Engineering Economic Analysis

Choosing an Analysis Method

c

A

$3000 $5000 $7000

PresentWorthof Cost

FIGURE 8-11 Present worth analysis of Example 8-8 using a benefit-cost plot.

$1000 $9000

we select Alt. 2 with larger NPW. The same technique is used in situations where there are.

multiple alternatives or continuous alternatives. In Example 8-8 there were five alternatives;

Figure 8-11 plots these five alternatives. We can see that A has the greatest NPW and,

therefore, is the preferred alternative.

CHOOSING AN ANALYSIS METHOD

At this point, we have examined in detail the three major economic analysis techniques:

present worth analysis, annual cash flow analysis, and rate of return analysis. A practical

question is, which method should be used for a particular problem?

While the obvious answer is to use the method requiring the least computations, a

number of factors may affect the decision..

1. Unless the MARR-minimum attractiverate of return (orminimum requiredinterest
   rate for investedmoney)-is known, neither present worth analysis nor annual cash
   flow analysis is possible.


2. Present worth analysis and annual cash flow analysis often require far less compu-
   tation than rate of return analysis.


3. In some situations, a rate of return analysis is easier to explain to people unfamiliar
   with economic analysis. At other times, an annual cash flow analysis may be easier
   to explain.


4. Business enterprises generally adopt one, or at most two, analysis techniques for
   broad categories of problems. If you work for a coq>orationand the policy manual
   specifies rate of return analysis, you would appear to have no choice in the matter.

Since one may not always be able to choose the analysis technique computationally best

suited to the problem, this book illustrates how to use each of the three methods in all

--

$9000

$8000

'"$7000

I.t:.....

gcu$6000

j:Q

'C; $5000 I- B

€

$4000

.....Q

$3000

£

$2000

$1000