IE346 ENGINEERING ECONOMICS & COST ANALYSIS
SUBMITTED TO
THE DEPARTMENT OF INDUSTRIAL ENGINEERING OF
ABDULLAH GUL UNIVERSITY
IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS
FOR THE DEGREE OF BACHELOR OF SCIENCE
by
Cemil Semih Yenikomşuoğlu
Gülbahar Bozkurt
Makbule Nisanur Arvas
Mert Uzun
Merve Demiryürek
Merve Karabacak
Mirza Humayun Adnan
i
Table of Contents
I. Introduction ...................................................................................................... 1
II. Methodology .................................................................................................... 1
A. Analysis Method ........................................................................................... 1
B. Cash Flow Components ................................................................................ 1
C. Calculation Process ..................................................................................... 2
D. Criteria and Decision-Making ........................................................................ 2
III. Findings .......................................................................................................... 2
Equations: ....................................................................................................... 3
Option 1: ...................................................................................................... 3
Option 2: ...................................................................................................... 4
Option 3: ...................................................................................................... 4
........................................................................................................................... 5
IV. Discussion ..................................................................................................... 6
List of Figures
Figure 1 Net annual Cash Flow Comparison .............................................................. 5
Figure 2 Present Worth (PW) and Future Worth (FW) Comparisor ................................ 5
ii
I. Introduction
Engineering economics and cost analysis is remarkable important field to take decision and
make a plan about resource allocation, investment options and project feasibility for the
organizations in the long term. investment and cost analysis, the term under the engineering
economics and cost analysis, is used to calculate capital budgeting such as future worth (FW),
present worth (PW) and annual worth (AW). These tools help to focus on taking decisions,
make a plan and for evaluation by providing better financial efficiency, cost management and
more. In this report, an investment and cost analysis problem which is trying to consider the
case of a manufacturing company evaluating three alternative equipment options to replace
its aging equipment will be handled.
II. Methodology
A. Analysis Method
The economic analysis was conducted by comparing the cost and revenue projections of each
equipment option using three key financial metrics:
• Future Worth (FW): To calculate the total equivalent value of cash flows at the end
of the useful life of each option.
• Present Worth (PW): To determine the present value of cash flows discounted at the
company’s minimum acceptable rate of return (MARR).
• Annual Worth (AW): To convert all cash flows into equivalent annual values,
enabling comparison of options with different useful lives.
B. Cash Flow Components
The data used in the analysis included the following components:
• Initial Investment Cost: The purchase cost of each equipment option.
• Annual Operating Cost: The annual fixed costs for maintenance, energy, and
operation of the equipment.
• Annual Revenue Increase: The additional revenue expected from increased
efficiency or production capacity.
• Useful Life: The period during which the equipment can be economically utilized.
These components served as the primary inputs for analyzing the long-term cost-benefit
relationship of each equipment option.
1
C. Calculation Process
The financial performance of each option was evaluated through the following steps:
• Determination of Net Cash Flows: Annual net cash flow was calculated by
subtracting operating costs from revenue increases.
• Future Worth (FW) Calculation: The total equivalent value of cash flows over the
useful life was calculated.
• Present Worth (PW) Calculation: Cash flows were discounted to their present
values using a 10% MARR.
• Annual Worth (AW) Calculation: Cash flows were converted into annual
equivalent values to normalize the evaluation for options with different lifespans.
D. Criteria and Decision-Making
The comparison of options was based on the following criteria:
• Highest Present Worth (PW): The option with the highest present value was
considered the most favorable.
• Highest Annual Worth (AW): The option with the highest annual equivalent value
was prioritized for its long-term economic benefits.
• Future Worth (FW): Used to assess the total financial performance at the end of the
evaluation period.
III. Findings
The financial performance of the three equipment options is analyzed using key
economic indicators, including Future Worth (FW), Present Worth (PW), and Net Annual
Cash Flow. These metrics provide a comprehensive basis for comparing the cost-
effectiveness and financial viability of each alternative, enabling a detailed evaluation of their
long-term economic impacts.
2
Equations:
𝑃𝑊 = −𝑃 + 𝐴(𝑃/𝐴, 𝑖, 𝑛) (1)
𝐴𝑊 = −𝑃(𝐴/𝑃, 𝑖, 𝑛) + 𝐴 (2)
𝐹𝑊 = −𝑃(𝐹/𝑃, 𝑖, 𝑛) + 𝐴(𝐹/𝐴, 𝑖, 𝑛) (3)
(1+𝑖)𝑛−1 𝑖(𝑖+𝑛)𝑛
(𝑃/𝐴, 𝑖, 𝑛) = , (𝐴/𝑃, 𝑖, 𝑛) = (1+𝑖)𝑛−1 , (𝐹/𝑃, 𝑖, 𝑛) = (𝑖 + 𝑛)𝑛 , (4)
𝑖(𝑖+1)𝑛
(1+𝑖)𝑛 −1
(𝐹/𝐴, 𝑖, 𝑛) = (5)
𝑖
Option 1:
• Initial investment: $300,000
• Annual operating cost: $40,000
• Annual revenue increase: $100,000
• Useful life: 10 years
A= $100,000-$40,000 = $60,000
P= $300,000
i=0.1
n=10
(1 + 𝑖)𝑛 − 1
𝑃𝑊 = −300,000 + 60000 ∗ = 𝟔𝟖, 𝟔𝟕𝟒. 𝟎𝟑$
𝑖(𝑖 + 1)𝑛
𝑖(𝑖 + 𝑛)𝑛
𝐴𝑊 = −300,000 + 60,000 = 𝟏𝟏, 𝟏𝟕𝟔. 𝟒$
(1 + 𝑖)𝑛 − 1
(1 + 𝑖)𝑛 − 1
𝐹𝑊 = −300,000(𝑖 + 𝑛)𝑛 + 60,000 = 𝟏𝟕𝟖, 𝟏𝟐𝟐. 𝟕𝟒$
𝑖
3
Option 2:
• Initial Investment: $400,000
• Annual Operating Cost: $30,000
• Annual Revenue Increase: $120,000
• Useful Life: 15 years
𝑁𝑒𝑡 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤: $120,000 − $30,000 = $90,000
𝑃
𝑃𝑊 = − 400.000 + 90 ∗ ( , 0.1,15) = 𝟐𝟖𝟒. 𝟓𝟒𝟕
𝐴
𝐹 𝐹
𝐹𝑊 = − 400.000 ∗ ( , 0.1,15) + 90 ∗ ( , 0.1,15) = 𝟏𝟏𝟖𝟖. 𝟔𝟑
𝑃 𝐴
𝐴
𝐴𝑊 == − 400.000 ∗ ( , 0.1,15) + 90 = 𝟑𝟖
𝑃
Option 3:
• Initial Investment: $250,000
• Annual Operating Cost: $50,000
• Annual Revenue Increase: $90,000
• Useful Life: 8 years
𝑁𝑒𝑡 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤: $90,000 − $50,000 = $40,000
𝑃
𝑃𝑊 = − 250.000 + 40 ∗ ( , 0.1,8) = −𝟑𝟔. 𝟔𝟎𝟐
𝐴
𝐹 𝐹
𝐹𝑊 = − 250.000 ∗ ( , 0.1,8) + 40 ∗ ( , 0.1,8) = −𝟕𝟖. 𝟒𝟔𝟏
𝑃 𝐴
𝐴
𝐴𝑊 == − 250.000 ∗ ( , 0.1,8) + 40 = −𝟔. 𝟖𝟔𝟏
𝑃
4
Figure 1 Net annual Cash Flow Comparison
Figure 2 Present Worth (PW) and Future Worth (FW) Comparisor
5
IV. Discussion
Evaluating three pieces of equipment using Future Worth (FW), Present Worth (PW),
and Annual Worth (AW) provides a clear understanding of their long-term costs and benefits.
For Option 1, the Present Worth is $68,674, and the Future Worth is $178,122. But its Annual
Worth of $11,176 reveals that it is not very profitable in the long run, thus recommended for
companies that want to minimize their initial costs but are willing to make moderate gains.
This is because Option 2 has the highest viability, with a Present Worth of $284,547 and a
Future Worth of $1,188,[Link] figures indicate high efficiency over a 15-year period,
resulting in a greater return on investment, making it suitable for companies with long-term
strategic goals. In contrast, the other option shows negative values across all evaluated
financial measures, rendering it unviable. From the above calculations it is advised to
accept Option 2 because it provides the best financial reward and the best value of the money.
But, the risk of operational disruption and the uncertainty considered of to market validate
conditions the should assumed be cash flows. To improve the decision, it will also be helpful
to perform sensitivity analysis on some of the key parameters such as rates and revenue
change. Selecting Option 2 will increase production capacity and long-term profitability by
implementing these safeguards, assisting the company in maintaining its competitiveness in
the market.
In conclusion, the adoption of Option 2 represents the most strategic choice for
achieving economic efficiency and securing sustainable growth.
