum Attractive Rate of Return (MARR)
- MARR is the minimum expected return rate established for evaluating alternatives.
- An investment is viable if the expected return meets or exceeds the MARR.
- Also known as hurdle rate, benchmark rate, and cutoff rate.
Net Present Worth Criterion
- Evaluates a single project through a systematic series of steps.
- Requires determining a desired interest rate, known as the required rate of return or MARR.
- Involves estimating the project’s service life and cash flows (inflows and outflows).
- Net cash flow is calculated as cash inflow minus cash outflow.
Basic Parameters for Analysis
- Engineering economic analysis involves initial costs, ongoing annual costs/revenues, nonrecurring costs, and salvage value.
- Important in evaluating the financial viability of projects.
Future Worth Analysis
- Future Worth (FW) analysis parallels Present Worth (PW) analysis but focuses on future cash flows.
- Alternatives must have equal service lives for comparison.
- The least common multiple (LCM) of project lives is ideally used for analysis.
Comparing Different Life Alternatives
- Example of machine comparison uses future worth analysis at a 10% interest rate.
- Machine A has a first cost of 20,000witha3−yearlife;MachineBcosts20,000 with a 3-year life; Machine B costs 20,000witha3−yearlife;MachineBcosts30,000 and lasts 6 years.
- Calculated FW indicates selecting Machine B based on lower future worth.
Capitalized Cost Analysis
- Applicable to projects with a perpetual or infinite lifespan, often seen in endowments for charities and universities.
- Present worth of cash flows is used to evaluate these projects.
Cash Flow Example
- Three alternatives (Electric, Gas, Solar) presented with different annual costs, first costs, and future salvage values (FSV).
- Present worth calculations for each alternative yield specific cost figures, with Electric having the lowest present worth cost.
Interest Rate Considerations
- Present Worth method requires the assumption of an interest rate to convert future cash flows into equivalent present dollars.
- Comparisons of alternatives are made using these present value calculations.
Life-Cycle Cost Analysis (LCC)
- LCC encompasses all costs related to a project from inception to disposal.
- Particularly useful when significant costs relate to Maintenance & Operations (M&O).
- It includes acquisition, operation, and phase-out costs, with PW analysis applicable when revenues/benefits are accounted for.
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Description
This quiz covers key concepts in engineering economics, focusing on linear programming, the Minimum Attractive Rate of Return (MARR), and the Net Present Worth Criterion. You'll explore how these concepts are applied in project evaluation and investment decisions. Get ready to test your understanding of analytical methods in engineering finance!
