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Unformatted text preview: Principle for comparison: focus on the difference.
We ask this question: can the additional investment for B
be justiﬁed by the additional beneﬁts (incremental
analysis)?
To answer this question, we can use the measures we
learned for evaluation of a single project.
If the answer is “yes”, then B should be selected. SEEM5740/ECLT5930 7 Example 6.1: investment alternatives Consider projects A and B, both last for 4 years. MARR = 10%. A
Capital investment
Annual revenues minus expenses
PW(10%) B ∆(B − A) 60,000
22,000
9,738 73,000
26,225
10,131 13,000
4,225
393 PWA (10%) > 0, PWB (10%) > 0 suggest that both A and B are
better than donothing. PW∆(B−A) (10%) > 0 implies additional
investment in B is justiﬁed, and B is better than A. SEEM5740/ECLT5930 8 Example 6.1
We note that PWB = PWA + PW∆(B−A) . In general, PW (FW and
AW) have the following additivity property (X , Y represent two
projects):
PWX +Y (i) = PWX (i) + PWY (i).
This is because
N
k =0 X
Y
Ck + Ck
=
(1 + i)k N
k =0 X
Ck
+
( 1 + i) k N
k=0 Y
Ck
.
(1 + i)k Due to the additivity property of PW, the result of incremental
analysis agrees with the result from maximizing PW. So no
need to do incremental analysis using PW.
Rule: For investment alternatives, choose the one with the
largest positive PW (equivalently, FW, AW). If all alternatives
have negative PW (FW, AW), then choose donothing.
SEEM5740/ECLT5930 9 Example 6.2: cost alternatives
MV stands for market value. MARR = 10%. 380000(38100/1+1.1)39100/(1+1.1)^2 time C D 0
1
2
3
MV at 3
PW(10%) 380,000
38,100
39,100
40,100
0
477,077 415,000
27,400
27,400
27,400
26,000
463,607 ∆(D − C)
35,000
10,700
11,700
12,700
26,000
13,470 计算DC的PW PW∆(D−C) (10%) > 0 implies additional investment in D is
justiﬁed, and D is better than C.
Rule: For cost alternatives, choose the one with the least
negative PW (FW, AW).
SEEM5740/ECLT5930 10 Incremental analysis by IRR: Example 6.1
600000+(22000/1+i)+....(22000/(1+i)^4) = 0 A
Capital investment
Annual revenues minus expenses
IRR B ∆(B − A) 60...
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This note was uploaded on 03/23/2013 for the course SEEM 5740 taught by Professor Zhou,xiang during the Fall '12 term at CUHK.
 Fall '12
 ZHOU,Xiang

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