woah! im amazed by how you present this video. the lightboard is such a goal. very ideal for online class. im a teacher btw. and i really like this video. thank you!
Sir in the present worth and future worth method, I have seen cases where project life is shorter or longer than the analysis period. I couldnt find these cases in the comparison playlist . Which video of your should I watch to learn it ?
Good question! I know the type of problem you are describing, but I'm sorry I don't have a related video. In most cases it's ok to simply decide on a 'study period' of a certain length of time and perform a PW analysis for the cash flows that occur during that period. If you want to have a look through my playlist on cash flow analysis, you should see a video on PW analysis for projects with unequal lives. This video comes closest to what you need... sorry, that's the best I have at the moment!
Good question. Any cash flow where money 'comes out of your pocket' should be a negative cash flow, or in other words, a down arrow on the cash flow diagram. When a company buys the equipment at time t=0, money comes out of their pocket. This can be confusing for things we refer to as 'investments', but remember that even for an investment you need to buy them...i.e. money comes out of your pocket at time t=0... you get it back later as up arrows!
HI, your videos are really helpful. You deserve more subscribers... I have a question for you. I have two alternatives, one is human based system and the other one is automated system. The automated system purchace price is $135000,install fee: 15,000. Cost of maintenance:120000/year For human based:salary :$40,000/year, benefits:$3000 per year If I am planning to do maintenance for every 2 years for the automated system, which alternative should be best using present worth method? MARR:7% Planning horizon:5 years please help me.
Hello! Sorry for the delayed response. Automated system -135000 and -15000 both at t=0, so -150000 Automated system -120000 at t=2 and again at t=4 PW = -150k-120k(P/F, 7%, 2)-120k(P/F, 7%, 4) = -191,234.40 Human: -43000 annuity for 5 years PW = -43k(P/A, 7%, 5) = -171,686.1 Therefore the human solution has a higher PW (less negative) - choose the Human Solution!
Sir i have two questions. 1. Why do the cash flows get smaller when we convert them in the present time? 2. If you're saying that a good investment is when PW is greater than or equal to MARR, then are we multiplying MARR with the annual savings each year individually (compound interest method) to make that comparison?
1 - Think of it like this: Money gets bigger as we go 'foreword' in time because the money earns interest. Moving money backwards in time does the opposite! Please watch: ua-cam.com/video/4MooLfomBmE/v-deo.html 2 - A good investment is when the PW is a 'positive' (+) value, when we use the MARR as the time-value-of-money interest rate. Keep this in mind and watch the video again - or, you could also watch: ua-cam.com/video/WYbC1-TsGis/v-deo.html
If the annual savings follow a pattern like a geometric or arithmetic gradient (check my Channel for videos on these) then you can use these formulas and the problem is more-or-less the same. If the annual savings change more 'randomly', then you will need to move each payment to the present one-at-a-time. ALTERNATIVELY, you can use the NPV function in Excel - again, check out my Channel for a video on this topic. ua-cam.com/video/NcO7LyJE8bA/v-deo.html
With the annual savings figures, what are those annual savings compared to? In other words what defines the annual savings? I'm asking because I am having to find the annual savings for class based on 2 scenarios with different costs.
Yes, my video assumes the annual saving have already been determined. I'm not sure exactly how your problem is structured, but I'm guessing you'll need to start with a cash flow diagram to help visualize the costs and benefits at each point in time. You can consolidate the cash flows at each point in time by finding the 'net' amount of cash (i.e. sum the positive and negative flows). Have a look at my video on cash flow diagrams. Hope this helps a little.
P/A is a special notation used in Finance. It means "present worth given an annuity". It is a factor calculated using an interest rate and a number of periods. It is called the 'P given A compound interest factor'. The complete notation looks like this: (P/A, 15%, 10). To find the value of this factor you look in the 15% compound interest factor table, in the P/A column, and in the row for 10 time periods. OR, you can also use the formula: [(1+i)^N -1]/[ i * (1+i)^N]. You multiply the value of this factor by the value of the annuity to obtain the present value. Have a look at some of my other videos in the 'cash flow analysis' playlist to learn more: ua-cam.com/play/PLcfz9wmNxKqgciRucJOr8VdEQQT_cicOT.html I hope this helps!
I have made some videos that are short clips taken from my online class where I teach these concepts. I recommend watching these 2 videos: ua-cam.com/video/nQuUjDuilAw/v-deo.html ua-cam.com/video/21P7VCw1DwI/v-deo.html The first video shows the common 'patterns' of cash flows and introduces the concept of the compound interest 'factors'. The second video shows the actual formulas for each of the compound interest factors - you can also use interest-tables when the interest rate is a nice 'round' number. You can watch any of my other videos from the 'Cash Flows' playlist to see example problems. I hope this helps. eeconomicsguy
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woah! im amazed by how you present this video. the lightboard is such a goal. very ideal for online class. im a teacher btw. and i really like this video. thank you!
I'm glad you liked the video. I agree, the lightboard is great! I'm teaching using Zoom + the lightboard and I'm very happy, and so are my students.
You're a teacher that looks like you could be in the student's seat, very pretty!
your videos have helped me pass my exams with very excellent marks...thanks for this...
Thank you for the comment! These types of comments are my favorite!!
you helped me so much. thanks
Great to hear! Good luck in your course!
good analysis Sir
Thanks! Glad you liked it.
Sir in the present worth and future worth method, I have seen cases where project life is shorter or longer than the analysis period. I couldnt find these cases in the comparison playlist . Which video of your should I watch to learn it ?
Good question! I know the type of problem you are describing, but I'm sorry I don't have a related video. In most cases it's ok to simply decide on a 'study period' of a certain length of time and perform a PW analysis for the cash flows that occur during that period. If you want to have a look through my playlist on cash flow analysis, you should see a video on PW analysis for projects with unequal lives. This video comes closest to what you need... sorry, that's the best I have at the moment!
how did you work out the initial P to be negative?
Good question. Any cash flow where money 'comes out of your pocket' should be a negative cash flow, or in other words, a down arrow on the cash flow diagram. When a company buys the equipment at time t=0, money comes out of their pocket. This can be confusing for things we refer to as 'investments', but remember that even for an investment you need to buy them...i.e. money comes out of your pocket at time t=0... you get it back later as up arrows!
HI, your videos are really helpful. You deserve more subscribers... I have a question for you.
I have two alternatives, one is human based system and the other one is automated system.
The automated system purchace price is $135000,install fee: 15,000. Cost of maintenance:120000/year
For human based:salary :$40,000/year, benefits:$3000 per year
If I am planning to do maintenance for every 2 years for the automated system, which alternative should be best using present worth method?
MARR:7%
Planning horizon:5 years
please help me.
could you please help me
Hello! Sorry for the delayed response.
Automated system -135000 and -15000 both at t=0, so -150000
Automated system -120000 at t=2 and again at t=4
PW = -150k-120k(P/F, 7%, 2)-120k(P/F, 7%, 4) = -191,234.40
Human: -43000 annuity for 5 years
PW = -43k(P/A, 7%, 5) = -171,686.1
Therefore the human solution has a higher PW (less negative) - choose the Human Solution!
Sir i have two questions.
1. Why do the cash flows get smaller when we convert them in the present time?
2. If you're saying that a good investment is when PW is greater than or equal to MARR, then are we multiplying MARR with the annual savings each year individually (compound interest method) to make that comparison?
1 - Think of it like this: Money gets bigger as we go 'foreword' in time because the money earns interest. Moving money backwards in time does the opposite! Please watch: ua-cam.com/video/4MooLfomBmE/v-deo.html
2 - A good investment is when the PW is a 'positive' (+) value, when we use the MARR as the time-value-of-money interest rate. Keep this in mind and watch the video again - or, you could also watch: ua-cam.com/video/WYbC1-TsGis/v-deo.html
what would you do if the annual savings vary each year?
If the annual savings follow a pattern like a geometric or arithmetic gradient (check my Channel for videos on these) then you can use these formulas and the problem is more-or-less the same. If the annual savings change more 'randomly', then you will need to move each payment to the present one-at-a-time. ALTERNATIVELY, you can use the NPV function in Excel - again, check out my Channel for a video on this topic. ua-cam.com/video/NcO7LyJE8bA/v-deo.html
With the annual savings figures, what are those annual savings compared to? In other words what defines the annual savings? I'm asking because I am having to find the annual savings for class based on 2 scenarios with different costs.
Yes, my video assumes the annual saving have already been determined. I'm not sure exactly how your problem is structured, but I'm guessing you'll need to start with a cash flow diagram to help visualize the costs and benefits at each point in time. You can consolidate the cash flows at each point in time by finding the 'net' amount of cash (i.e. sum the positive and negative flows). Have a look at my video on cash flow diagrams. Hope this helps a little.
Can you tell me what is the value of P/A, in the formula?
P/A is a special notation used in Finance. It means "present worth given an annuity". It is a factor calculated using an interest rate and a number of periods. It is called the 'P given A compound interest factor'. The complete notation looks like this: (P/A, 15%, 10). To find the value of this factor you look in the 15% compound interest factor table, in the P/A column, and in the row for 10 time periods. OR, you can also use the formula: [(1+i)^N -1]/[ i * (1+i)^N]. You multiply the value of this factor by the value of the annuity to obtain the present value. Have a look at some of my other videos in the 'cash flow analysis' playlist to learn more: ua-cam.com/play/PLcfz9wmNxKqgciRucJOr8VdEQQT_cicOT.html
I hope this helps!
@@EngineeringEconomicsGuy can you elaborate more example sir
I have made some videos that are short clips taken from my online class where I teach these concepts. I recommend watching these 2 videos:
ua-cam.com/video/nQuUjDuilAw/v-deo.html
ua-cam.com/video/21P7VCw1DwI/v-deo.html
The first video shows the common 'patterns' of cash flows and introduces the concept of the compound interest 'factors'. The second video shows the actual formulas for each of the compound interest factors - you can also use interest-tables when the interest rate is a nice 'round' number.
You can watch any of my other videos from the 'Cash Flows' playlist to see example problems.
I hope this helps.
eeconomicsguy
Is the best alternative the least value of the highest value? I am referring to the results of the present worth calculations for all alternatives.
Is the best alternative the least value or the highest value? I am referring to the results of the present worth calculations for all alternatives.
The alternative with the highest present worth is the best! Thanks for the question!
Sir, what if number of years difference among alternative
Excellent question! I have a video for this: ua-cam.com/video/WEGZzry21Jo/v-deo.html