COMPARING

ALTERNATIVES

By:
ENGR. CHEZANIE MIYA ASUNCION
ENGR. KRISTELLE ANN GINEZ
ENGR. JERICO FIEL
Isabela State University-Ilagan Campus
 Different methods for Investment of Capital
The alternative that requires the The basic principle in selecting
minimum investment of capital among alternatives that requires
and will produce satisfactory the minimum investment of the
functional result will always be capital and produces satisfactory
used unless there are definite functional results will be chosen
reasons why an unless the incremental capital
alternative requiring a larger associated with an alternative
investment should be adopted. having a large investment can be
justified with respect to its
incremental benefits.
 Types of projects and
alternatives:

a. Investment alternatives are those with b. Cost alternatives are those with all
initial capital investments that produce negative cash flows, except for a
positive cash flows from increased possible positive cash flow element
revenues, saving through reduced costs, or
both.
from disposal of assets at the end of the
project’s useful life.
 Types of Projects
and Alternatives:

RULES

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.
 THE RATE OF RETURN ON ADDITIONAL
INVESTMENT METHOD

Methods or Patterns in ANNUAL COST OF METHOD

ComparingAlternatives:
THE EQUIVALENT UNIFORM ANNUAL COST
(EUAC) METHOD

THE PRESENT WORTH COST (PWC) METHOD

THE CAPITALIZED METHOD

PAYBACK (PAYOUT) PERIOD METHOD

 Methods or Patterns in
Comparing
Alternatives:
THE RATE OF RETURN ON ADDITIONAL INVESTMENT METHOD

This method assumes that unlimited capital is available; therefore an alternative requiring
a bigger investment may be adopted provided the rate of return on the additional
investment justifies the bigger outlay of capital by savings or benefits. In this method the
rate of return on additional investment is calculated as:

If the rate of return on additional investment is satisfactory, then, the alternative requiring
a bigger investment is more economical and should be chosen.
 Examples
A piece of production
equipment is to be replaced
immediately because
it no longer meets quality
requirements for the end
product. The two best
alternatives are a used piece
of equipment (E1) and a new
automated
model (E2). The economic
estimates for each are shown
 Examples
To compare the two
alternatives, determine first
the total annual cost for
each alternative, including
annual depreciation.
Solution

Consider B

Since ROR < MARR Choose E1

 Methods or Patterns in
Comparing
ANNUAL COST OF METHOD
Alternatives:
In this method, the annual cost for each alternative is determine and the alternative
with the least AC should be chosen.

To apply this method, the annual cost of alternatives including interest on investment
is determined. The alternative with the east annual cost is chosen. This pattern, like the
rate of return on additional investment pattern, applies only to alternatives which has a
uniform cost data for each year and a single investment of capital at the beginning of the
first year of the project life.
 Examples

Solution

Since AC of E1, is less than AC of E2, choose E2.

 Methods or Patterns in
Comparing
Alternatives:
THE EQUIVALENT UNIFORM ANNUAL COST (EUAC) METHOD

The most straightforward technique In this method, all cash flows (irregular
for comparing mutually exclusive or uniform) must be converted to equivalent
alternatives is to determine the uniform annual cost, that is, a year-end
equivalent worth of each alternative over amount which is the same each year. The
the same study period based on the total alternative with the least equivalent annual
investment at I=MARR. The for cost is preferred. When the euac method is
investment alternative, the one with the used, the equivalent uniform annual cost of
greatest positive equivalent worth is alternatives must be calculated for one life
selected. cycle only. This method is flexible and can be
used for any type of alternative selection
problems. The method is modification of the
annual cost pattern.
 Examples
Solve the above problem using
EUAC method:

Solution

Choose A as alternative.
 Methods or Patterns in
Comparing
Alternatives:
THE PRESENT WORTH COST (PWC) METHOD

In comparing alternatives by this method, determine the present worth of the net cash
outflows for each alternative for the same period of time. The alternative with least
present worth of cost is selected.
In this method, the present worth of all cash flows each alternative is computed for the
same study period.
 Methods or Patterns in
Comparing
THE CAPITALIZED METHOD
Alternatives:
The capitalized cost method is a variation of the present worth cost pattern. This
method is used for alternatives having long lives. To use the method, determine the
capitalized cost of all the alternatives and choose that one with the least capitalized cost.
 Methods or Patterns in
Comparing
PAYBACK (PAYOUT) PERIOD METHOD
Alternatives:
To use this method, the payback period of each alternative is computed. The
alternative with the shortest payback period is adopted. This method is seldom used.
 Examples
A company is considering two
types of equipment for its
manufacturing
plant. Pertinent data are as
follows:
 Examples
By the rate of return on
additional investment method

Solution
 Examples
A. By the rate of return on
additional investment method

Solution
 Examples
A. By the rate of return on
additional investment method

Solution

Type B should be selected.

 Examples
B. By annual cost method

Solution
 Examples
B. By annual cost method

Solution

Since ACA < ACB, TYPE B SHOULD BE SELECTED

 Examples
C. By the present worth cost
method

Solution
 Examples
C. By the present worth cost
method

Solution
 Examples
D. By equivalent uniform
annual cost method

Solution
 Examples
D. By equivalent uniform
annual cost method

Solution

Since EUACB< EUACA, type B is more economical.

 Examples
Choose from the two machines
which is more economical

Money is worth at least 16%.

 Examples
A. By rate of return on
additional investment method:

Solution
 Examples
A. By rate of return on
additional investment method:

Solution
 Examples
A. By rate of return on
additional investment method:

Solution

Machine A is more economical.

 Examples
B. By the annual cost method:

Solution
 Examples
B. By the annual cost method:

Solution

Since ACA< ACB, Machine A is more economical

 Examples
C. By present worth cost
method
Use 30-year study period, which
is the least common multiple of
10 and 15.
Solution
 Examples
C. By present worth cost
method

Solution

Machine A should be chosen, since

PWCA< PWCB
 Examples
D. By the equivalent uniform
annual cost method

Solution
 Examples
D. By the equivalent uniform
annual cost method

Solution

Machine A should be
chosen, since
EUACA< EUACB
 Examples
A company manufacturing acids,
upon inspection of the roofing
of the
plant, found out that it is
badly corroded from the acids
fumes and would
need to be replaced. To try to
get some more life out of the
roofing, The
Company consulted a roofing
coating constructor who
 Examples

Solution
 Examples

Solution
 Examples

Solution
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