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Engineering Cooperative Ed (EGR 393) Present Worth Analysis

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Sandra Watson
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Michigan State University

Engineering Cooperative Ed (EGR 393)

Economics Module 3 – Present Worth Analysis

Engineering Economics Module 3
Evaluating the Economic Feasibility of an Engineered Solution1
The goal of this module is to continue the introduction of some basic concepts of
engineering economics. Concepts that will be discussed include:
 Minimum Attractive Rate of Return
 Present Worth Method or Present Value
 Capitalized Worth Method or Capitalized Equivalency
These concepts are used to evaluate the economic feasibility of an engineered solution. You
should review Engineering Economics Module 1 and Module 2: Basic Concepts to make sure
you are familiar with that material prior to continuing with this module.
Minimum Attractive Rate of Return:
The minimum attractive rate of return (MARR), also called the target rate, hurdle rate,
cut-off rate or valuation rate, is the rate by which a project is evaluated when an interest rate is
not known. It is usually chosen to maximize the economic viability of an organization when
considering a project, and accounts for various risk factors. The MARR is typically established
based on company policy and may be project specific. The MARR may take into account some of
the following:
 The amount of money available for investment, and the source and cost of these funds
 The number of good projects available for investment and their purpose
 The amount of perceived risk associated with investment opportunities available
 The type of organization involved (e.g., government, public utility, private industry)
(Sullivan, et.al. 2012).
Present Worth Analysis
Present worth (PW) is the concept of the equivalent worth of all cash flows at the end of
year 0 – or, another way to look at it, at the beginning of year 1. All cash inflows and outflows
are discounted to the present point in time at an interest rate (typically chosen as the MARR).
Present worth as a function of interest rate for a series of cash flows is found as follows:
Content of this module is largely excerpted from Chapter 5 of Engineering Economy (fifteenth edition) by Sullivan,
Wicks and Koelling (2012) and Chapters 6 and 7 of Engineering Economics by Sepulveda, Souder and Gottfried
(1984).

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Engineering Cooperative Ed (EGR 393) Present Worth Analysis

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