Engineering Economic Analysis

Rationing CapitalbyRate of Return 521

TABLE17-1 Criteria for Rejecting Unattractive Alternatives

For'Each Alternative Compute Reject Alternative When Do Not Reject Alternative When

Rate of return,i

Present worth, PW

Annual cost. EUAC

Annual benefit, EUAB

Benefit-cost ratio, BjC

Net present worth, NPW

i< MARR

PW of benefits < PW of costs

EUAC > EUAB

B/C < 1

NPW < 0

i:::MARR

PW of benefits ::: PW of costs

EUAC::: EUAB

B/C::: 1

NPW ::: 0

TABLE 17-2 Criteria for Choosing the BestAlternative from Among Mutually

Exclusive Alternatives

Situations

Analysis Method

Present worth

Fixed Input

(The cost of each

alternative is

the same.)

FixedOutput

(The benefits from

each alternative

are the same.)

Annual cash flow

Maximize present

worth of benefits

Maximize

equivalent unifonn

annual benefits

Minimize present

worth of cost

Minimize

equivalent unifonn

annual cost

Neither Input Nor

Output Fixed

(Neither the costs nor the

benefits for the alternatives

given are the same.)

Maximize net present

worth

Maximize EAUB -EAUC

Maximize Maximize Incrementalbenefit-cost

benefit-cost ratio benefit-cost ratio ratio analysisis required

Incrementalrate of return analysis is required

Benefit-cost ratio

Rate of return

Selecting the Best Alternative from Each Project Proposal

The task of selecting the best alternative from among two or more mutually exclusive

alternatives has been a primary subject of this book. Since a project proposal is the same

form of problem, we may use any of the severalmethods discussedin Chapters 5 through 9.

The criteria are summarized in Table 17-2..

TIONING CAPITAL BY RATE OF RETURN

One way of looking at the capital rationingproblem is through the use of rate of return. The

technique for selecting from among independent projects is illustrated by Example 17-2.

These projects are independent, so their only interdependence is the budget constraint on

the total accepted set of projects.

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