Engineering Economic Analysis

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480 SELECTIONOF A MINIMUM ATTRACTIVERATEOF RETURN

Consider the two following alternatives:the MARR of Alt.Bhas been raised from 10% to 15%

to take into account the greater risk and uncertainty that Alt.B'sresults may not be as favorable

as indicated. What is the impact of this change of MARR on the decision?

Year

o

1-10

11-20

Alt.A

-$80

10

20

Alt.B

-$80

13.86

10

. Computations at MARR of 10% Ignoring R.isk ~d Uncertainty.
Both alternatives have the same positive NPW (+$28.83) at,a MARR o~10%. Also, the differences
in the benefits schedules (A - B) produce a...10% increrp.ental rate of.rettlrn. (The calculations
are qot shown here.) This must be tr'ueifNPW for the two alternatives is totemaJ,n constant at a
MARR of 10%.

I

L~

I

Considering Risk.and Uncertainty with MARR of 10% I

Ai 10% ,both alternatives are equally desirable. Since Alt. Bis believed topave greater. risk arid ~t

uncertainty, a logical conclusion is to select Alt.Arather tpanB. 1

a e j

t .. 'n::Cre:a~iMA.RR ta15% "'::;: =!: = "" ~ '"' ...~::: :::::: = ~~ :=-='-~ == = ...,

A

.

t.a

.

:1\1

.

.

...

ARR

.

of 15

..%,A.

lt

.

.

.

A

..

.

.

ha

.

s a ne

.

.

.

ga

.

tiv

..

e NPWand

..

Alt. B

..

has a.positive NPW

.

.A

.

71

.

tematiyeJ3is

p~eferred.qn<ler tl1ese..cir~mrp.stance?:: .!ii!.'! ~ ~ '" >; ~ ~::: ==='1:1=_11 oil ~ :;;:;;~ =...,J

.-1000... 11\II,\:>::1 _ __. III _ , A

NPW

Year Alt.A At 14.05% At 10% At 15%

(^0) -$80 -$80.00 -$80.00 -$80.00
1-10 10 52.05 61.45 50.19
11-20 20 27.95- 47.38 24.81
(^0) +28.83 --5.00
.
NPW
Year Alt. (^8) At 15.48% At 10% At 15 %
(^0) -$80 -$80.00 -$80.00 -$80.00
1-10 3.86 68.31 85.14 69.56
11....20 (^0) 11.99- 23.69 12.41
(^0) +28.83 +1.97