Engineering Economic Analysis

Incremental Rate of Return Analysis 253

SolveExample 8-1 mathematically.With two mutually exclusive alternatives and a 6% MARR, which alternative should be selected? Year

o

1

Alt. 1 -$10 +15

Alt. 2 -$20 +28

Examine the differences between the alternatives.

Year

o

1

Alt. 2 - Alt. 1 -20 - (-10)=-10 +28 - (+15) -+13

Ip.crementalinternal rate of return (~IRR),

10 =13(PIF, i, 1) 10

(P I F, i,1) = --,.. 13 =0.7692

LlIRR. 30%

The Ll:IBRis greater than the MARR; hence, we will select the alteroative that gives this increment.

[Higher-cost All. 2]=[Lower-costAlt. 1] + [mcremel1tbetween theIll].

Select Alternative 2.

Recompute Example 8- 3 for MARR=6%. Each alternative has a 20-year life and no salvage value.

Initial cost Uniform annual benefit

A $2000 410

B $4000 639

C $5000 700

A practical first step is to compute the rate of return for each alt~rnative.

Alt~matiye A

2000 410(PIA,t, 20)

,.

(p.I.A. ""'0)

. .-" - -"-"11 878 - ''''~ ' 20 nT/-- -
= '. .l;1,l,""L. = "'="'-="''-t. 410. - r-"" -/o'~ w

..------

r---
-- - I

(P I F, i,1) = --,.. 13 =0.7692