Transcript T7 P2 - SIUE

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
F
PW 
n
(1  i )
Annualized costs
(1  i)  1
PW  A x PWF  A x
n
i(1  i)
n
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 $56,000. Assume a 20-year
useful life for the facilities and a zero salvage
value for both. If the prevailing interest rate is
10%, which alternative is preferable?
Benefit/Cost Analysis
BD
B
B/C 
or 
C
CD
B = benefits
C = costs
D = disbenefits or negative benefits
Example - B/C Analysis
Type of Cost or Benefit
Capital
Increased maintenance
Reduced air pollution
Reduced future fees
Improved public image
Amount ($)
7 million
1.5 million
50,000 per year
0.3 million
0.4 million
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
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.
Example continued
Effectiveness
Factor
Short-term liability
Weight Presen
t
2
-3
A
B
C
-2
-1
-1
-2
-1
Long-term liability
3
-5
-3
Compliance
5
-2
+1 +2 +2
Production impact
5
0
-2
PR
1
0
+2 +2 +4
Regulatory impact
1
-3
-2
-1
-1
-3
0
Example continued
35
Effectiveness
30
25
20
15
10
5
0
0
10
20
30
Cost (millions $)
40
50
60
Payback Period
Total Cost
Payback 
Annual Savings