MONEY WORTH

ANALYSIS
Made By: GROUP 6

Dian Ratri Cahyani (1606896981)

Joshua Lokatili (1606897012)

Muhamad Ivan Farhan (1606862854)

PRESENT WORTH ANALYSIS
• What present worth method does is, all future cash flows are converted to
present amounts at a specific rate of return, which is the MARR (Minimum
Acceptable Rate of Return)
 Present Worth Analysis of Equal-Life
Alternatives
• This makes very simple to determine which alternative has the best
economic advantage. The required conditions and evaluation procedure are:
• For mutually exclusive alternatives, whether it’s revenue or cost alternatives,
these guidelines are used to justify a single or several alternatives.
EXAMPLE
SOLUTION
 Present Worth Analysis of Different-Life
Alternatives
• When the present worth method is used to compare mutually exclusive
alternatives that have different lives, the equal-service requirement must be
met. The procedure of PW analysis of equal life is followed, with one
exception:
• The equal-service requirement is satisfied by using either of two approaches:
EXAMPLE
SOLUTION
FUTURE WORTH ANALYSIS
• The future worth (FW) of an alternative may be determined directly from
the cash flows, or by multiplying the PW value by the F/P factor, at the
MARR.
• The n value in the F/P factor is either the LCM value or a specified study
period.
• Future worth analysis over a specified study period is often utilized if the
asset might be sold or traded at some time before the expected life is
reached.
EXAMPLE
SOLUTION
Annual Worth Analysis
 Advantages and Uses of Annual Worth
Analysis
• Annual Worth method is the best to use compare to others.
• Offers a prime computational and interpretation advantage since the AW
value needs to be calculated for only one life cycle.
 Capital Recovery and AW Values
• The AW value for an alternative is comprised of two components: capital recovery
for the initial investment P at a stated interest rate and the equivalent annual amount
A.

• The recovery of an amount of capital P committed to an asset, plus the time value
of the capital at a particular interest rate.
• Capital recovery is the equivalent annual amount that the asset, process, or system
must earn each year to just recover the initial investment plus a stated rate of return
 Evaluating Alternatives by Annual Worth
Analysis
• One alternative: if AW ≥ 0. the requested MARR is met or exceeded and
the alternative is economically justified.
• Two or more alternatives: select the alternative with the AW that is
numerically largest. This indicates a lower AW of cost alternatives or a larger
AW of net cash flows revenue alternatives.
 AW and Permanent Investment
• Cash flows recurring at regular or irregular intervals are handled exactly as a
conventional AW computations
• Convert them to equivalent uniform annual amounts A for one cycle.
 Life-Cycle Cost Analysis
• Life-cycle cost analysis utilizes AW or PW methods to evaluate cost estimates
for one project and big event.
Phases in Life-Cycle Cost Analysis
PAYBACK PERIOD
 Definition
The payback period np is an estimated time for the revenues, savings, and any other monetary
benefits to completely recover the initial investment plus a stated rate of return i.

In other word, The payback period is the length of time that it takes for a project to recover its initial cost out of the
cash receipts that it generates.
 Types of Payback Period
SIMPLE PAYBACK DISCOUNTED PAYBACK

• In other term, usually called no return • The stated of return rate is bigger than zero
payback ( i=0%) ( i>0%)

• The recovery of only the initial investment • The time value of money is considered

• Does not consider the time value of money

concept

Each type of the payback period used different equations to solve the problem
Where, - NCF = Net Cash Flow

- Annual Net Cash Flow = Cash inflows - Cash outflows

- For i = 0% or i > 0%, determine the pattern of the NCF series

-P = Initial investment
 Advantages and Disadvantages
Disadvantages Advantages

• For the simple payback, the time value of • The concept is extremely simple to understand
money is completely disregarded in the and calculate.
payback method, which is calculated by
counting the number of years it takes to • The analysis is focused on how quickly money
recover the cash invested. can be returned from an investment, which is
essentially a measure of risk.
• Either type of payback neglects all cash
flows occurring after the payback period.
Thus it is better to use payback as an initial
screening method
 Example
Even Cash Flows

Company C is planning to undertake a project requiring initial investment of $105

million. The project is expected to generate $25 million per year for 7 years. Calculate
the payback period of the project.

Solution
Payback Period = Initial Investment ÷ Annual Cash Flow = $105M ÷ $25M = 4.2 years
 Example
The board of directors of Halliburton International has just approved an $18 million world- wide engineering
construction design contract. The services are expected to generate new annual net cash flows of $3 million. The
contract has a potentially lucrative repayment clause to Halliburton of $3 million at any time that the contract is
canceled by either party during the 10 years of the contract period. If i 15%, compute the payback period.
Solution
The net cash flow each year is $3 million. The single $3 million payment (call it CV for cancellation value) could be
received at any time within the 10-year contract period.

0 = -P + NCF(P/A,i,n) + CV(P/F,i,n)

0 = -18 + 3(P /A,15%,n) + 3(P/F,15%,n)

The 15% payback period is np 15.3 years, found by trail and error. During the period of 10 years, the contract will
not deliver the required return.