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T7 P2

T7 P2. Economic Analyses. Economic Estimation. WAG = wild a… guess SWAG = sophisticated WAG WAGNER = WAG not easily refuted. Present Worth Analysis. “Lump sum” future costs Annualized costs. Example - PW Analysis.

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T7 P2

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  1. T7 P2 Economic Analyses

  2. Economic Estimation • WAG = wild a… guess • SWAG = sophisticated WAG • WAGNER = WAG not easily refuted

  3. Present Worth Analysis “Lump sum” future costs Annualized costs

  4. Example - PW Analysis A firm needs to expand its manufacturing capacity. The present facility could be expanded to meet the needs at a cost of $1.2 million. Waste treatment costs for the expanded facility would be about $184,000 per year. An entirely new facility that would reduce waste production could be built for approximately $3.35 million. The new facility would have an estimated annual waste treatment cost of $56,000. Assume a 20-year useful life for the facilities and a zero salvage value for both. If the prevailing interest rate is 10%, which alternative is preferable?

  5. Benefit/Cost Analysis B = benefits C = costs D = disbenefits or negative benefits

  6. Example - B/C Analysis

  7. Cost Effectiveness Analysis Method: • Identify factors • Assign weights • Assign relative effectiveness score • Calculate effectiveness = (weighted sum of option) – (weighted sum of do-nothing option) • Plot cost vs. effectiveness

  8. Example – CE Analysis A manufacturing plant is faced with the loss of a hazardous waste disposal site. It is evaluating three strategies. • Ship waste to a distant site. • Construct major in-plant changes to reduce hazardous waste generation. • Rebuild the plant using a new process that does not generate hazardous waste.

  9. Example continued

  10. Example continued

  11. Payback Period

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