Engineering Economic Analysis

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Elements in Incremental Rate of Return Analysis CONTENTS xi

1000 =61(PIA, i, 20)

1000 ~IRR

(PIA, i,20)= 61 2.0%

The C-Bincrement has an unsatisfactory 2% rate of return; therefore,Bis preferred over C.

(Answer:Alt.B)

Solve Example 8.4 mathematically.AlternativeAin Example 8-6 was believed to have an over-

stated benefit. The new situation forA(we will again call itA')is a uniform annual benefit of

122. Compute the rate of return forA'.

SOLUTION

2000 =122(PI A, i, 20)

2000

(PIA, i,20)=- =16.39 i -.2%

122

This time Alt.A'has a rate of return less than the MARR of 6%. AlternativeA'is rejected, and the
problem now becomes selecting the better ofBand C. In Example 8-6.we saw that the increment
C-B had a ~IRR of 2% and it, too, was undesirable.
Thus, we again select AlternativeB.

The following information is provided for five mutually exclusive alternatives that have 20-year
useful lives. If the minimum attractive rate of return is 6%, which alternativeshould be selected?

II

i!

I

I

*PW of benefit =(uniform annual benefit)(PIA,6%,20)= 11.470 (uniform annual benefit). These I

val1,leswill be,used later to plot a curve'f()r,P~f c()stversus'PWofbenBftt,1I'

;;I

.- -- - ......

Alternatives

A B C D E

Cost $4000 $2000 $6000 $1000 $9000

Uniform annual benefit 639 410 761 117 785

PW of benefit* (^733047008730) - - (^13409000) <.
Rate of return 15% ;=20q;h=w:
:I:
'ii% 10% 6%