Lec%2023_Full

Lec%2023_Full - IE 343 Engineering Economics Lecture 23:...

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Unformatted text preview: IE 343 Engineering Economics Lecture 23: Chapter 6 - Comparison and Selection among Alternatives Instructor: Tian Ni Oct.21, 2011 IE 343 Fall 2011 1 Step 1. Order the alternatives by increasing capital investment . Step 2. Find a base alternative (current best alternative) Cost alternatives: the first alternative in the ordered list (the one with the least capital investment). Investment alternatives: the first acceptable (profitable) alternative in the ordered list (EW 0, or IRR MARR). Note: the IRR of the DN (Do-Nothing) is assumed to be the MARR. IE 343 Fall 2011 The Incremental Analysis Procedure 2 Step 3. Evaluate the difference between the next alternative and the current best alternative. If the incremental cash flow is acceptable (profitable), choose the next alternative as the current best alternative. Otherwise, keep the current best alternative and drop the next alternative from further consideration. Step 4. Repeat Step 3 until the last alternative is considered. Select the current best alternative as the preferred one. IE 343 Fall 2011 The Incremental Analysis Procedure 3 Useful life of each alternative is 10 years and the MARR=10%. The alternatives are ranked in increasing Capital Investment Which project should be selected? IE 343 Fall 2011 Example 6.5 A B C D E F Capital Investment 900 1,500 2,500 4,000 5,000 7,000 Annual net income 150 276 400 925 1,125 1,425 4 The incremental analysis proceeds as follows: Find the IRRs: The alternatives are already ranked in the order of increasing capital investment. We can eliminate alternative C (9.6%<10%). The incremental analysis starts with the current best alternative as Alternative A. (The first acceptable project.) IE 343 Fall 2011 Example 6.5 Solution A B C D E F IRR 10.6% 13.0% 9.6% 19.1% 18.3% 15.6% 5 Compare A and B: Consider (B-A). Incremental investment for alternative B is justified. Current best alternative is B. IE 343 Fall 2011 Example 6.5 Solution (B-A) Capital Investment 600 Annual net income 126 IRR 16.4% 6 Compare A and B: Consider (B-A). Incremental investment for alternative B is justified. Current best alternative is B. Alternative C has been dropped, because its not profitable. Compare D and B: Consider (D-B). Incremental investment for alternative D is justified. Current best alternative is D. IE 343 Fall 2011 Example 6.5 Solution (B-A) (D-B) Capital Investment 600 2,500 Annual net income 126 649 IRR 16.4% 22.6% 7 Compare E and D: Consider (E-D). Incremental investment for alternative E is justified. Current best alternative is E....
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Lec%2023_Full - IE 343 Engineering Economics Lecture 23:...

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