Week-12

Financial Analysis
EUAC, Gradient and Capitalized Cost Analysis

Dr. Raza Ali Khan

 Exercise
• A plant superintendent is trying to decide between two
excavating machines with the estimates presented
below.
(a)Determine which machine should be selected on the
basis of PWC analysis, using an interest rate of 15% per
annum.
(b)Use EUAC analysis
Description Machine- A Machine -B

First cost $ 11000 18000

Annual O&M cost $ 3500 3100

Salvage value $ 1000 2000
Life, years 6 9
 Exercise

• Lubbock County is planning to construct a bridge across

the Rio de Lubbock to facilitate afternoon skiing in the El
Dusto Ski Basin. The first cost for the bridge will amount
to $6,500,000. Annual maintenance and repairs will
amount to $25,000 for each of the first five years, to
$30,000 for each of the next ten years and to $35,000 for
each of the next five years. In addition a major overhaul
costing $500,000 will be required at the end of the tenth
year. Use an interest rate of 5% and determine the
equivalent uniform annual cost for a 20-year period.
 Exercise
• What is the equivalent uniform annual cost of two
hydraulic systems with expected 30-year life with the
following features? The first hydraulic system requires
annual operating, maintenance and repair cost of $1,000
and it has a useful life of 15 years. Its initial cost is
$35,000 and it has a salvage value of $6,000 at the end
of its useful life. The second hydraulic system has an
initial cost of $18,000 and is expected to be
unserviceable after ten years. It requires $500 annual
operating, maintenance and repair cost and has a zero
salvage value after its 10-year useful life. Assume the
interest rate is 7%. Present the economic equivalence
function required, showing the functional notation and
then the numerical value.
 Exercise
• An investment company is considering building a 25 unit’s
apartment complex in a growing town. Because of the long term
growth potential of the town, it is felt that the company could
average 90% of full occupancy for the complex each year. If the
following items are reasonably accurate estimates, what is the
minimum monthly rent that should be charged if a 12% MARR/
year is desired? Use the annual worth method.
• Land investment $ 50,000
• Building investment cost $ 225,000
• Study period 25years
• Upkeep expense per month $ 35
• Property tax and insurance 10% of total
initial investment
 Exercise
• A businessman purchased a building and
insulated the ceiling with 6 inches of foam.
This cut the heating bill by $25/ month and
the air conditioning cost by $20/ month.
Assuming that the winter season is the first 6
months of the year and the summer season
is the next 6 months, what was the
equivalent amount of his savings after the
first 3 years at an interest rate of 1% per
month
 Exercise
• A company purchased a machine for $18000.
Its annual maintenance and operation cost was
$ 2700. After 4 years from the initial purchase,
the company decided to purchase an additional
unit for the machine which would make it fully
automatic. The additional unit had a first cost of
$9100. The cost for operating the machine in
fully automatic condition was $1200/ yr. If the
company used the machine for 13 years with no
salvage value, what was its EUAC at interest
rate of 9% per year.
 Gradient Factor

• Uniform increase or decrease in the amount is

known as gradient amount. It is designated by
letter “ G”.
• Gradient factor is used for converting gradient
amount into present worth or in annual worth
 Gradient Factor

• Uniform gradient P.W factor

(P/G,i%, N) = (1/i) [ {(1+i)n -1/i(1+i)n} – {n/(1+i)n}]

• Uniform gradient annual series

(A/G, i%, N) = (1/i)- [n / (1+i)n – 1]
 % Gradient
• Amount increase or decrease by constant %.

• Amount {(1+ r / 1+ i)n - 1} / ( r – i)}

• Where
r = % change in amount
i = rate of interest
n = Total period of change
 Example

• Calculate equivalent present worth of

$35000 now and annual series of $7000
per year for 5 years beginning 1 year from
now, which starts to increase annually at
12% thereafter for the next 8 years. Use
interest rate 15% per year.
 Capitalized Cost

• Capitalized cost refer to the present worth

value of a project that is assumed last
forever or permanent or perpetual life
project.
 Capitalized Cost Calculation

1. Cash-flow diagram
2. Find PW of nonrecurring amounts
3. Find EUAW of all recurring amounts
4. EUAW / i% to get the capitalized cost
5. Add value obtained in step 2 to the value
obtained in step 4
 Example

• Calculate the capitalized cost of a project that

has an initial cost of $150,000 and an additional
investment cost of $ 50,000 after 10 years. The
annual operating cost will be $5000 for the first
four years and $8000 thereafter. In addition
there is expected to be major rework cost of
$15000 every 13 years. Assume interest rate is
5% per year.
 Example
• CDGK has estimated the first cost of new amusement
park to be $ 40,000. They expect to improve the park
by adding new rides every year for the next 5 years at
a cost of $6000 per year. Annual operating cost are
expected to be $12000the first year: These will
increase by $2000per year until year 5,after that it will
remain same. CDGK expect to receive $11000 in
income the first year, 14000 the second and amounts
increasing by $3000 per year until year 8 after which
the income will remain constant. Calculate the
capitalized cost of the park if the interest rate is 6%
per year.