Engineering Economic Analysis

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Rationing Capital by Present Worth Methods

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III

529

Solve Example 17-4 by the rate of return method. For project proposals with two or more

alternatives, incremental rate of return analysis is required. The data from Example 17-4 and

the computed rate of return for each alternative and each increment of investment are as

follows:

The various separableincrements of investmentmay be ranked by rate of return. They are plotted

in a graph of cumulative cost versus rate of return in Figure 17-4. The ranking of projects by rate

of return gives the following:

Project

lA

2A

3A :;;

IB inplace oflA

lC in place ofIB

---------- 3B."" ~-~in place of~ ~~::::iii:iii3A ::

. -

Incremental Analysis

Uniform Uniform
Annual Salvage Computed Annual Salvage Computed
,mbination Cost Benefit Value Rate of Cost Benefit Value Rate of
Alternatives (thousands) (thousands) (thousands) Return (thousands) (thousands) (thousands) Return

)POScu1
A $100 $23.85 $^0 20.0%
B-A $ 50 $ 8.35 $ 0 10.6%
B 150 32.20 0 17.0
C-B 50 7.65 0 8.6
C-A 100 16.00 0 9.6
C 200 39.85 0 .15.0
b 0 0 0 0
)posal 2
50 14.92^0 15.0
B 0 0 0 0
iposal 3
4- 100 18.69 25 15.0
9-A 50 0.73 100 8.3
r1 150 19.42^125 12.0
0 0 0 0