EGR 403 - The Big Picture
   • Framework: Accounting & Breakeven Analysis
   • “Time-value of money” concepts - Ch. 3, 4
   • Analysis methods
      – Ch. 5 - Present Worth
      – Ch. 6 - Annual Worth
      – Ch. 7,7A,8 - Rate of Return (incremental analysis)
      – Ch. 9 - Benefit Cost Ratio & other methods
   • Refining the analysis
      – Ch. 10, 11 - Depreciation & Taxes
      – Ch. 12 - Replacement Analysis
                       EGR 403 - Cal Poly Pomona - SA12   2
           Chapter 9 - Other Analysis Methods
          • Future worth analysis
          • Benefit-cost ratio analysis
          • Payback period
          • Sensitivity and breakeven analysis
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                               Future Worth Analysis
     • Answers the question, what will the future situation be, if 
         we take some particular course of action now?
           – Example 9.1,  FW = P(F/P,i , n),  FW = A(F/A, i, n)
                                Semi-annual 
                                consumption                 Semi-annual                       FW if invested 
                    Vices          in units     Cost/ unit    sub total      FW if saved        in market
                 Smoking
                   Cigarettes         26        $   1  5.00  $      390.00    $128,370.16 $1,225,019.32
                       Cigars         26        $     1.00   $       2  6.00    $8,558.01        $81,667.95
                 Spirits
                         Beer         26        $     6.00   $      156.00     $51,348.06       $490,007.73
                       Liquor         6         $   1  5.00  $       9  0.00   $29,623.88       $282,696.77
                        Wine          13        $     8.00   $      104.00     $34,232.04       $326,671.82
                                       Semi-annual total $      766.00        $252,132.16 $2,406,063.59
                                 Present age        20      Annual i            5.00%             12.00%
                             Retirement age         65      Compounded semi-annually
                         Years to retirement        45
                                             EGR 403 - Cal Poly Pomona - SA12                                     4
                                 Future Worth Analysis
          When constructing a building, the issue is:
                 •
                   not the dollars out of pocket,
                 •
                   but the invested cost at start- up.
                 •
                   Example 9-2: The remodel project costs less out of pocket, 
                 but has a higher “up front” cost. That makes it less desirable.
    Interest rate                             8.00%               Alternatives
                                                                             Remodel 
                                                          Construct          available 
                                            Year          new plant           factory
    Purchase site                              0        $             85   $          8  50
    Design & site preparation                  1        $           200    $          2  50
    Construction                               2        $        1  ,200   $          2  50
    Equipment installation                     3        $           200    $          2  50 Select:
    Out of pocket costs                                 $        1  ,685   $        1,600 Remodel available factory
    FW at start-up                                      $        1  ,836   $        1,882 Construct new plant
                                              EGR 403 - Cal Poly Pomona - SA12                                       5
                             Benefit-Cost Ratio Analysis
                                                                                           Example 9-3
                                                                                                             MARR =          7.00%
             • If the PW of benefits -                                                                            Alternative
                                                                                              Year            A                B
                   PW of costs 0.                                                             0       $   ( 1,000.00) $     (1,000.00)
                                                                                                1       $       300.00   $        4  00.00
                                                                                                2       $       300.00   $        3  50.00
                     The alternative is                                                         3       $       300.00   $        3  00.00
                                                                                                4       $       300.00   $        2  50.00
                                                                                                5       $       300.00   $        2  00.00
                          considered acceptable. PW of:
                                                                                                 Cost     ($1,000.00)       ($1,000.00)
             • Restated:                                                                       Benefit $    1  ,230.06   $      1,257.75
                                                                                                B/C =             1.23             1.26
                     Benefit-cost ratio B/C =.                                                Select:                          B
                                                                                           Other alternatives for comparison:
                     PW of benefit/PW of cost  1.                                                PW $       230.06      $        2  57.75
                                                                                               EUAC            $56.11           $62.86
                                                                                                  FW         $322.67           $361.50
             • Fixed input, maximize B/C.                                                         IRR         15.24%            17.47%
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