IE463 – Chapter 4

COMPARING INVESTMENT
AND COST ALTERNATIVES

Objective:
 To learn how to properly apply the
profitability measures described in Chapter
3 to select the best alternative out of a set
of mutually exclusive alternatives (MEA).

CHAPTER 4 2

1
Mutually Exclusive
 The selection of one alternative excludes
the consideration of any other alternative.
 Example: suppose you are shopping for a
used automobile. You consider several
cars, but will only buy one from a mutually
exclusive set of choices.

CHAPTER 4 3

Basic Rule:
 Spend the least amount of capital possible
unless the extra capital can be justified by
the extra savings or benefits.
 In other words, any increment of capital
spent (above the minimum) must be able
to pay its own way.

CHAPTER 4 4

2
 Investment Alternatives
 Each alternative has an initial investment
producing positive cash flows resulting from
increased revenues, reduced costs, or both
 "Do nothing" (DN) is usually an implicit
investment alternative
 If positive cash flows) > negative cash
flows) then IRR 0
 If EW(MARR) 0, investment is profitable
 if EW(MARR) 0, do nothing (DN) is better
CHAPTER 4 5

Cost Alternatives
 Each alternative has all negative cash
flows except for the salvage value (if
applicable)
 These alternatives represent “must do”
situations, and DN is not an option
 IRR not defined for cost alternatives. Can
you explain why?
 IRR can be used for comparing cost
alternatives. Can you explain why?
CHAPTER 4 6

3
 The study period must be appropriate
for the decision being made
 Study Period: The time interval over which
service is needed to fulfill a specified function.
 Useful Life: The period over time during which
an asset is kept in productive operation.
 Case 1: Study period Useful life
Case 2: Study period Useful life
 Fundamental Principle: Compare MEAs over
the same period of time.
CHAPTER 4 7

Comparing MEAs using EW

Methods-Example A
 Four mutually exclusive alternatives are
being evaluated, and their costs and
revenues are given in the following table. If
the MARR is 12% per year, and the
analysis period is 10 years, use the PW
method to determine which alternatives
are economically acceptable and which
one should be selected.

CHAPTER 4 8

4
 Costs and revenues
MEAs
I II III IV
Investment $100,000 $152,000 $184,000 $220,000
cost (I)
Net annual 15,200 31,200 35,900 41,500
receipts (A)
Salvage 10,000 0 15,000 20,000
value (S)
Useful life 10 10 10 10

CHAPTER 4 9

Comparing MEAs using PW

 They are investment alternatives
 Study Period = Useful Life
 PW(12%) = – I + A(P/A, 12%, 10) + S(P/F, 12%, 10)
 PWDN (12%) = 0

CHAPTER 4 10

5
Comparing MEAs using PW
Costs & MEAI  PWI(12%) = – 100,00
Revenues
+ 15,200(P/A, 12%, 10)
Investment $100,000
cost (I) + 10,000(P/F, 12%, 10)
Net annual 15,200  PWI(12%) = – 10,897
receipts (A)
Salvage 10,000
value (S)
Useful life 10

CHAPTER 4 11

Comparing MEAs using PW

Costs & MEAII  PWII(12%) = – 152,000
Revenues
+ 31,200(P/A, 12%, 10)
Investment $152,000
cost (I)
Net annual 31,200  PWII(12%) = 28,241
receipts (A)
Salvage 0
value (S)
Useful life 10

CHAPTER 4 12

6
Comparing MEAs using PW
Costs & MEAIII  PWIII(12%) = – 184,000
Revenues
+ 35,900(P/A, 12%, 10)
Investment $184,000
cost (I) + 15,000(P/F,12%,10)
Net annual 35,900  PWIII(12%) = 23,672
receipts (A)
Salvage 15,000
value (S)
Useful life 10

CHAPTER 4 13

Comparing MEAs using PW

Costs & MEAIV  PWIV(12%) = – 220,000
Revenues
+ 41,500(P/A, 12%, 10)
Investment $220,000
cost (I) + 20,000(P/F,12%,10)
Net annual 41,500  PWIV(12%) = 20,923
receipts (A)
Salvage 20,000
value (S)
Useful life 10

CHAPTER 4 14

7
Summary of comparison
 PWDN (12%) = 0
 PWI (12%) = – 10,897
 PWII (12%) = +28,241
 PWIII (12%) = +23,672
 PWIV (12%) = +20,923
 Select Alternative II to maximize PW.

CHAPTER 4 15

Comparing MEAs using EW

Methods-Example B
 The net cash flows are shown in the
following table for three preliminary design
alternatives. The MARR = 12% per year,
and the study period is seven years.
Which preliminary design is economically
preferred based on the AW method.

CHAPTER 4 16

8
 Costs of MEAs
A B C
Initial cost (I) – $85,600 – $63,200 – $71,800
Annual expenses, – 7,400 – 12,100 – 10,050
years 1 – 7 (E)

CHAPTER 4 17

Comparing MEAs using AW

 They are cost alternatives
 Study Period = Useful Life = 7 years
 AW = I(A/P, 12%, 7) + E
 DN is not an option

CHAPTER 4 18

9
Comparing MEAs using AW
Costs A
Initial cost (I) – $85,600
Annual expenses, years 1 – 7 (E) – 7,400

 AWA = – $85,600(A/P, 12%, 7)

– $7,400
= – 26,155

CHAPTER 4 19

Comparing MEAs using AW

Costs B
Initial cost (I) – $63,200
Annual expenses, years 1 – 7 (E) – 12,100

 AWB = – $63,200(A/P, 12%, 7)

– $12,100
= – 25,947

CHAPTER 4 20

10
Comparing MEAs using AW
Costs C
Initial cost (I) – $71,800
Annual expenses, years 1 – 7 (E) – 10,050

 AWC = – $71,800(A/P, 12%, 7)

– $10,050
= – 25,781

CHAPTER 4 21

Summary of comparison
 AWA = – 26,155
 AWB = – 25,947
 AWC = – 25,781
 Select alternative C to minimize AW of
costs.

CHAPTER 4 22

11
Comparing MEAs using IRR
Method-Example A
 Consider 2 alternatives:
A B
Investment – $100 – $10,000
Lump-Sum Receipt Next Year $1,000 $15,000
IRR 900% 50%

 If comparable risk is involved and

MARR = 20%, would you rather have A or B?

CHAPTER 4 23

Comparing MEAs using IRR

Method-Example A
A B
Investment – $100 – $10,000
Lump-Sum Receipt Next Year $1,000 $15,000
IRR 900% 50%

 PWA = – 100 + 1000(P/F,20%,1) = $733

 PWB = – 10,000 + 15,000(P/F,20%,1) = $2,500

CHAPTER 4 24

12
Comparing MEAs using IRR
Method-Example A
A B
Investment – $100 – $10,000
Lump-Sum Receipt Next Year $1,000 $15,000
IRR 900% 50%

 Never simply maximize the IRR.

 Never compare the IRR to anything except
the MARR.

CHAPTER 4 25

Comparing MEAs using IRR

Method-Example A
A B B–A( )
Investment – $100 – $10,000 – $9,900
Lump-Sum $1,000 $15,000 $14,000
Receipt Next Year
IRR 900% 50% 41.4%

 IRRA B PWA B=0=– 9,900 +14,000(P/F, i'%, 1)

 9,900 / 14,000 = (P/F, i'%, 1)
 i' = 41.4% (MARR = 20%)

CHAPTER 4 26

13
 Comparing MEAs using IRR
Method-Example B
 A small investment project involves two alternatives, A and
B. The cash flow for each alternative are stated here.
Alternative
A B
Capital investment - $60,000 - $73,000
Annual revenue less expenses 22,000 26,225

 The useful life of each alternative and the study period is

four years. Also, assume that the MARR = 10% per year.
Use the IRR method and decide on which one will be
selected. CHAPTER 4 27

Ranking Inconsistency with the

IRR Method
 IRRA: 0 = -$60,000 + $22,000(P/A, iA '%, 4)
iA ' = 17.3%
 IRRB: 0 = -$73,000 + $26,225(P/A, iB '%, 4)
iB ' = 16.3%
 NEVER simply select the MEA that
MAXIMIZES the IRR.

CHAPTER 4 28

14
 We don't maximize rate of return.
Look at the increment
Alternative Difference
A B (B – A)
Capital investment - $60,000 - $73,000 - $13,000
Annual revenue less expenses 22,000 26,225 4,225
Useful life 4 years 4 years 4 years
MARR 10% 10% 10%

 IRRA B : 0 = -$13,000 + $4,225(P/A, i A B', 4)

iA B ' = 11.4%
 The rate of return on the increment, 11.4%, >MARR.
 It is worth the additional investment to select Alternative B

CHAPTER 4 29

Never compare IRR to anything except MARR

so as to be consistent with EW methods

CHAPTER 4 30

15
 Comparing MEAs using IRR
Method-Example C
 In the design of a new facility, the mutually
exclusive alternatives in the following table
are under consideration. Assume that the
MARR is 15% per year and the analysis
period is 10 years.
 Use the incremental IRR procedure to
choose the best alternative.

CHAPTER 4 31

Costs and revenues

1 2 3
Capital investment – $28,000 – $16,000 – $23,500
Net cash flow /year 5,500 3,300 4,800
Salvage value 1,500 0 500
Useful life 10 yrs 10 yrs 10 yrs

CHAPTER 4 32

16
 The incremental IRR procedure
to choose the best alternative:
 Step1: Rank order alternatives from low capital
investment to high capital investment
 Step2: Compare MEAs in order
 Step3: Determine the winner from comparison
 Step4: Continue steps 2 and 3 until all
alternatives are considered
 Step5: The last winner is selected from among
all
CHAPTER 4 33

Step 1: Rank order alternatives from low

capital investment to high capital investment

Alternative Capital Investment Rank

DN 0 1
1 28,000 4
2 16,000 2
3 23,500 3

 DN 2 3 1

CHAPTER 4 34

17
 Compare DN 2:
(2 - DN)
cash flows
Investment – 16,000 – 0 = – $16,000
Annual Receipts 3,300 – 0 = 3,300
Salvage Value 0–0= 0
 Compute IRRDN 2 (i.e., IRR2)
 PW( i') = 0 = -$16,000 + $3,300(P/A, i'%, 10)
 i'DN 2 15.9%
 Since i' > MARR, keep alt. 2 as current best
alternative. Drop DN from further consideration
CHAPTER 4 35

Compare 2 3:
(3 - 2)
cash flows
Investment -23,500 – (-16,000) = – $7,500
Annual Receipts 4,800 – 3,300 = 1,500
Salvage Value 500 - 0 = 500
 Compute IRR2 3
 PW( i') = 0 = -$7,500 + $1,500(P/A, i'%, 10) + $500(P/F, i'%, 10)
 i'2 3 15.5%
 Since i' > MARR, keep alt. 3 as current best
alternative. Drop 2 from further consideration
CHAPTER 4 36

18
 Compare 3 1:
(1 - 3)
cash flows
Investment -28,000 – (-23,500) = – $4,500
Annual Receipts 5,500 – 4,800 = 700
Salvage Value 1,500 – 500 = 1,000
 Compute IRR3 1
 PW( i') = 0 = -$4,500 + $700(P/A, i'%, 10) + $1,000(P/F, i'%, 10)
 i'2 3 10.9%
 Since i' < MARR, keep alt. 3 as the best of all

CHAPTER 4 37

Comparing Cost Alternatives

with IRR ( ) method
 Study Period =Useful Life =7 years
 MARR =12%

A B C
Investment cost – $85,600 – $63,200 – $71,800
Annual costs – 7,400 – 12,100 – 10,050

CHAPTER 4 38

19
Compare B C:

B C (C – B)
Investment cost – $63,200 – $71,800 – 8,600
Annual costs – 12,100 – 10,050 2,050

 AW( i') = 0 = -$8,600(A/P, i'%, 7) + $2,050

 i' B C 14.7% > MARR =12%
 Keep C, Reject B
 Next comparison: C A
CHAPTER 4 39

Compare C A:

C A (A – C)
Investment cost – $71,800 – $85,600 – 13,800
Annual costs – 10,050 – 7,400 2,650

 AW( i') = 0 = -13,800(A/P, i'%, 7) + 2,650

 i' C A 8% < MARR =12%
 Keep C, Reject A
 C is the least cost of all
CHAPTER 4 40

20
Study Period Useful Life
 Up until now, study periods and useful
lives have been the same length. The
study period is frequently taken to be a
common multiple of the alternatives’ lives
when study period useful life.

CHAPTER 4 41

Repeatability Assumption
 It assumes that study period is either
indefinitely long or equal to a common
multiple of the lives of the alternative.
 The cash flows associated with an
alternative's initial life span are
representative of what will happen in
succeeding life spans.

CHAPTER 4 42

21
 Cotermination Assumption
 It is preferred if the study period is not a
common multiple of the alternatives' lives
or repeatability is not applicable
 Cost alternatives: Without repeatability, we
must purchase/lease the service/asset for
the remaining years
 Investment alternatives: Assume all cash
flows will be reinvested at the MARR to
the end of the study period

CHAPTER 4 43

Comparing procedure based on

Repeatability Assumption - Example
 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 in the
accompanying table.

CHAPTER 4 44

22
Cash flows of alternatives
Alternative
E1 E2
Capital investment $14,000 $65,000
Annual expenses 14,000 9,000
Useful life (years) 5 20
Market value 8,000 13,000
(at end of useful life)

CHAPTER 4 45

Common Multiple of Useful Lives

 Useful life of E1 = 5
 Useful life of E2 = 20
 Study period = 20 years

E1 E1 E1 E1
0 5 10 15 20

E2
0 20

CHAPTER 4 46

23
Cash flow diagram of four times
repeated E1

CHAPTER 4 47

PW of alternatives
 PWE1 = -14,000 - 6,000(P/F, 15%, 5)
- 6,000(P/F, 15%, 10) - 6,000(P/F, 15%, 15)
+ 8,000(P/F, 15%, 20) - 14,000(P/A, 15%, 20)
= -$106,345
 PWE2 = -65,000 - 9,000(P/A, 15%, 20)
+ 13,000(P/F, 15%, 20) = -$120,539
 Select E1 to minimize costs

CHAPTER 4 48

24
 AW of alternatives
 AWE1 = -$106,345(A/P, 15%, 20) = -$16,990
 AWE2 = -$120,539(A/P, 15%, 20) = -$19,262

CHAPTER 4 49

Consider the AW over the useful

life of Alternative E1
AW E1 = -14,000(A/P, 15, 5) - 14,000 + 8,000(A/F, 15, 5) = -16,990

CHAPTER 4 50

25
Comparing procedure based on
Cotermination Assumption
 When Study Period > Useful Life:
Calculate FW at end of useful life and
move this to the end of the study period
using the MARR
 When Study Period < Useful Life:
Truncate the alternative at the end of the
study period using an estimated or
imputed Market Value

CHAPTER 4 51

Study Period > Useful Life

MVA
RA – EA

0 1 2 3 4 5 6 7 8 9 10 11 12

MVB FWB(F/P,i,6)
RB – EB

0 1 2 3 4 5 6 7 8 9 10 11 12

CHAPTER 4 52

26
Study Period < Useful Life
MVA
RA – EA

0 1 2 3 4 5 6 7 8 9 10 11 12

MVB
RB – EB

0 1 2 3 4 5 6

CHAPTER 4 53

Study Period < Useful Life

MVıA MVA
RA – EA

0 1 2 3 4 5 6 7 8 9 10 11 12

MVB
RB – EB

0 1 2 3 4 5 6

CHAPTER 4 54

27
 Study Period < Useful Life
MVıA = imputed or estimated MVA
RA – EA
EWA is computed
with MVıA
0 1 2 3 4 5 6

MVB
RB – EB

0 1 2 3 4 5 6

CHAPTER 4 55

Example of Cotermination
A B
Investment cost $50,000 $120,000
Useful life 20 yrs. 40 yrs.
Salvage value 10,000 20,000
Annual cost 9,000 6,000
a) Study period = 40 yrs.
b) Study period = 20 yrs.
Assume MVB @ EOY 20 = $50,000
 Which alternative would you recommend? The
MARR is 10% per yearCHAPTER 4 56

28
 Solution to (a):
Project A 10,000

0 1 2 3 ...... 19 20

50,000 9,000
20,000
Project B

0 1 2 3 ...... 19 20 21 22 ............. 39 40

120,000 6,000
CHAPTER 4 57

Solution to (a): FWA FWA

Project A 10,000

0 1 2 3 ...... 19 20 20 40

50,000 9,000

FWA@EOY20 = – 50,000(F/P,10%,20) – 9,000(F/A,10%,20)

+ 10,000 = – 841,850
Same service will be leased or purchased for 20 years:
FWA@EOY40 = – 841,850(F/P, 10%, 20) = – 5,663,546

CHAPTER 4 58

29
 Solution to (a):
20,000
Project B

0 1 2 3 ...... 19 20 21 22 ............. 39 40

120,000 6,000

FW B@EOY40 = – 120,000(F/P,10%,40) – 6,000(F/A,10%,40)

+ 20,000 = – 8,066,666
Select A to minimize costs
(Cost of B = 8,066,666 Cost of A = 5,663,546)

CHAPTER 4 59

Solution to (b):
Project A 10,000

0 1 2 3 ...... 19 20

50,000 9,000
50,000 20,000
Project B

0 1 2 3 ...... 19 20 21 22 ............. 39 40

120,000 6,000
CHAPTER 4 60

30
 Solution to (b):
10,000 50,000
Project A Project B

0 1 2 3 ...... 19 20 0 1 2 3 ...... 19 20

50,000 9,000 120,000 6,000

AWA(10%) = - 9000 - [50,000(A/P,10%,20) -10,000(A/F,10%,20)]

= -14,700
AW B(10%) = - 6000 - [120,000(A/P,10%,20) -50,000(A/F,10%,20)]
= -19,225

Still select A to minimize costs

CHAPTER 4 61

Sensitivity question?
10,000 X?
Project A Project B

0 1 2 3 ...... 19 20 0 1 2 3 ...... 19 20

50,000 9,000 120,000 6,000

What would the market value of B @ EOY 20 have

to be in order to select B instead of A?

CHAPTER 4 62

31
 Solve for X?
10,000 X?
Project A Project B

0 1 2 3 ...... 19 20 0 1 2 3 ...... 19 20

50,000 9,000 120,000 6,000

Set AWA = AW B , let X be the unknown market value
-14,700 = -6,000 - {120,000(A/P, 10%, 20) - X(A/F,10%, 20)}
-8,700 = -{14,100 - 0.0175X}
5,400 = 0.0175X
X = $308,571; therefore, MVB > $308,571 to favor B
Such a value is very unlikely because X is more than the
initial cost of B
CHAPTER 4 63

Imputed Market Value

MVT S
R-E R-E

0 1 2 3 ...... T-1 T T+1 T+2 ............. N-1 N

 MVT = CR (i %) (P/A, i%, N – T) + S (P/F, i%, N – T)

 Imputed (implied) market value is often used to

truncate an alternative at end of time T.
CHAPTER 4 64

32
 Imputed Market Value - Example

Alternative
E1 E2
Capital investment $14,000 $65,000
Annual expenses 14,000 9,000
Useful life (years) 5 20
Market value 8,000 13,000

If the study period = 10 years which alternative is

preferred? Repeatability is valid. MARR = 15%
CHAPTER 4 65

Repeatibility for E1
study period = 10 years
E1: 8,000 8,000

0 1 2 3 4 5 6 7 8 9 10

14,000 14,000 14,000

14,000

AWE1 = -14,000(A/P, 15, 5) - 14,000 + 8,000(A/F, 15, 5)

= -16,990
CHAPTER 4 66

33
 Imputed market value for E2
study period = 10 years
54,705 13,000
E2:

0 1 2 3 ...... 9 10 11 12 ............. 19 20

65,000 9,000

MV10 = 13,000(P/F, 15%, 10)

+ [65,000(A/P, 15%, 20) – 13,000(A/F, 15%, 20)] (P/A, 15%, 10)
= 54,705

CHAPTER 4 67

Imputed market value for E2

study period = 10 years
54,705
E2:

0 1 2 3 ...... 9 10

65,000 9,000

AW E2 = -65,000(A/P,15%,10) - 9,000 + 54,705(A/F,15%,10)

= -$19,258
Alternative E1 is preferred since cost of E1 < cost of E2

CHAPTER 4 68

34
COMBINATIONS OF PROJECTS
 Mutually Exclusive: At most one project out of
the group can be chosen.
 Independent: The choice of a project is
independent of the choice of any other project in
the group, so that all or none of the projects may
be selected or some number in between.
 Contingent: The choice of a project is
conditional on the choice of one or more other
projects.

CHAPTER 4 69

Mutually exclusive alternatives

Mutually Exclusive Project

Combinations A B C Explanation
1 0 0 0 Accept none
2 1 0 0 Accept A
3 0 1 0 Accept B
4 0 0 1 Accept C

CHAPTER 4 70

35
 Independent alternatives
Mutually Exclusive Project
Combinations A B C Explanation
1 0 0 0 Accept none
2 1 0 0 Accept A
3 0 1 0 Accept B
4 0 0 1 Accept C
5 1 1 0 Accept A and B
6 1 0 1 Accept A and C
7 0 1 1 Accept B and C
8 1 1 1 Accept A , B and C
CHAPTER 4 71

A is contingent on the acceptance of B and C.

C is contingent on the acceptance of B

Mutually Exclusive Project

Combinations A B C Explanation
1 0 0 0 Accept none
2 0 1 0 Accept B
3 0 1 1 Accept B and C
4 1 1 1 Accept A , B and C

CHAPTER 4 72

36
 Combination of projects –
Example A
Project Investment Annual Useful Market
Revenue Life Value
A $10,000 $2,300 5 years $10,000
B 12,000 2,800 5 0
C 15,000 4,067 5 0
 A, B, and C are independent projects
 MARR = 10% per year
 No budget limitation
CHAPTER 4 73

Calculation CR(10%) of projects

Project Investment Annual Useful Market
Revenue Life Value
A $10,000 $2,300 5 years $10,000
B 12,000 2,800 5 0
C 15,000 4,067 5 0

CR(10%)A = 10,000(A/P,10%,5) – 10,000(A/F,10%,5) = $1,000

CR(10%)B = 12,000(A/P,10%,5) = $3,166
CR(10%)C = 15,000(A/P,10%,5) = $3,957

CHAPTER 4 74

37
 Calculation AW(10%) of projects
Project R CR (10%) AW = R – CR(10%)
A $2,300 $1,000 1,300
B 2,800 3,166 – 366
C 4,067 3,957 110
 Reject project B.
 Accept A and C.
 Because no budget limitation;
 Recommend A + C for implementation to maximize
AW CHAPTER 4 75

Combination of projects –
Example B
 There are five projects (B1, B2, C1, C2, and D)
to be considered
 B1 and B2 are mutually exclusive alternatives
 C1 and C2 are mutually exclusive alternatives
and contingent on the acceptance of B2
 D is an individual alternative and contingent on
the acceptance of C1
 MARR = 10% per year

CHAPTER 4 76

38
PW(10%) of projects
Project Investment Useful life PW
B1 $50,000 4 years $13,400
B2 30,000 4 8,000
C1 14,000 4 – 1,300
C2 15,000 4 800
D 10,000 4 9,000

 What is the best portfolio if;

a) budget is unlimited
b) budget is limited to $48,000
CHAPTER 4 77

Solution to (a)
Mutually Exclusive Projects Invested
Combinations B1 B2 C1 C2 D Capital PW
1 0 0 0 0 0 $0 $0
2 1 0 0 0 0 50,000 13,400
3 0 1 0 0 0 30,000 8,000
4 0 1 1 0 0 44,000 6,700
5 0 1 0 1 0 45,000 8,900
6 0 1 1 0 1 54,000 15,700

 Recommend portfolio 6 (B2 + C1 + D) with PW

of $15,700
CHAPTER 4 78

39
 Solution to (b)
Mutually Exclusive Projects Invested
Combinations B1 B2 C1 C2 D Capital PW
1 0 0 0 0 0 $0 $0
2 1 0 0 0 0 50,000 13,400
3 0 1 0 0 0 30,000 8,000
4 0 1 1 0 0 44,000 6,700
5 0 1 0 1 0 45,000 8,900
6 0 1 1 0 1 54,000 15,700

 Budget = $48,000
 Portfolio 5 is the best one
CHAPTER 4 79

Combination of projects –
Example C
Annual Useful PW(10%) = - I
Project Investment, I Revenue, A Life, N + A(P/A, 10%, N)
X $93,000,000 $13,000,000 15 years $5,879,034
Y 55,000,000 9,500,000 10 years 3,373,388
Z 71,000,000 10,400,000 30 years 27,039,910

 X, Y, and Z are three independent; nonrepeating

projects
 MARR = 10% per year
 Investment budget is $200 million
 Study period = 30 years (the longest-lived project)
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 Under cotermination assumption
PW of alternatives for their initial life span

 FWX = $5,879,034 (F/P, 10%, 30)

FWY = $3,373,388 (F/P, 10%, 30)
FWZ = $27,039,910(F/P, 10%, 30)
 This will result in the same selection as
that of PW based on alternative’s useful
life

CHAPTER 4 81

MEC 6 (X+Z) is selected

Mutually ($million)
Exclusive Project Invested
Combinations X Y Z Capital PW (10%)
1 0 0 0 $0 $0
2 1 0 0 93 5,879,034
3 0 1 0 55 3,373,388
4 0 0 1 71 27,039,910
5 1 1 0 148 9,252,421
6 1 0 1 164 32,918,944
7 0 1 1 126 30,413,298
8 1 1 1 219 > 200 36,292,332
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