Engineering Economic Analysis

250 INCREMENTALANALYSIS

FIGURE 8-5 Solving

multiple-alternative problems by

successive two-alternative analyses.

Three Alternatives

A~Y'i'

B ~1 Bestof3

C tLI Alternatives

Four Alternatives

1\vo-Alternative Analysis

J

K

L

M

Best of 4

Alternatives

Five Alternatives

1\vo-Alternative Analysis

p

Best of 5

Altemlttives

Q

R

S

T

The two example problems show us some aspects of incremental analysis. We now will

examine some multiple-alternativeproblems. We can solve multiple-alternativeproblems

by means of present worth and annual cash flow analysis without any difficulties.Rate of

return analysis requires that the differences between two alternatives must be examined to

see whether either is desirable. Now, if we can choose between two alternatives,then by a

successiveexamination we can choose from multiple alternatives.Figure 8-5 illustrates the

method.

Consider three mutually exclusive alternatives:

A

$2000

~41O~

Initial cost

Unifofrii annual bem5fit

B

$4000

639

C

$5000

700"

Each alternative has a 20-year life and no salvage value. If the MARR is 6%, which alternative

II shouldhe,selected? = 1S; :

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