Appendix A 241A.8.4 Some Interesting Observations
Regarding Constrained Analysis
Several interesting observations can be made regarding the ap-
proach, measures of worth, and decisions associated with constrained
analysis. Detailed development of these observations is omitted here
but may be found in many engineering economic analysis texts [White,
et al., 1998].
- The present worth of a decision alternative is the sum of the present
worths of the projects contained within the alternative. (From above,
PWA&D = PWA + PWD). - The annual worth of a decision alternative is the sum of the annual
worths of the projects contained within the alternative. - The internal rate of return of a decision alternative is NOT the sum of
internal rates of returns of the projects contained within the alternative.
The IRR for the decision alternative must be calculated by the trial and
error process of finding the value of i that sets the PW of the decision
alternative to zero. - The savings investment ratio of a decision alternative is NOT the sum
of the savings investment ratios of the projects contained within the
alternative. The SIR for the decision alternative must be calculated
from the cash flows of the decision alternative. - A common, but flawed, procedure for selecting the projects to accept
from the set of potential projects involves ranking the projects (not
decision alternatives) in preferred order based on a measure of worth
calculated for the project (e.g., decreasing project PW) and then accept-
ing projects as far down the list as funds allow. While this procedure
will select the optimal set under some conditions (e.g., it works well
if the initial investments of all projects are small relative to the capital
budget limit), it is not guaranteed to select the optimal set under all
conditions. The procedure outlined above will select the optimal set
under all conditions. - Table A-10 illustrates that the number of decision alternatives in the
collectively exhaustive, mutually exclusive set can grow prohibitively