Engineering Economic Analysis

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Rate of Return Analysis 219

Payback Period

,In discussing present worth analysis and annual cash flow analysis, an important consid-

eration is the analysis period. This is also true in rate of return analysis. The method of

solution for two alternativesis to examine the differencesbetween the alternatives. Clearly,

the examination must cover the selected analysis period. For now, we can only suggest that

the assumptionsmade should reflect one's perception of the future as accurately as possible,

In Example 7-10 the analysis period is a common multiple of the alternative service

lives and identical replacement is assumed. This problem illustrates an analysis of the

differences between the alternatives over the analysis period.

Two machines are being considered for purchase. If the MARR is 10%, which machine should

be bought? Use an IRR analysis comparison.

Initial cost

Uniform annual benefit

End-of-useful-life salvage value

Usefullife, in years

Machine X

$200

95

50

6

Machine Y

$700

120

150

12

SOU!JTION

The solution is based on a 12-year analysis period and a replacement machine X that is identical

to the present machine X. The cash flowfor the differencesbetween the alternatives,is as follows:

MachineY MachineY-Machine X

-$700

+120

+120

+120

+120

+120

+120

-$500

+25

+25

+25

+25

+25

+25

+150

+120

+120

+IW

+120

: +120

+120

+150

+25

+25

+25

+25

=-+25

+25

+100

• 
  
  
  
  • 
    
    
    
    • ..-
    
    
    
    
  
  
  
  

Year MachineX

(^0) -$200
(^1) +95
(^2) +95
(^3) +95
4 +95
(^5) +95

{ +95'

(^6) +50
-200
(^7) +95
(^8) +95
I (^9) +95
l^10 +95
ii:I;=:; '='= ;;: ::,;; 1:; ==^11 +95
I 12
1:1 .... {+95+50
-. ...---
-,.
II; II!
I
I
!II!
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