Engineering Economic Analysis

Summary

FIGURE 8-12b Spreadsheet after GOAL SEEK.

The incremental IRR found by GOAL SEEK is 14.52%.

....

Summary

A graph of the PW of benefits versus PW of cost (called a benefit-cost graph) can be an

effective way to examine two alternatives by incremental analysis. And since multiple-

alternative incremental analysis is done by the successive analysis of two alternatives,

benefit-cost graphs can be used to solve multiple-alternative and continuous-function

alternatives as easily as two alternative problems.

The important steps in incremental rate of return analysis are as follows:

1. Check to see that all the alternatives in the problem are identified.


2. (Optional)Compute the rate of return for each alternative.If one or more alternatives
   has IRR ::: MARR, reject any alternatives with IRR < MARR.
   ,3. Arrange the remaining alternatives in ascending order of investment.


3. Make a two-alternative analysis of the first two alternatives.


4. Take the preferred alternative from Step 4, and the next alternative from the list in
   Step 3. Proceed with another two-alternativecomparison.


5. Continue until all alternatives have been examined and the best of the multiple
   alternatives has been identified.

Decision Criteria for Increments ofInvestment

·If LlIRR ::: MARR, retain the higher-cost alternative.

. If LlIRR < MARR, retain the lower-cost alternative.
·Reject the other alternative used in the analysis.

Decision Criteria for Increments ofBo"owing

· If, LlIRR ~ MARR, the increment is acceptable.

·If, LlIRR > MARR, the increment is not acceptable.

Benefit-cost graphs, which plot the PW of benefits versus the PW of cost, can also be used

in present worth analysis to graphically show the NPW for each alternative.

J

, A B C D E F

(^1) 14.52% Interestrate
(^2) Alternative Cost Life EUAC
3 Good 600000 6 156,503 = -PMT($A$1,C3,B3)
(^4) Better (^80000010) 156,503 = -PMT($A$1,C4,B4)
5 difference = 0 =,D3-D4