Engineering Economic Analysis

Estimatesand Their Use in Economic Analysis 305

SOLUTION

Alternative A

NPW=-1000+ 150(PjA, 3Y2%,10) + 100(PjF, 3Y2%,10)

=-1000 + 150(8.317) + 100(0.7089)

=-1000 + 1248 + 71

=+$319

Alternative B

NPW =-2000 + 250(P j A,3Y2%, 10) +400(P j F,3Y2%, 10)

=-2000 + 250(8.317) + 400(0.7089)

=-2000 + 2079 + 284

=+$363

Alternative B,with its larger NPW, would be selected.

Alternate Formation of Example 10-1
Suppose that at the end of 10 years, the actual salvage value forBwere $300 instead of the $400
best estimate. If all the other estimates were correct, isB still the preferred alternative?

Revised B

NPW =-2000 +250(P j A, 3Y2%, 10) +300(P j F,3Y2%, 10)

=-2000 + 250(8.317) + 300(0.7089)

=-2000 + 2079 + 213

=+$292 -+Ais now the preferred alternative.

Example 10-1 shows that the change in the salvage value of AlternativeBactually

results in a change of preferred alternative.Thus, a more thorough analysis of Example 10-1

would consider (1) which values are uncertain, (2) whether the uncertaintyis :1:5%or ~50 to

+80%, and (3) which uncertain values lead to differentdecisions.A more thoroughanalysis,

which is done using the tools of this chapter, determines which decision is better over the

range of possibilities. Explicitly considering uncertainty lets us make better decisions. The

tool of breakeven analysis is illustrated in Example 10-2.

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