Engineering Economic Analysis

274 OTHER ANALYSISTECHNIQUES

The total cost of remodeling the available factory ($1,600,000) is smaller than the total cost of a

new plant ($1,685,000). The timing of the expenditures, however, is less favorable than building

the new plant. The new plant is projected to have the smaller future worth of cost and thus is the

preferred altefl1ative..

The Benefit-Cost Ratio

At a given minimum attractive rate of return (MARR), we would consider an alternative

acceptable, provided

PW of benefits - PW of costs ~ 0 or EUAB - EUAC 2: 0

These could also be stated as a ratio of benefits to costs, or

;
;,

B PW of benefit_EUAB > 1

Benefit-cost ratio C= PW of costs - EUAC -

, '

Rather than using present worth or annual cash flow analysis to solve problems, we can

base the calculations on the benefit-cost ratio, BIe. The criteria are presented in Table9-1.

We will illustrate"B/Canalysis" by solving the same example problems worked by other

economic analysis methods. ' ' ,

, , TABLE 9-1 Benefit-Cost Ratio Analysis

Situation Criterion

Fixed input Amount of money or other

input resources are fixed

Fixed task, benefit, or

other output to be

accomplished

External Sources of Money

or other inputs nor

amount of benefits or

other outputs are fixed

Fixed output

Neither input

nor output

fixed

Maximize BIC

Maximize BIC

Two alternatives: Compute

incremental benefit-cost ratio

(~BI ilC) on the increment

of investment between the

alternatives. IfilBIilC ::::1,

choose higher-cost alternative;

otherwise, choose lower~cost

alternative. ,

Three or more alternatives:

Solve by benefit-cost ratio

incremental analysis