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CASE STUDY
ON
APPLICATION OF MONEY-TIME RELATIONSHIP
By
TABLE OF CONTENTS
5000 at the end of a study period of five years. Market value refers to the
8000 per year after extra operating costs have been subtracted from the
given in Figure 1.1. Noted, the firms MARR is 20% per year. An analysis
method which are Present Worth (PW), Future Worth (FW) and Annual
3
asset at a specific date. AW of project is the equivalent annualized
4.0
5.0
operating costs have been subtracted from the revenue generated by the
additional production.
as the present worth method, future worth method and annual worth
9.0
10.0 Solution Methodology (Formula)
11.0 Question 1:
4
12.0 New equipment has been proposed by process engineers to
after extra operating costs have been subtracted from the revenue
13.0
14.0
15.0
RM 5000
16.0
17.0
19.0
20.0
1 2 3
21.0 4 5
Years
22.0
i=20 / yr
23.0
RM
24.0
25.0 Figure 1.1: Cash Flow Diagram for the investment of new
equipment
5
26.0
mentioned below:
28.0 Solution
The Name column shows the traditional names for the factors. Each
factor has a formula that depends on i, the interest rate per compounding
factors are valid for i strictly greater than zero and N integer.
6
31.0
32.0 The solution for the questions above are shown in table below
N hod
7
1 ent Worth
PW =PV ( PP , 20 , 5)+ AV ( PA ,20 ,5)+ FV ( PF ,20 ,5)
(PW)
( 1+i )n1
39.0
PW =PV (1 ) + AV
( )
i ( 1+ i )
n
n
+ FV ( (1+i ) )
40.0
( 1+i )n1
PW =25000+8000
( i ( 1+i )
n)+5000 ( 1+i )
n
41.0
( 1+0.2 )51
PW =25000+8000
( i ( 1+0.2 )
5 )
+5000 ( 1+0.2 )
5
42.0
PW =2009.3879+23924.897125000
43.0
PW =RM 934.28
2 re Worth
8
49.0
( 1+i )n 1
FW =25000
( 1
)
( 1+ i )n
+ (
8000
i ) +5000
50.0
5
FW =25000
( 1
( 1+ 0.2 )5 )
+8000 (
( 1+0.2 ) 1
0.2
+5000 )
51.0
FW =8359.492+59532.8+5000
52.0
FW =RM 2324.8
9
53.0 54.0 Ann 55.0
3 ual Worth
n
AW =PV
(
i ( 1+ i )
n
( 1+i ) 1 )
+ AV ( 1 ) + FV
i
(
i ( 1+i )n1 )
57.0
n
AW =25000
(
i ( 1+i )
n
( 1+i ) 1 )
+8000+5000
i
n
i ( 1+ i ) 1 ( )
58.0
5
AW =25000
(
0.2 ( 1+ 0.2 )
5
( 1+0.2 ) 1
+8000+5000
) 0.2
(
0.2 ( 1+ 0.2 )51 )
59.0
AW =8359.492+8000+671.8985
60.0
AW =RM 312.41
61.0
63.0 Recommendation
10
64.0 Using the present worth method, there are 2 analyses that
can be done which is if the value obtained is negative or less than zero,
positive, the investment can bring profit. From the calculation done
previously, the value obtained is positive which means that the future
value of the machine will be greater than the future cost and it is
feasible.
65.0 Using the future worth method, there are also 2 possible
analyses that can be made which is the same as the present method.
method, the suggested answer is also the same which is the investment is
66.0 Last but not least, using the annual worth method, there
are also 2 possible analyses that can be made whether it is greater or less
than zero. From the calculations done previously, the value obtained is
positive and the suggestion is also the same where the equipment should
67.0 Conclusion
11
68.0 For this case, there are various ways to determine the
method, future worth method and the annual worth method. Each of the
methods have different calculations and formula used but for this case,
all the methods points to a single answer where the investment of the
operation
69.0
70.0 References
https://www.me.utexas.edu/~me353/lessons/S2_Evaluation/L02_Equivale
Key ndation
wor
d
77.0 78.0 Definition: The amount of 79.0 IGI Global
12
converting the investment http://www.igi-
cost/15660,
Accessed on 12
March 2017
80.0
81.0 82.0 Definition: The income 83.0 Business
ml, Accessed on 12
March 2017
84.0 85.0 Definition: Operating costs 87.0 Investopedia
basis. http://www.investo
86.0 pedia.com/terms/o/
operating-
cost.asp#ixzz4b5r
VJZkX, Accessed on
12 March 2017
88.0
89.0 90.0 All cash inflows and 99.0 Berrado, A.
13
wort present time at the MARR Present Worth
h 91.0 Analysis,
93.0 o/EGR2302/EGR23
94.0 02_Ch05.pdf,
Accessed on 12
P P P March 2017
PW =PV ( P ) (
, i, n + AV
A )
, i, n + FV ( , i, n)
F 100.0 Blank, L. &
n Tarquin, A. (2005),
P (1+ i) 1
95.0 =
A i(1+ i)n Engineering
Economy, New
P n
96.0
=(1+i)
F York, McGraw Hill.
97.0
98.0
101.0 102.0 If FW (i %) 0, then the 111.0 Man-Cho So,
h 104.0 Economics,
105.0 Department of
106.0 System
Engineering
F F F Management, Hong
PW =PV ( P ) (
,i , n + AV
A )
,i , n + FV ( ,i , n)
F Kong, China.
14
n
F (1+ i) 1 Engineering
109.0 =
A i
Economy, New
116.0 Engineering
Management, Hong
A A A Kong, China.
PW =PV ( P ) (
, i ,n + AV
A )
, i ,n + FV ( , i, n)
F 121.0 Blank, L. &
n Tarquin, A. (2005),
A i(1+ i)
117.0 =
P (1+ i)n1 Engineering
Economy, New
A i
=
118.0 F i(1+i)n 1 York, McGraw Hill.
119.0
122.0
15