Engineering Economic Analysis

Ranking Project Proposals

Rank the following nine independent projects in their order of desirability, basedon a 14.5%

minimum attractive rate of return. (To facilitate matters, the necessarycomputations are included

in the tabulation.)

SOLUTIONI

Rankedby NPwIPWof cost, the projects are listed as follows:

Project

5 1 4 6 3 2 9 7 8

NPWIPW of Cost

0.2814

0.2201

0.2110

0.1791

0.1362

0.0194

-0.0256

-0.0902

-0.1056

Rate of Return

20%

20

20

18

25

15

14

10

12

The rate of return tabulation illustrates that it is not a satisfactory ranking criterion and would

have given a different ranking from the present worth criterion.

.I

~

In Example 17-6, the projects are ranked according to the ratio NPWIPW of cost. In Fig-

ure 17-3, the criterion used is [NPW- p(pW of cost)]. If one were to compute the value of

pat which [NPW- p(PWof cost)]= 0, we wouldobtainp =(NPWIPW of cost). Thus

the multiplier pis the ranking criterion at the point at which [NPW-p(PW of cost)]=0."."

If independent projects can be ranked in their order of desirability,then the selection of ::'.11,

projects to be.include~ in a cap.italbudget is a simple task. One may proc~eddown ~e li~t ~.~~,I, '.

of ranked projects until the capItal budget has been exhausted.The only difficulty WIththis i][.£-

~~

Uniform Computed

Annual Useful Salvage Computed NPWat Computed

Cost Benefit Life Value Rate of 14.5% NPW/Cost

"Oject (thousands) (thousands) (years) (thousands) Return (thousands) (thousands)

(^1) $100 $23.85 (^10) $ 0 20% $22.01 0.2201
(^2200) 39.85 (^10015) 3.87 0.0194
3 50 34.72^2025 6.81 0.1362
4 100 20.00^610020 21.10 0.2110
5 100 20.00^1010020 28.14 0.2814
6 100 18.00 10 100 18 17.91 0.1791
7 300 94.64 4 0 10 - 27.05 -0.0902
8 300 47.40 10 100 12 -31.69 -0.1056
9 50 7.00 10 50 14 -1.28 -0.0256