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ALTERNATIVES
CHE40: Engineering Economy
Engr. Elisa G. Eleazar
Alternatives
Case
Study Period
Case
Capitalized
Worth Method
Incremental
Project
Outline
B/C Analysis
Combination
Comparing Alternatives
Among Alternatives
Comparing Alternatives
Mutually Exclusive
at most one project can be
chosen
Independent
the choice is not dependent of the
choice of any other project; all or
none of the projects may be
selected
Contingent
the choice is conditional on the
choice of one or more other
projects
Alternatives
Investment Alternatives
those with initial capital
investments that produce positive
cash flows from increased
revenue, savings through reduced
costs, or both
Comparing Alternatives
Cost Alternatives
those with negative cash flows,
except for a positive cash flow
element from disposal of assets
at the end of the projects useful
life
Alternatives
Comparing Alternatives
Alternatives
Comparing Alternatives
Alternatives
Comparing Alternatives
Alternatives
Comparing Alternatives
Comparing Alternatives
Rate-of-Return Methods
Comparing Alternatives
10
Incremental
1
Investment Analysis
Comparing Alternatives
11
Annual Maintenance
Expenses, $
Service Life
80,000
35,000
10,000
3,000
5,000
10
10
Comparing Alternatives
Salvage Value, $
100,000
12
Repeatability Assumption
assumes that the economic estimates for an
alternatives initial useful life will be repeated in the
subsequent replacement cycles
Comparing Alternatives
Coterminated Assumption
13
Use the
Useful Life <
repeatability
Study Period
assumption
Comparing Alternatives
14
Capital Investment, $
272,000
346,000
Annual Expenses, $
28,800
19,300
Salvage Value, $
25,000
40,000
Comparing Alternatives
15
16
Comparing Alternatives
17
Capital Investment, $
9,000
8,000
Annual Expenses, $
5,000
6,000
10
15
Salvage Value, $
1,000
Comparing Alternatives
18
Capitalized Worth
used when the period of needed service is
indefinitely long
Comparing Alternatives
CW i % PW N
1
A
i
19
Capital Investment, $
3,400
6,500
Annual Expenses, $
2,000
1,800
Salvage Value, $
100
500
Comparing Alternatives
20
Criterion:
B/C 1
Investment, $
75,000
50,000
65,000
Annual
maintenance cost
4,000
5,000
4,700
Comparing Alternatives
Annual benefits
20,000
18,000
20,000
21
Comparing Alternatives
Mutually Exclusive
at most one project can be
chosen
Independent
the choice is not dependent of the
choice of any other project; all or
none of the projects may be
selected
Contingent
the choice is conditional on the
choice of one or more other
projects
22
Project Combination
Mutually exclusive
Mutually exclusive
Cap Inv, $
Net Annual
Benefits, $
A1
5,000
1,500
A2
7,000
1,800
B1
12,000
2,000
B2
18,000
4,000
C1
14,000
4,000
C2
18,000
4,500
Project Combination
Comparing Alternatives
Mutually exclusive
Project
23
B2
Cap Inv, $
30,000
22,000
70,000
82,000
Annual Profit, $
8,000
6,000
14,000
18,000
Salvage Value
3,000
2,000
5,000
7,000
Comparing Alternatives
24
Project Combination
Alternatives
Case
Study Period
Case
Capitalized
Worth Method
Incremental
Project
Outline
B/C Analysis
Combination
Comparing Alternatives
Among Alternatives
25
COMPARING
ALTERNATIVES
CHE40: Engineering Economy
Engr. Elisa G. Eleazar