COST CONSIDERATIONS

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COST CONSIDERATIONS
Problems 7
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COST CONSIDERATIONS

• TYPES OF COSTS
• CONVERTING BETWEEN TYPES OF COSTS
• COMPARING OVERALL COSTS

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INTRODUCTORY COMMENTS

• FOR ALL ENGINEERING WORK COST IS A KEY
  CONSIDERATION
• A BENEFIT IS SIMPLY A NEGATIVE COST
• VARIOUS TYPES OF COSTS
• CAPITAL
• ANNUAL
• OPERATING
• SALVAGE

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INTRODUCTORY COMMENTS

• MUST FIND A COMMON BASIS FOR COSTS TO MAKE
  SENSIBLE COMPARISONS BETWEEN ALTERNATIVES

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TYPES OF COSTS

• CAPITAL COSTS
• lt FIRST COST
• lt COST OF PURCHASING INITIAL ITEMS
• lt INVESTMENT COST
• ANNUAL COSTS
• lt ONGOING, YEARLY, COSTS
• lt MAINTENANCE
• lt INSURANCE
• lt REPAIRS
• lt SALARIES

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TYPES OF COSTS

• SALVAGE
• lt RESALE VALUE AT THE END
• lt COST OF DECOMMISSIONING PROJECT
• EQUIVALENT UNIFORM ANNUAL COST (EUAC)
• lt COST/BENEFIT EXPRESSED AS A UNIFORM ANNUAL COST
• lt A WAY TO COMPARE ALL COSTS ON AN EQUAL BASIS

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CONVERTING BETWEEN COSTS

• HOW DO YOU COMPARE SOMETHING WITH, SAY,
• A HIGH CAPITAL COST AND LOW ANNUAL COST
• TO SOMETHING ELSE WITH
• A LOW CAPITAL COST AND A HIGH ANNUAL COST?

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CONVERTING BETWEEN COSTS

• HOW DO YOU COMPARE ...
• CONVERT ALL COSTS TO THE SAME TYPE

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CONVERTING BETWEEN COSTS

• PRESENT VALUE (PV) TO A FUTURE VALUE (FV)
• FV FROM A PV
• EUAC OF A PV

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FV OF A SINGLE PAYMENT

• FV ?

• 1

• 0

• 2

• 3

• n

• Time

• PV Known

• FOR 1 YEAR FV1 PV (1 i)
• FOR 2 YEARS FV2 FV1 (1 i) PV (1 i)
  (1 i)
• FV2 PV (1 i)2
• FOR n YEARS FVn PV (1 i)n

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FV OF A SINGLE PAYMENT

• FV ?

• 1

• 0

• 2

• 3

• n

• Time

• PV Known

• PAYMENT OCCURS AT THE START OF YEAR 1, COLLECT AT
  THE END OF n YEARS
• FOR EXAMPLE PV 3000, n 15 yrs, i 10/YR
• FV 3000 (1 0.10)15 12,531.74

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PV OF A FUTURE PAYMENT

• FV KNOWN

• 1

• 0

• 2

• 3

• n

• Time

• PV ?

• PV FV / (1 i)n

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PV OF A SERIES OF EQUAL PAYMENTS

• A

• A

• A

• A

• 1

• 0

• 2

• 3

• n

• Time

• PV ?

• PV A / (1 i)1 YEAR 1
• A / (1 i)2 YEAR 2
• A / (1
  i)n YEAR n

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PV OF A SERIES OF EQUAL PAYMENTS

• A

• A

• A

• A

• 1

• 0

• 2

• 3

• n

• Time

• PV ?

• (1 i ) n - 1
• PV A ----------------------
• i ( 1 i ) n

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PV OF A SERIES OF EQUAL PAYMENTS

• A

• A

• A

• A

• 1

• 0

• 2

• 3

• n

• Time

• PV ?

• Example A 3000/yr, n 15 years, i 10/yr

• (1 0.10 ) 15 - 1
• PV 3000 -------------------------- 3000
  7.606
• 0.10 ( 1 0.10 )15
• PV 22,818.23

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EQUIVALENT UNIFORM ANNUAL COST (EUAC)

• WITHIN ANY PROJECT ONE WILL HAVE ALL KINDS OF
  COSTS
• ONE APPROACH TO ALLOW COMPARISON IS TO CONVERT
  ALL COSTS AND BENEFITS TO THE SAME TYPE OF COSTS,
  EITHER PV, FV OR EUAC AND ADD THEM UP
• THE COST COMPARISON IS THEN MADE ON THE BASIS OF
  SIMILAR COSTS

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EXAMPLE
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COST CONSIDERATIONS
Problems 7