Engineering Economic Analysis

278 OTHER ANALYSISTECHNIQUES

4. Examine each separable increment of investment. If~BI~c < 1, the increment is not
   attractive. If D.BI~C 2: 1, the increment of investment is desirable. The increments B-D
   andA-B are desirable. Thus, of the first three alternatives(D, B,andA),Alt.Ais the
   preferred alternative.IncrementC-Ais not attractive as~BI~C = 0.70,whichindicates
   that of the first four alternatives(D, B, A,andC), Acontinues as the best of the four.
   Now we want to decide betweenAandE, which we'll do by examining the increment of
   investment that represents the difference between these alternatives.
   Increment E-A
   $500b
   1670
   0.33

D.Cost

~Benefit

D.BI4C

The increment is undesirable. We choose Alt.Aas the best of.the six alternatives. One should

note that the best alternativein this example does not have the highestB/Cratio.

I, '

Benefit-cost ratio analysis may be graphically represented. Figure 9.1 is a graph of

Example 9-5. We see thatF has aB/C< 1 and can be discarded. AlternativeDis the

starting point for examining the separable increments of investment. The slope of line

B-D indicates a~BID.Cratio of > 1. This is also true for lineA-B. IncrementC-A has

a slope much flatter than BIC= 1, indicating an undesirable increment of investment.Al-

ternative C is therefore discarded andAretained. IncrementE-A is similarly unattractive.

AlternativeAis therefore the best of the six alternatives.

Note particularly two additional things about Figure 9-1: fin;t, even if alternatives

withB/C ratio < 1 had not been initially excluded, they would have been systematically

eliminated in the incremental analysis. Since this is the case, it is not essential to compute

theB/Cratio for each alternative as an initial step in incremental analysis. Nevertheless,it

seems like an orderly and logical way to approach a multiple-alternativeproblem. Second,

Alt.Bhad the highestB/C ratio(B/C =2.35), but Itis not the best of the sixaltematives.We

saw the same situation in rate of return analysis of three or more alternatives.The reason is

the same in both analysis situations.We seek to maximize thetotalprofit, not the profit rate.

FIGURE 9-1 Benefit-cost ratio

graph of Example9-5.

$10,000

$9000

I+::~ $8000

~~ $7000

Eo $6000

'€o $5000

~ $4000

-=

~ $3000

!!:!

~ $2000

$1000

B/C=2.0 B/C=1.5 B/C=1.0

"

,.

a

, ,

"
o 4000 6000 8000 10,600
PresentWorthof Cost