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CH8_101 - 248 INCREMENTAL ANALYSIS HE‘S muck Alternative...

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Unformatted text preview: 248 INCREMENTAL ANALYSIS HE‘S muck. Alternative 1 Present Worth of Benefits 9% f3 99 €19 ‘0 H3- 0* $3 $6 $9 $12 $15 $18 $21 $24 $27 $30 0 $3 $6 $0 $12 $15,518 $2 Present Worth of Cost Present Worth of Cost FIGURE 8—2 Benefit-cost graph for Example 8-1 FIGURE 8-3 Benefit—cost graph fer ’ with a one-year analysis period. and 2 with a one—year analysis period. , Since [Higher-cost Alt. 2]: [Lower-cost Alt. 1] + [Difference between them] the difference between the alternatives can be represented by a line shown in Figure _ _ _ Viewed' 111 this manner, we clearly see that Alt. 2 may be considered to be two-r , increments of investment. The first increment is Alt 1 and the second one is the between the alternatives Thus we will select Alt. 2 if the difference between the desirable increment of investment. , , Since the slope of the line represents a rate of return, we see that the increment 1s ’ the slepe of the increment is greater than the slope of the 6% line that correspon _ ‘ We can see that the slope' 1s greater; hence, the increment of investment i attractiv careful examination shows that the “Difference between the alternatives” line has the , as the 30% rate of return line. We can say, therefore, that the ineremental rate of re L selecting Alt. 2 rather than Alt. 1 is 30%. This' 1s the same as was computed 111 amp ‘ coneiude that Alt. 2 is the preferred alternative. EXAMPLE 8-2 Solve Example 7- 10 by means of a benefit—cost graph. Two machines are being considered purchase. If the minimum attractive rate of return (MARR) 1s 10%, which machine sho : bought? ...
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