Engineering Economic Analysis

214 RATEOF RETURN ANALYSIS

From the plot of these data in Figure 7-5, we see that NPW=0 ati=8%.

217

'€

~

i:$G)

'"

Q..,~

...G)

Z

-1783

FIGURE 7-5 NPW plot for Example 7-5.

Thus, the incremental rate of return-b.IRR--of selecting Saleco rather than Leaseco is 8%. This

is less than the 10% MARR. Select Leaseco.

You must select one of two mutually exclusive alternatives.(Note:Engineering economists often

use the term "mutually exclusivealternatives" to emphasize that selecting one precludes selecting

any other alternative.) The alternatives are as follows:

Year

o

1

Alt. 1

-$10

+15

Alt. 2

-$20

+28

Any money not invested here may be invested elsewhere at the MARR of 6%. If you can choose

only one alternative one time, which one would you select using the internal rate of return (lRR)

analysis method?

:.~9!-qTION

Using the IRR analysis method, we will select the lesser-cost alternative (Alt. 1), unless we find

that the additional cost of Alt. 2 produces enough additionalbenefitsto make it preferable instead.

If we consider Alt. 2 in relation to Alt. 1, then

[

Higher-cost

]

=

[

LOWer-cost

]

+

[

Differences between

Alt. 2 Alt. 1 Alt. 1 and Alt. 2 ]

or

Differe~ces betwe;n ~t. 1 and Alt. 2=

[

Higher-cost

]

_

[

LOWer-cost

Alt. 2 Alt. 1 ]

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