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BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

TUTORIAL : Present Worth Analysis / Future Worth Analysis

1. A company that manufactures magnetic membrane switches is investigating two production


options that have the estimated cash flows shown (RM 1 million units). Suggest which
alternative should be selected with 10% interest rate using present worth analysis.

In house Contract
First cost, RM 30 0
Annual Cost, RM per year 5 2
Annual income, RM per year 14 3.1
Salvage value, RM 2 -
Life, years 5 5
Answer:
PWin house = RM 5.359 (5,359,000)
PWcontract = RM 4.170 (4,170,000)
The in house contract option is selected because it has the numerically largest PW value, or larger profit.

2. The manager of a canned food processing plant must decide between two different
labelling machines. Machine A will have a first cost of RM 42,000, an annual operating
cost of RM 28,000, and a service life of 4 years. Machine B will cost RM 51,000 to buy
and will have an annual operating cost of RM 17,000 during its 4-year life. At an interest
rate of 10% per year, select the best machine on the basis of a present worth analysis.
Answer:
PWA = RM – 130,757
PWB = RM – 104,888
Select machine B because the PW of its costs is the lowest; it has the numerically largest PW value.

3. A mechanical engineer is considering two materials for use in an electrical vehicle. All
estimates are made.
Material X Material Y
First cost, RM 15,000 35,000
Maintenance Cost, RM per year 9,000 7,000
Salvage value, RM 2,000 20,000
Life, years 5 5
a) Suggest which alternative should be selected with 10% interest rate.
b) Find out at what first cost the method not selected above will become the more
economics preference.

Answer:
a. PWX = RM – 47,875
PWY = RM – 49,117
Select material X

b. First cost of Y, PY= RM –33,758


Select Y, if first cost of Material Y ≤ 33,758

1 by: Nor Akramin Mohamad


BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

4. The supervisor of a community swimming pool has developed two methods for
chlorinating the pool. If gaseous chlorine is added, a chlorinator will be required that has
an initial cost of RM 8,000 and a useful life of 5 years. The chlorine will cost RM 650 per
year, and the labor cost will be RM 800 per year. Alternatively, dry chlorine can be added
manually at a cost of RM 1,000 per year for chlorine and RM 1, 900 per year for labor.
Recommend the best option the basis of a present worth analysis if the interest rate is 10%
per year.
Answer:
PWGas = RM – 13,497
PWDry = RM – 10,993
Select Dry chlorine because

5. An electric switch manufacturing company has to choose one of three different assembly
methods. Method A will have a first cost of RM 40,000, an annual operating cost of RM
9,000, and a service life of 2 years. Method B will cost RM 80,000 to buy and will have an
annual operating cost of RM 6,000 over its 4-year service life. Method C will cost
RM130,000 initially with an annual operating cost of RM 4,000 over its 8-year life.
Methods A and B will have no salvage value, but method C will have some equipment
worth an estimated RM 12,000. At an interest rate of 10% per year, select the best method
on the basis of a present worth analysis.

Answer:
PWA = RM – 170,970
PWB = RM – 166,649
PWC = RM – 145,742
The method C is selected since the PW of its costs is the lowest; it has the numerically largest PW value.

6. Machines that have the following costs are under consideration for a automatic welding
process. Using an interest rate of 10% per year, determine which machine should be
selected on the basis of a present worth analysis.

Machine X Machine Y
First cost, RM 250,000 430,000
Annual Operating Cost, RM per year 60,000 40,000
Salvage value, RM 70,000 95,000
Life, years 3 6

Answer:
PWX = RM – 607,037
PWY = RM – 550,585

7. Chemical processing corporation is considering three methods to dispose of a non-


hazardous chemical sludge: land application, fluidized-bed incineration, and private
disposal contract. The estimates for each method are shown.

2 by: Nor Akramin Mohamad


BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

Land Incineration Contract


Application
First cost, RM 130,000 900,000 0
Annual Operating Cost, RM per year 95,000 60,000 120,000
Salvage value, RM 25,000 300,000 0
Life, years 3 6 2
a. Determine which has the least cost on the basis of a present worth comparison
at 10% per year.
b. If the contract award cost increases by 20% every 2-year renewal, analyse
whether the decision will change.
Answer:
a. PWLand = RM – 608,528
PWIncinerator = RM – 991,968
PWContract = RM – 522,636
Select disposal contract
b. PWContract = RM – 619,615
Select land application, the selection changed

8. An industrial engineer is considering two robots for purchase by a fiber-optic


manufacturing company. Robot X will have a first cost of $80,000, an annual maintenance
and operation (M&O) cost of $30,000, and a $40,000 salvage value. Robot Y will have a
first cost of $97,000, an annual M&O cost of $27,000, and a $50,000 salvage value.
Analyse which should be selected on the basis of a future worth comparison at an interest
rate of 15% per year using a 3-year study period.
Answer:
FWX = RM – 185,847
FWY = RM – 191,285

9. Compare the alternatives shown below on the basis of a future worth analysis, using an
interest rate of 8% per year.

Alternative P Alternative Q
First cost, RM -23,000 -30,000
Annual Operating Cost, RM per year -4,000 -2,500
Salvage value, RM 3,000 1,000
Life, years 3 6
Answer:
FWP = RM – 88,036
FWQ= RM – 64,947
Select Alternative Q because….

10. A wealthy businessman wants to start a permanent fund for supporting research
directed toward sustainability. The donor plans to give equal amounts of money for each
of the next 5 years, plus one now (i.e., six donations) so that RM100,000 per year can be

3 by: Nor Akramin Mohamad


BMFG 4623 ENGINEERING ECONOMY AND MANAGEMENT

withdrawn each year forever, beginning in year 6. If the fund earns interest at a rate of 8%
per year, determine how much money must be donated each time.
Answer:
A = RM 170,400

11. Compare the alternatives shown on the basis of their capitalized costs using an
interest rate of 10% per year.

Alternative M Alternative N
First cost, RM 150,000 800,000
Annual Operating Cost, RM per year 50,000 12,000
Salvage value, RM 8,000 1,000,000
Life, years 5 ∞

Answer:
CCM = RM – 882,600
CCN = RM – 920,000
Select Alternative M

4 by: Nor Akramin Mohamad