Comparing Alternatives

Charlie A. Marquez, PIE

Methods for Comparing Alternatives
1. Rate of Return on Additional Investment
Rate of Return on Additional Investment
ROR on additional investment = Annual Net Savings /
Additional Investment
If the ROR on additional investment is satisfactory, then, the
alternative requiring a bigger investment is more economical and
should be chosen.
2. Annual Cost Method
To apply this method, the annual cost of the alternatives including
interest on investment, is determined. The alternative with the least
annual cost is chosen. This method 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.
3. Present Worth Cost Method
In comparing alternative by this method, determine the present
worth of the net cash outflows for each alternative for the same
period of time. The alternative with the least present worth
cost is selected.

4. Equivalent uniform Annual Cost (EUAC) Method

In this method, all cash flows (irregular or uniform) must be
converted to an equivalent uniform annual cost. The alternative
with the least EUAC is preferred.
Sample Problems
1. A company is considering two types of equipment for its
manufacturing plant. Pertinent data are as follows:
Type A Type B
First Cost P200,000 P300,000
Annual Operating Cost P32,000 P24,000
Annual Labor Cost P50,000 P32,000
Insurance & Property Taxes 3% 3%
Payroll Taxes 4% 4%
Estimated life 10 years 10 years
If the minimum required rate of return is 15%, which equipment should
be selected?