NEW VISION OF

ENGINEERING ECONOMY
COURSE (VISION)
MODULE 3
LECTURE 1-2
Cairo, 13 July 2005

Module 3 Contents

Introduction
Investments Evaluation
The Cost Benefit Model
Applications of the Cost Benefit Model
Dealing with Uncertainties
Replacement Analysis
CASE STUDIES: Evaluation of Energy and
Environmental Projects
JULY 2005

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Greek Project Team

TEAM MEMBER
EMILIA
KONDILI
J. K. KALDELLIS

K. KAVADIAS
C. CHALVATZIS

JULY 2005

CONTRIBUTION
Material
Development,
Survey, Website, Project
Management, Evaluation,
Seminar
Material
Development,
Survey, Website, Project
Management, Evaluation,
Seminar
Material Development,
Training
Material Development,
Training

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SPECIALISATION
/ LAB
Optimisation of
Production Systems
(http://ikaros.teipir
.gr/mecheng/OPS)
Soft Energy
Applcations and
Environmental
Protection Lab,
www.sealab.gr

Greek Project Team

Technological Educational
Institute of Piraeus

JULY 2005

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Greek Project Team

Technological Educational
Institute of Piraeus

V 1.00

Welcome to the Optimization of Pruduction System modules Website

Optimization of Production Systems
Mechanical Engineering Department
Faculty of Engineering
Created by V.S.

26.11.2004

JULY 2005

26.03.2005

Technological Educational Institute of Piraeus

TEI OF PIRAEUS

Optimisation of Production
Systems Lab (1/2)
Dr. Emilia Kondili, Chemical Engineer
Educational and Research Interests in the field of
Optimization of Energy and Environmental Production
Systems
Modules being provided :
Production Management,
Project Management,
Engineering Economics,
Operations Research,
Waste Management

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Optimisation of Production Systems

Lab (2/2)

Research Interests / Activities

Optimisation of Production Systems with the
use of Operations Research (Mathematical
Programming) Tools.
Production Management
Implementation of optimization tools in energy
and environmental systems.
Water Resources Management with the Use of
Optimisation Tools

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SEALAB Presentation (1/3)

Energy Related Courses:
Introduction to RES
Lab of RES
Applications of RES
Energy Engineering & Management of
Natural Resources
Design & Optimisation of Energy
Systems
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SEALAB Presentation (2/3)

Environment Related Courses:
Environment & Industrial Development
Basic Principles of Ecology
Air Pollution-Pollution Prevention
Technologies
Environmental Measurements Technology
Waste Management Systems
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SEALAB Presentation (3/3)

Research Interests/Activities:
Wind and Solar Energy Applications
Feasibility studies on Energy Investments
Hybrid Energy Systems
Energy Storage Systems
Energy Saving
Cogeneration Systems
RES based Desalination
Environmental Impact of Power Stations
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Module 3 Learning Outcomes

Investments Evaluation Criteria
Comparison and Suitability of Evaluation
Criteria
Development of a General Cost Benefit
Model
Applicability of the Cost-Benefit Model for
the Evaluation of a Wide Range of Energy
and Environmental Projects of Special
Interest to our trainees

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Investment Evaluation
Objective:
To evaluate the profitability of an
investment, or
To compare mutually exclusive alternatives
and select the most economical, or
To compare alternative and not mutually
exclusive investments and rank them
according to their profitability.

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Evaluation Criteria

Payback Period
Net Present Value
Internal Rate of Return
Benefit / Cost Ratio (Lecture 2)

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Payback Period
PBP = Depreciable Fixed Investment/
Average Annual Cash Flow
It expresses the minimum length of time
necessary to recover the original fixed
capital investment in the form of cash flow
from the project
No weighting of earlier vs. later cash flows,
no consideration of project earnings after
the initial investment has been recovered, no
consideration of time value of money.
Suitable only for rough calculations
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Payback Period (including interest)

PBP including interest = (Depreciable Fixed
Investment + interest on total capital
investment during estimated service life)/
(Average Annual Profit + average annual
depreciation)

This method increases the PBP found

with no interest.

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Evaluation Criteria Net

Present Value
The NPV is computed as the Present Value
of all Revenues the Present Value of all
Costs
n

NPV

[F
j 1

/(1 i ) ] I 0
j

If projects are mutually exclusive, choose the

one with the highest NPV
If multiple projects are feasible, rank
according to NPV and select the top ones first

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Net Present Value - Practical issues

The interest reflects the minimum accepted
rate of return of the investment
Determine the expected cash flows for the
project, that may be different for each year
NPV Rule: NPV > 0 indicates that the investment
has an annual rate of return greater that the
minimum acceptable.

Reject the project if its NPV < 0

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Net Present Value - Practical

issues (2)
It is easy to compute, it works with all cash flow
patterns,
It gives correct ranking in most project
evaluations.
However
The size of NPV for a single investment
sometimes fails to indicate relative profitability

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Internal Rate of Return (IRR)

The internal rate of return is the interest
rate that makes the NPV = 0, ie. it is the
break-even interest rate.
It is a familiar and easy to understand concept
It treats variable cash flows
It requires trial and error calculations

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Example I
INVESTMENT A INVESTMENT B

Initial
Investment
Annual Revenue

75,000

105,000

16,000

22,000

Annual Cost

3,000

5,000

Residual Value

10,000

15,000

10

10

Life Time
NPV (I = 0,12)
IRR
JULY 2005

16.627,95

21.548,67

0,18

0,17

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Example II
An energy intensive industrial unit, for energy conservation
purposes, intends to install a Natural Gas based cogeneration unit.
To that effect, two alternative proposals are examined, their data
being presented in Table I. The investments must be depreciated
within 10 years, but their economic life is 15 years. Taxation is 40%
on the profits. Determine the annual energy conservation of each
investment that will result in an IRR of 12%.
INVESTMENT 1

INVESTMENT 2

Initial Investment Cost

()

900.000

1.300.000

Natural Gas Cost ()

100.000

190.000

Maintenance Cost ()

40.000

50.000

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