Engineering Economic Analysis

Capital Expenditure Project Proposals 519

The general manager of a manufacturingplant has received the followingproject proposals from

the various operating departments:

1. The foundry wishes to purchase a new ladle to speed up the casting operation.


2. The machine shop has asked for some new inspection equipment.


3. The painting department reports that improvements must be made to the spray booth to
   conform to new air pollution standards.


4. 'Theoffice.::managerwants to buy:a larger".more modern safe.

For each project there is a single course of action proposed. Note that the singleproject proposals
are also independent,for there is no interrelationshipor interdependenceamongthem.The general
~ger~.a~de.~ideJo=;allQcat~0ney;;:for.none;=some;::o~l:of the~various.'Pr{)jectproposals~

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process for a given situationor problem a project proposal. Associatedwith variousproject

propqsals are their particular available alternatives.For a firm with many projectproposals,

the following situation may result:

Capital Expenditure Proposals

Project Alternatives

1. Acquire additional manufacturing
   facility

A Lease an existing building

B Construct a new building

C Contract for the manufacturing to be doneoverseas

A Purchase semiautomatic machine

B Purchase automatic machine

A Make the parts in the plant

B Buy the parts from a subcontractor

2. Replace old grinding machine


3. Produce parts for the assembly line

Our task is to apply economic analysis techniques to this more complex problem.

Mutually Exclusive Alternatives and Single Project Proposals

Until now we havedealt with mutuallyexclusivealternatives,thatis, selectingonealternative

results in rejecting the other alternatives being considered. Even in the simplestproblems

encountered, the question was one of selectionbetweenalternatives.Should, for example,

MachineAor MachineBbe purchased to perform the necessarytask? Clearly,thepurchase

of one of the machinesmeant thatthe other one wouldnot be purchased.Sinceeithermachine

would perform the task, the selection of one precludes the possibilityof selectingthe other

one as well.

Even in the case of multiple alternatives,we have been consideringmutuallyexclusive

alternatives. A typical example was: What size pipeline shouldbe installed to supplywater

to a remote constructionsite? Only one alternativeis to be selected.This is differentfrom the

situation for single project proposals, where only one course of action is outlined.Consider

Example 17-1.

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