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Copy of Basic Methods For Making Economy Studies

Engineering Economy
by

NRheena NJane NSenido

on 6 March 2013

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Transcript of Copy of Basic Methods For Making Economy Studies

Basic Methods for Making Economy Studies Chapter 6 The Rate of return method (ROR) THE ANNUAL WORTH METHOD (AW) The Present Worth METHOD(PW) THE FUTURE WORTH METHOD (FW) IS A MEASURE OF THE EFFECTIVENESS OF AN INVESTMENT OF CAPITAL.IT IS A FINANCIAL EFFICIENCY.WHEN THIS METHOD IS USED,IT IS NECESSARY TO DECIDE WHETHER THE COMPUTED RATE OF RETURN IS SUFFICIENT TO JUSTIFY THE INVESTMENT THIS PATTERN FOR ECONOMY STUDIES IS BASED ON THE CONCEPT OF PRESENT WORTH.IF THE PRESENT WORTH OF THE NET CASH FLOWS IS EQUAL TO OR GREATER THAN,ZERO THE PROJECT IS JUSTIFIED ECONOMICALLY. THE PRESENT WORTH METHOD IS FLEXIBLE AND CAN BE USED FOR ANY TYPE OF ECONOMY STUDY.IT IS USED EXTENSIVELY IN MAKING ECONOMY STUDIES IN THE PUBLIC WORK FIELD, WHERE LONG-LIVED STRUCTURES ARE INVOLVED THE FUTURE WORTH METHOD FOR ECONOMY
STUDIES IS EXACTLY COMPARABLE TO THE PRESENT WORTH METHOD EXCEPT THAT ALL CASH INFLOWS AND OUTFLOWS ARE COMPOUNDED FORWARD TO A REFERENCE POINT IN TIME CALLED THE FUTURE. IF THE FUTURE WORTH OF THE NET CASH FLOWS IS EQUAL TO, OR GREATER THAN, ZERO, THE PROJECT IS JUSTIFIED ECONOMICALLY. in this method,interest on the original investment (sometimes called minimum required profit)is include as a cost. If the excess of annual cash inflows over annual cash outflows is not less than zero the proposed investment is justified-is valid.This method is covered by the same limitations as the rate of return pattern a single initial investment of capital and uniform revenue and cost throughout the life of the investment THE PAYBACK (PAYOUT) PERIOD METHOD THE PAYBACK PERIOD IS COMMONLY DEFINED AS THE LENGTH OF TIME REQUIRED TO RECOVER THE FIRST COST OF AN INVESTMENT FROM THE NET CASH FLOW PRODUCED BY THAT INVESTMENT FOR AN INTEREST FOR AN INTEREST RATE OF ZERO. (6-1)An investment of 270000 can be made in a project that will produce a uniform annual revenue of 185,400 for 5 years and then have a salvage value of 10% of the investment. Out-of pocket costs for operation and maintenance will be P81,000 per year.Taxes and insurance will be 4% of the first cost per year. The company expects capital to earn not less than 25% before income taxes Is this a desirable investment? What is the payback period of the investment? A man is considering investing 500,000 to open a semi automatic auto washing business in a city of 400,000 POPULATION. The equipment can wash,on the average 12 cars per hour, using two men to operate it and to do small amount of handwork. The man plans to hire two men in addition to himself and operate the station on an 8 hour basis 6 days per week 50 weeks per year He will pay his employees P25.00 per hour.He expects to charge P25.00 for a car wash. Out of pocket miscellaneous cost would be P 8,500 PER MONTH
He would pay his employees for 2 weeks for vacations each year.Because of the length of his lease.he must write off his investment within 5 years His capital now is earning 15% and he is employed at a steady job that pays P25,000 per month.He desires a rate of return of at least 20% of his investment,
Would you recommend the investment ?
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