Lecture 11 (Engineering Economics) PDF

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Engineering Economics...

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`Choosing the Best Alternative

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Consider a situation with multiple mutually exclusive alternatives, where the interest rate is not yet known. Which option is better? Clearly depends on the (currently unknown) interest rate - Cart A costs $10310 and earns $3300 annually - PW = -10310 + 3300(P/A, i, 5) - Cart B costs $13400 and earns $4000 annually - PW = -13400 + 4000(P/A, i, 5) We can build a table and a graph of the two Present Worths versus interest rate and it shows the range in which each alternative is preferred - Excel Function : Pv(interest rate, period.payment/benefit per period) - Pv(0.005,5,3300)

Best Procedure 1. Define all the alternatives fully 2. Graph each alternative on the same axes 3. Find the best alternative in each range of the graph 4. Determine or estimate crossover points 5. Build a table of alternatives Procedure working on multiple alternatives - If interest is > 20%, do nothing - If 20% > (or equal) interest > 9.6%, choose B - If 9.6% > (or equal) interest > 2%, choose A - If 2% > (or equal) interest > 0%, choose C EUAC - EUAC can also be analyzed graphically - consider the choice of three vessels with different costs and lifetimes - EUAC = Equivalent Uniform Annual Cost = The annual cost of owning an asset == Capital Recovery - Can think of EUAC as equal periodic payments at the end of each year for X years if you got a loan of Y at a rate of 2 - Excel Function: PMT(rate, period, balance)...