## The Irrelevance of Sunk Costs

Once an asset has been installed and has been operating for some time, the costs of installation and all other costs incurred up to that time are no longer relevant to any decision to replace the current asset. These costs are called sunk costs. Only those costs that will be incurred in keeping and operating the asset from this time on are relevant. This is best illustrated with an example. Two years have passed since the Jiffy Printer Company from Example 7.7 installed an automated moulding...

## The Galore Creek Project

XovaGold Resources is a former gold exploration company that has recently been transforming itself into a gold producer. Its first independent development is the Galore Creek Project. It is also involved as a partner with Placer Dome in another project, and with Rio Tinto in a third. Galore Creek is expected to produce an average of 7650 kilograms of gold, 51 030 kilograms of silver, and 5 670 000 kilograms of copper over its first five years. In a news release, XovaGold reported that an...

## Review Problems

Tilson Dairies operates several cheese plants. The plants are all old and in need of renovation. Tilson's engineers have developed plans to renovate all the plants. Each project would have a positive present worth at the company's MARR. Tilson has S3.5 million available to invest in these projects. The following facts about the potential renovation projects are available Which projects should Tilson accept ANSWER Table 4.2 shows the possible mutually exclusive projects that Tilson can consider....

## Present Worth PW and Annual Worth AW Comparisons

The present worth (PW7) comparison method and the annual worth (AW) comparison method are based on finding a comparable basis to evaluate projects in monetary units. With the present worth method, the analyst compares project A and project B by computing the present worths of the two projects at the ALARR. The preferred project is the one with the greater present worth. The value of any company can be considered to be the present worth of all of its projects. Therefore, choosing projects with...

## Info

The negative net cash flow in the second period implies that this is not a simple project. Therefore, we apply the second test. We plot the present worth against interest rates to Figure 5A.2 Wellington Woods Present Worth search for IRRs. (See Figure 5A.2.) At 0 interest, the present worth is a small positive amount, S7000. The present worth is then 0 at 20 , 50 , and 70 . Each of these values is an IRR. The spreadsheet cells that were used for the plot are shown in Table 5A.2. Table 5A.2...

## Al Introduction

Clem looked up from his computer as Naomi walked into his office. Hi, Naomi. Sit down. Just let me save this stuff. After a few seconds Clem turned around, showing a grin. I'm working on our report for the last quarter's operations. Things went pretty well. We exceeded our targets on defect reductions and on reducing overtime. And we shipped evervthing required over 90 on time. Naomi caught a bit of Clem's exuberance. Sounds like a report you don't mind writing. Yeah, well, it was a team job....

## Challenger Is Different From Defender Challenger Does Not Repeat

In this section, we no longer assume that challengers are alike. We recognize that future challengers will be available and we expect them to be better than the current challenger. We must then decide if the defender should be replaced by the current challenger. Furthermore, if it is to be replaced by the current challenger, when should the replacement occur This problem is quite complex. The reason for the complexity is that, if we believe that challengers will be improving, we may be better...

## Pl PFPiN

So that the compound amount factor is A handy way of thinking of the notation is (reading from left to right) What is F, The compound amount factor is useful in determining the future value of an investment made today if the number of periods and the interest rate are known. The present worth factor, denoted by (P F,i,X), gives the present amount, P, that is equivalent to a fumre amount, F, when the interest rate is i and the number of periods is N. The present worth factor is die inverse of...

## A2 Problem Definition

About 40 minutes later, Dave and Xaomi were most of the way through their main courses. Dave suggested that they get started. He took a pad from his briefcase and said that he would take notes. Xaomi agreed to let him do that. Dave started. OK. A nat are our options Well, I did a bit of arithmetic on my calculator while you were on the phone before lunch. It looks as though, even if the demand growth rate is only 5 , a single small former will not have enough capacity to see us through 10...

## Additional Pedagogical Features

Each chapter begins with a list of the major sections to provide an overview of the material that follows. Key terms are boldfaced where they are defined in the body of the text. For easy reference, all of these terms are defined in a Glossary near the back of the book. Additional material is presented in chapter appendices at the ends of Chapters 3, 4, 5,8, 9, and 13. Numerous worked-out Examples are given throughout the chapters. Although the decisions have often been simplified for clarity,...

## Compound Interest Factors for Annuities

The next four factors involve a series of uniform receipts or disbursements that start at the end of the first period and continue over N periods, as illustrated in Figure 3.2. This pattern of cash flows is called an annuity. Mortgage or lease payments and maintenance contract fees are examples of the annuity7 cash flow pattern. Annuities may also be used to model series of cash flows that fluctuate over time around some average value. Here the average value would be the constant uniform cash...

## Questions

Construct spreadsheets for calculating present worths of the three proposals. For each proposal, you need to calculate PWs for each of 5 , 10 , and 15 demand growth and SO.03, 0,035, and S0.04 selling price (nine combinations in all). Present the results in tabular and or graphical format to support your analysis. A portion of a sample spreadsheet layout is given in Table A.2. 2. Write a memo to Clem presenting vour findings. The goal of the analysis is to determine if bringing production...

## When Capital or Operating Costs Are Non Monotonic

Sometimes operating costs do not increase smoothly and monotonically over time. The same can happen to capital costs. Y Ten the operating or capital costs are not smooth and monotonic, the one year principle does not apply. The reason that the principle does not apply is that there may be periodic or one-time costs that occur over the course of the next year (as in the case where periodic overhauls are required). These costs may make the cost of keeping the defender for one more year greater...

## Replacement Example

We introduce some of the basic concepts involved in replacement decisions through an example. Sergio likes hiring engineering students to work in his landscaping business during the summer because they are such hard workers and have a lot of common sense. The students are always complaining about maintenance problems with the lawnmowers, which are subject to a lot of use and wear out fairly quickly. His routine has been to replace the machines every five years. Clarissa, one of the engineering...

## B1 Introduction

Engineering projects often involve an investment in equipment, buildings, or other assets that are put to productive use. As time passes, these assets lose value, or depreciate. The first part of this chapter is concerned with the concept of depreciation and several methods that are commonly used to model depreciation. Depreciation is taken into account when a firm states the value of its assets in its financial statements, as seen in the second half of this chapter. It also forms an important...

## Sam Is Considering Buying A New Lawn Mower He Has A Choice Between

For additional practice, please see the problems with selected solutions provided on the Student CD-ROM that accompanies this book. 4.1 IQ Computer assembles Unix workstations at its plant. The current product line is nearing the end of its marketing life, and it is time to start production of one or more new products. The data for several candidates are shown below. The maximum budget for research and development is S300 000. A minimum of S200 000 should be spent on these projects. It is...

## Problems

For additional practice, please see the problems with selected solutions provided on the Student CD-ROM that accompanies this book. 6.1 For each of the following, state whether the loss in value is due to use-related physical loss, time-related physical loss, or functional loss a -Albert sold his two-year-old computer for S500, but he paid S4000 for it new. It wasn't fast enough for the new software he wanted. b Beatrice threw out her old tennis shoes because the soles had worn thin. c Claudia...

## PAgiX V

Capitalized value formula Capital recovery formula Engineering Economics in Action, Part 3B This time it was Naomi who stuck her head in Clem's doorway. Here's the recommendation on the shipping palletizer. Oh, and thanks for the hint on the leasing figures. It cleared up my confusion right away. No problem. What did you figure out Clem had his mentor expression on his face, so Naomi knew he was expecting a clear explanation of the trick used by the leasing company. Well, as you hinted, they...

## Conversion Factor for Geometric Gradient Series

A geometric gradient series is a series of cash flows that increase or decrease by a constant percentage each period. The geometric gradient series may be used to model inflation or deflation, productivity improvement or degradation, and growth or shrinkage of market size, as well as manv other phenomena. In a geometric series, the base value of the series is A and the growth rate in the series the rate of increase or decrease is referred to as g. The terms in such a series are given by A, A l...

## PAi8 50 00011 000

134 CHAPTER 5 Comparison Methods Part 2 From the interest factor tables, or by trial and error with a spreadsheet, P 4,14 ,8 4.6388 P A,IS ,8 4.4873 By interpolation or further trial and error, i 14.5 The slicer alone is thus economically justified and is better than the do nothing alternative. We now consider the system with the slicer and loader. Its IRR is 12.5 , which may be seen by solving for in P 4,12 ,8 4.9676 P 4,13 ,8 4.7987 12.5 The IRR of the meat slicer and automatic loader is...

## Appendix 5A Tests for Multiple IRRs

When the IRR method is used to evaluate projects, we have to test for multiple IRRs. If there are undetected multiple IRRs, an IRR might be calculated that seems correct, but is in error. We consider three tests for multiple IRRs, forming essentially a three-step procedure. In the first test, the signs of the cash flows are examined to see if the project is a simple investment. In the second test, the present worth of the project is plotted against the interest rate to search for interest rates...

## Non Standard Annuities and Gradients

As discussed in Section 3.3, the standard assumption for annuities and gradients is that the payment period and compounding period are the same. If they are not, the formulas given in this chapter cannot be applied directly. There are three methods for dealing with this situation 1. Treat each cash flow in the annuity or gradient individually. This is most useful when the annuity or gradient series is not large. 2. Convert the non-standard annuity or gradient to standard form by changing the...

## Present Worth Computations When

We have until now assumed that the cash flows of a project occur over some fixed, finite number of periods. For long-lived projects, it may be reasonable to model the cash flows as though they continued indefinitely. The present worth of an infinitely long uniform series of cash flows is called the capitalized value of the series. We can get the capitalized value of a series by allowing the number of periods, N, in the series present worth factor to go to infinity The town of South Battleford...

## Compound Interest Factors for Discrete Compounding

Compound interest factors are formulas that define mathematical equivalence for specific common cash flow patterns. The compound interest factors permit cash flow-analysis to be done more conveniently because tables or spreadsheet functions can be used instead of complicated formulas. This section presents compound interest factors for four discrete cash flow- patterns that are commonly used to model the timing of receipts and disbursements in engineering economic analysis. The four patterns...