Engineering Economy - Comparing Alternatives PDF

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Chapter 6

Comparing Alternatives In chapter 5, the different methods for investment of capital were discussed. In that chapter, the problem that was resolved was whether the investment of capital in a certain enterprise was justified or not. However, most engineering and business project can be accomplished by more than one method or alternative. This chapter will deal with this type of problems. The fundamental principle on which alternative should be used is stated as follows. The alternative that requires the minimum investment of capital and will produce satisfactory functional result will always be used unless there are definite reasons why an alternative requiring a larger investment should be adopted When the selection of the one of the alternatives excludes the choice of any of the others, the alternatives are called mutually exclusive alternatives. The basic principle in selecting among alternatives that requires the minimum investment of the capital and produces satisfactory functional results will be chosen unless the incremental capital associated with an alternative having a large investment can be justified with respect to its incremental benefits.

Two types of projects and alternatives a. Investment alternatives are those with initial capital investments that produce positive cash flows from increased revenues, saving through reduced costs, or both. b. Cost alternatives are those with all negative cash flows, except for a possible positive cash flow element from disposal of assets at the end of the project’s useful life. Rule 1: when revenues and other economic benefits are present and vary among the alternatives, choose the alternative that maximizes overall profitability. That is, select the alternative that has the greatest positive equivalent worth at i= MARR and satisfies all project requirements....