Engineering Economic Analysis

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Incremental Benefit-Cost Analysis^503

As .an example of these calculations, consider the third increment (I~ II).

APlant construction cost = 11,000- 12,500= -$1500

AAnnualO&Mcost = 480 - 120 =$360

PW of ACosts =-1500 +360(P/A,8%,45)=$2859

or =16,812 - 13,953=$2859

=700 - 580=$120

=550 -700 =-$150

= 750 - 400 =$350

=(120 - 150 +350)(P/A,8%,45)

= $3875

= 3875/2850 = 1.36

AAnnual utility payment savings

AAnnual overcapacity revenue

dAnnual benefits of newjobs

PW of dBenefits

AB/C ratio (PW dB)/(PW dC)

Step 8 The analysis in the table proceeded as follows: do nothing to Alternative I was justified

(AB/ C ratio=1.46), Alternative I became the new base; Alternative I to Alternative

ill was not justified (AB/C ratio = -'-1.15), Alternative I remained base; Alternative

I td Alternative II was justified (dB/C ratio=1.36), Alternative II became the base;

Alternative II to Alternative IV was not justified (.AB/C ratio=0.35), and Aiternativell

became the recommended power plant design alternative because it is the one associated

with the last justified increment. All alternatives in the feasible set were considered before

the recommendation was produced. Notice that Alternative ill, even though included in

the feasible set, did not affect the recommendation and was eliminated through the

incremental method. Notice also that the first increment considered (do nothing ~ I)

was not selected even though it had thelargestAB/C ratio (1.45). Selection is based on

the alternative associated with thelast justified increment (in this case, Alt. II).

Let us reconsider Example 16-4, this time using the modified B/C ratio to analyze the set of
cr 'peting design alternatives. Again we will use the present worth method.

.SOLUTION,

Here we use the modified B/C ratio.

Step 1 The alternatives are still do nothing and designs I, II, ill, and IV.

Step 2 We calculate the modified B/C ratio using the PW of benefits and costs~

B/C ratio (I) =(580 + 700 + 400 - 120)(P/A,8%, 45)/(12,500) = 1.51

B/C ratio (II) = (700+ 550 + 750 - 480)(P/A,=-:8%,45)/(11,000)..:;;;:r;~~=:tiC. 1.67

B/C ratio (III)=(200 + 950 + 150 - 325)(P/A,8%,45)/(12,500) =0.95

B/C ratio (IV)=(1300+ 250+ 500- 145)(P/ A,8%=45)/(16,&00)-).37

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