ME 291

Engineering

ME-291 Engineering Economy

Economy
Lecture 14

Present Worth Analysis of different

Alternatives

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
© Faculty of Mechanical Engineering, GIKI
 Present Worth analysis of different-life
alternatives

• The PW of the alternative must be compared

ME-291 Engineering Economy

over the same number of years.
• Compare the alternatives over a period of
time equal to the least common multiple
(LCM) of their lives
• Compare the alternatives using a study
period of length n years, which does not
necessarily take into consideration the useful
lives of the alternatives. This is also called
the planning horizon approach.

© Faculty of Mechanical Engineering, GIKI

 LCM Approach

• The service provided by the alternatives will

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be needed for the LCM of years or more.
• The selected alternative will be repeated
over each life cycle of the LCM in exactly the
same manner.
• The cash flow estimates will be the same in
every life cycle.

© Faculty of Mechanical Engineering, GIKI

 Study Period Approach

• A study period analysis is necessary if the first assumption

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about the length of time, the alternatives are needed, cannot
be made.
• A time horizon is chosen over which the economic analysis
is conducted, and only those cash flows, which occur during
that time period, are considered relevant to the analysis.
• All cash flows occurring beyond the study period are
ignored.
• An estimated market value at the end of the study period
must be made.
• It is useful when LCM of alternatives yields an unrealistic
evaluation period, for example, 5 and 9 years.

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 Example 5.2

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 Future Worth Analysis

• The future worth analysis (FW) of an alternative may be

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determined directly from the cash flows by determining the
future worth value, or by multiplying the PW value by the
F/P factor, at the established MARR.
• Therefore, FWA is an extension of PW Analysis.
• FW values are especially applicable to large capital
investment decisions when a prime goal is to maximize the
future wealth of a corporation’s stockholders.
• It is often utilized if the assets might be sold or traded at
some time after its start-up, but before the expected life is
reached.
• Also FW can be used for the projects that will not come
online until the end of the investment period. e.g. electric
generation facilities, roads, hotels, can be analyzed using
the FW value of investment commitments made during
construction.

© Faculty of Mechanical Engineering, GIKI

 Future Worth Analysis

• Once the future value is determined, the selection

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guideline is the same as the PW analysis;
• FW ≥ 0 means the MARR is met or exceeded (one
alternative).
• For two or more mutually exclusive alternatives, select
the one with the numerically larger (largest) FW value.

© Faculty of Mechanical Engineering, GIKI