Engineering economy lorie m. Cabanayan francisco d. Cuaresma

 
5. Units-of-Production Method 
 This method results in the cost basis (minus final SV) being allocated equally over the 
estimated number of units produced during the useful life of the asset. 

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Depreciation per unit of production = B 
– SV
N
/ Estimated lifetime production in units 
 
Sample problem 3. A piece of equipment used in a business has a basis of $50,000 and is expected 
to have a $10,000 salvage value when replaced after 30,000 hours of use. Find depreciation rate per 
hour of use, and find its book after 10,000 hours operation. 
Solution:
Depreciation per unit of production = $50,000 
– 10,000 / 30,000 = $1.33 per hour 
After 10,000 hours, BV = $50,000 - $1.33/hr (10,000 hrs) = $36,700 
 
 

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CHAPTER V, APPLICATIONS OF MONEY-TIME RELATIONSHIPS 
METHODS FOR EVALUATING THE VIABILITY OF A PROPOSED PROJECT
 
1. THE PRESENT WORTH METHOD
 It is based on the concept of equivalent worth of all cash flows relative to some base or 
beginning point in time called the present.  
 It is a measure of how much money an individual or a firm could afford to pay for the 
investment in excess of its cost.  
 The criterion for this method in order that a project be economically feasible is that the 
present worth of the net cash flows be equal to or greater than zero (PW ≥ 0) . 
 To find the PW as a function of i% of a series of cash receipts and/or expenses, use the 
following relationship: 
PW (i%) = F
0
(1+i)
0
+ F
1
(1+i)
-1
+ F
2
(1+i)
-2
+ ………+ F
k
(1+i)
–k
+ ……... F
N
(1+i)
–N
N 
= Σ F
k
(1+i)
-k 
k=0
Where i = effective interest rate, or MARR, per compounding period 
k = index for each compounding period (0 ≤ k ≥ N) 
F
k
= future cash flow at the end of period k 
N = number of compounding periods in the planning horizon 
 
Sample problem1: An investment of $10,000 can be made that will produce a uniform annual of 
$5,500 for five years and then have a market (salvage) value of $2,000. Annual expenses will be 
$3,150 each year. The company is willing to accept any project that will earn 10% per year or more, 
on all invested capital. Show whether this is a desirable investment by using the PW method.