contemporary engineering economics, 4 th edition, © 2007 applying annual worth analysis lecture...
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Contemporary Engineering Economics, 4th edition, © 2007
Applying Annual Worth Analysis
Lecture No.20Chapter 6Contemporary Engineering EconomicsCopyright © 2006
Contemporary Engineering Economics, 4th edition, © 2007
Applying Annual Worth Analysis
• Unit Cost (Unit Profit) Calculation
• Make or Buy Decision
• Pricing the Use of an Asset
Contemporary Engineering Economics, 4th edition, © 2007
Unit Cost (Profit) Calculation
Step 1: Determine the number of units to be produced (or serviced) each year over the life of the asset.
Step 2: Determine the annual equivalent cost (or worth) by owning and operating the asset.
Step 3: Divide the equivalent cost (worth) by the number of units produced or service each year.
Contemporary Engineering Economics, 4th edition, © 2007
0
1 2 3
$24,400$55,760
$27,340
$75,000 Operating Hours per Year
2,000 hrs. 2,000 hrs. 2,000 hrs.
• PW (15%) = $3553• AE (15%) = $3,553 (A/P, 15%, 3)
= $1,556• Savings per Machine Hour
= $1,556/2,000= $0.78/hr.
Example 6.5 Unit Profit per Machine Hour
Contemporary Engineering Economics, 4th edition, © 2007
0
1 2 3
$24,400$55,760
$27,340
$75,000 Operating Hours per Year
1,500 hrs. 2,500 hrs. 2,000 hrs.
• Savings per Machine Hour= $1,556/1,975.16= $0.79/hr.
Example 6.6 Unit Profit per Machine Hour When Annual Operating Hours Fluctuate
C
PAFPC
FPC
FPC
16.975,1
)3%,15,/)](3%,15,/(2000
)2%,15,/(2500
)1%,15,/(1500[Savings Annual Equivalent
Contemporary Engineering Economics, 4th edition, © 2007
Make or Buy Decision Step 1: Determine the time span (planning horizon) for
which the part (or product) will be needed. Step 2: Determine the annual quantity of the part (or
product). Step 3: Obtain the unit cost of purchasing the part (or
product) from the outside firm. Step 4: Determine the equipment, manpower, and all other
resources required to make the part (or product). Step 5: Estimate the net cash flows associated with the
“make’’ option over the planning horizon. Step 6: Compute the annual equivalent cost of producing
the part (or product). Step 7: Compute the unit cost of making the part (or
product) by dividing the annual equivalent cost by the required annual volume.
Step 8: Choose the option with the minimum unit cost.
Contemporary Engineering Economics, 4th edition, © 2007
Example 6.7 Outsourcing the Manufacture of Cassettes and Tapes Make Option (annual costs):
Labor $1,445,633 Materials $2,048,511 Incremental overhead $1,088,110 Total annual cost $4,582,254
Buy Option: Capital expenditure:
Acquisition of a new loading machine $ 405,000 Salvage value at end of 7 years $ 45,000
Annual Operating Costs: Labor $ 251,956 Purchasing empty cassette ($0.85/unit) $3,256,452 Incremental overhead $ 822,719
Total annual operating costs $4,331,127
Contemporary Engineering Economics, 4th edition, © 2007
Solution:
Make Option: AEC(14%) = $4,582,254
Unit cost: $4,582,254/3,831,120 = $1.20
Buy Option: AEC(14%) = $4,421,376
Unit cost: $4,421,376/3,831,120 = $1.15
Contemporary Engineering Economics, 4th edition, © 2007
Pricing the Use of an Asset
The cost per square foot for owning and operating a real property (example, rental fee)
The cost of using a private car for business (cost per mile)
The cost of flying a private jet (cost per seat) The cost of using a parking deck (cost per
hour)
Contemporary Engineering Economics, 4th edition, © 2007
Example 6.8 Pricing an Apartment Rental Fee Land investment cost = $1,000,000 Building investment cost = $2,500,000 Annual upkeep cost = $150,000 Property taxes and insurance = 5% of total
investment Study period = 25 years Salvage value = Only land cost can be
recovered in full
Contemporary Engineering Economics, 4th edition, © 2007
Solution:
Ownership cost:
Annual O&M Cost
Total Equivalent Annual Cost
Required Monthly Charge
O&M cost = (0.05)($3,500,000) + $150,000
= $325,000
749,536$
)15.0)(000,000,1(
)25%,15,/)(000,000,1000,500,3(%)15(
PACR
749,861$
000,325$749,536$%)15(
AEC
69018505012
749861rentmonthly Required
,$.xx
,$
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