Engineering Economic Analysis

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526 RATIONING CAPITAL AMONG COMPETING PROJECTS

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At a MARR of 14.5% the best set of projects is the same as computed in Example 17-2, namely,

Projects 1,2,3,4,5, and 6, and their cost equals the capital budget. One can see that only projects

with a rate of return greater than MARR can have a positive NPW at this interestrate. With MARR

equal to the cutoff rate of return, wemustobtain the same solution by either the rate of return or

present worth method.

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Example 17-4outlines the present worth method for the more elaborate case of independent

projects with mutually exclusive alternatives.

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Tl1~following tabulation shows that to maximize NPW, we would choose Alternatives 1C,2A,

anQ.3.1I.The to.tal cost of these three projects is $400,000. Since the capital budget is only

$250,000, we cannot fund ffiese projects. 1'5 pen1ilize a1f pr6jec1s 1)1propodion~tb tlfeif cost, "we

will use Equation 17-1 with its multiplier, p.As a first trial, a value ofp-:..0.10 is selected and

thelalternatiyes with the large~t .[NPW, -p(PW of cost)] selected.

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A company is preparing its capital budget for next year according to the steps in the flowchart

shown in Figure 17-3.The amount has been set at $250,000 by the Board of Directors.The MARR

of 8% is believed to be close to the cutoff rate of return. The followingproject proposals are being

considered.

Uniform Salvage Useful Computed

Project Cost Annual Benefit Value Life NPW

Proposals (thousands) (thousands) (thousands) (years) (thousands)

Proposal 1

Alt.A $100 $23.85 $0 (^10) $60.04
Alt.B 150 32.20 0 10 66.06
Alt. C 200 39.85 0 10 67.40
Alt.D 0 0 0
Proposal 2
Alt.'A 50 14.92 0 5 9.57
Alt.B^000
Proposal 3
Alt.A (^100) 18.69 25 10 36.99
Alt.B 150 19.42 125 10 38.21
Alt. C 0 0 0
Which project alternatives should be selected, based on present worth methods?