Comparing Alternatives :

Fundamental principle on which

alternatives should be used

The alternatives that the

requires
minimum investment will
of capital
and

produce satisfactory functional result will

always be used unless there a

difrnite
alternative
reasons
why an

investment should be
requiring
a
larger adopted .

Patterns in
Comparing Alternatives :

Investment
Rate
of Return additional
① on method

annual net
=
savings
additional 2am street

ROK additional Investment is

If on

alternative
satisfactory ,
then the
requiring
investment economical
a
bigger is more

and should be chosen .

② The Annual cost ( AC) Method

The cost alternative

annual
including
-

of
interest on investment is determined
-
The alternative with least annual

cost is chosen .

-
Applies only to alternatives which

has a
uniform cost data
for each

investment capital
year , single of @
the
beginning of
the
first year
of the project life .

③ The
Equivalent Uniform Annual cost [ EUAC ] Method
-

all cash
flow ( irregular or
uniform ) must be

cost
converted to an
equivalent uniform annual
,

that is end amount which is the

a
year same
-

each
year .

- alternative with least equivalent

uniforms annual cost is
preferred .

-
EUAC must be calculated for one

life cycle only .

④ the Present worth cost ( Pwc ) Method

comparing Alternatives
In
-

determine the present worth of the net

cash outflows each alternatives for
for
the same
period of time .

-
least present worth of cost is

selected .

⑤ Capitalised Method
Variation the
present worth
of
-

cost pattern .

-
Used
for alternatives having long
lives .

-
determine the capitalised cost

all alternatives choose that

of the and one

with the least

capital cost .

⑥ Payback ( PAYOUT ) period Method

* Alternative with the shorten

payback period is adopted .

$ this method is seldom used .

 A company is considering two types of equipment for its manufacturing plant. The data are as
"
follows: F -

-
d [ Citi) -

D
-
Type A Type B i

{
First Cost 200,000 300,000
i

I E D=
Annual Operating Cost 32,000 24,000 F
-
-

Tain ,
Annual Labor Cost 50,000 32,000 -

Insurance & Property Taxes 3% 3%

Payroll taxes 4% 4%
-_
- .

Estimated life 10 10
-

€
If the minimum required rate of return is 15%, which equipment shall be selected?

2005000 ]
Is d =
To . 15
By the rate of return on additional investment method: A -
"

Type A Ici . , -5
- I
]
Annual Cost
Depreciation 9,850 D= 9,850 u

I
Operation 32,000
Labor Cost 50,000 Annual tabor
Payroll taxes 50,00001047=2,000 Payroll taxes =

(0.04)
Taxes & Insurance 200,000601037=6,000 lost
Total Annual Cost 991850 =
-
,

Taxes and Insurance =

Type B FC ( 0.03) =
-

Annual Cost
Depreciation 14,776

02%000 }
Operation 241000

324,300,000645784056
Labor Cost
Payroll taxes dB =

Taxes & Insurance "

Total Annual Cost [ ( i. is ) - l

)
-

Annual Savings = Total Annual Cost A – Total Cost B = 99,850

-

St 056
,
043=14,775.62
= 18,794 OR

Additional Investment = Difference in First Cost Between the two types of Equipment
- 100,000 14,776
-

Rate of Return on Additional Investment = Annual Savings/ Additional Investment

Note: Chose the an equipment with least annual cost =

18,79£ = 18.8%7 IT

100,000
Select type B Equipment
TACB L TACA
 Interest on Capital =

By Annual Cost Method Fc x (O . 15 )

-

Type A
Annual Cost 200,000 ⑨ 115) =
30,000
Depreciation
Operation
Labor Cost
Payroll taxes
Taxes & Insurance
Interest on Capital 991850 t 30,000
Total Annual Cost

Type B
Annual Cost
Depreciation

}
Operation
Labor Cost
Payroll taxes 81,056
Taxes & Insurance
Interest on Capital 45,000
Total Annual Cost 126,056 300,000 (0,15)
=

Note: Equipment with least annual Cost should be selected =

126,056 L 129,850

Select equipment B

-
 D
"
A- I [ Ceti) -

"
i. ( Itis
By Present Worth Cost Method

Type A
Annual Cost (excluding Depreciation) =
aok 9%990 90k

l l l l l
10
T l
2 3

Pe 200,0-00 "

90,000T Clits) -
I ]
Present wort cost = 200,000 t
-
¥157

PWC , =
651,689.17

c
-

Type B
Annual Cost (excluding Depreciation) =

1 2 10 81,056

14,776
¥
-

l l f
66,280 66,250 66,280 ¥
300,000

"

t 66,280 [ Clits ) - l
)
PWC = 300,000
is

Pwcp =
632,643.98

PWCB L PWCA
-

-
: select TYPE B Eqpt .
 "
PAA [ Citi ) -
I
]

By the Equivalent Uniform Annual Cost Method

a&r Ion
2 "
1 10 I
Type A
i
!!
' '
'
I .
.
.
I
g EOAC
* EOAC EOAC

f- 200,000
-
"

EUACA = 200,000 [ Oils] [ 1,157

- t 90,000
'O

[ Cl . 15 ) -
ly
-

129,850.41
lo
Type B I z

zo# 616,280 6.la?..so 66,280

EUCACB =
300,000 (o -

B) Clits)
- t 66,280 = 1261055.62
" -

[ ( I. 15 ) -

I 3

must selected
Note : least EUAC be

EUACB L EUACA
.
'

.
Select Eqpt B
-
 Comparing Alternatives

Problem: A gasoline driven pump and an electric power pump are being considered for use in a
mine for a period of 10 years. The data available are:

gas ele c

- First Cost 12,000 25,000

10 years I
- .

Life in years 5 years

Salvage Value 1,000 -
2,000 -

Annual Operating Cost 3,200 -

1,800 -
Annual repairs 600 -
400 a
Annual Taxes 3% 3%
€p
If money is worth 12% compounded annually, which would you recommend on the basis of
annual Cost?
¢ = 11,000 (O '
'
= 1731
✓By Annual Cost Method
-

[ Cl 1235 I ]
=
-

Gasoline Driven Pump:

minimum Required Profit
Depreciation
-4731 (0,12) FC
Annual Operating Cost 3,200
Annual Repairs 600

so :c:* :: :&
Annual Taxes
Minimum Required Profit
Total Annual Cost 7331
,

①
d = 23 ,
000 (o . 12

Electric Power Pump: Tis

d = I 310

Depreciation 1310

}
Annual Operating Cost Ii 500
Annual Repairs 400
Annual Taxes
Minimum Required Profit Goi:3's:S.in?a5ome
Total Annual Cost 7260

Note: Whichever has the least Cost

TAC p L TACA
By Rate of Return Method

Gasoline Driven Pump:

Total Annual Cost (Minimum Required Profit is Excluded) =

Electric Power Pump:

-
7331 -

1440
-5891C
.

Total Annual Cost (Minimum Required Profit is Excluded) = 4,260

=

Savings on Electric Power Pump = bigger - on

TAC
5891 -

4260 = 1631

Additional Investment on Electric Power Pump = 13,000

're
Dove - co on the
first cost

Rate of Return on Additional Investment = Savings on Electric Power Pump / Additional

Investment on Electric Power Pump

12%
1631%0=12.55%7
Activity

Based on estimates the data for two types of bridges with different lives are as
follows. If the minimum attractive rate of return is 9%, determine which project is
more desirable.

TIMBER BRIDGE Steel Bridge

First Cost 50,000 140,000

Salvage Value 2000 10,000
Life in Years 12 36
Annual Maintenance 6,000 2,500

Solve by:

A. Annual Cost Method

B. By Present Worth Cost Method

C. By rate of Return Method