Eng Econ Im 6

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: ENG ECON – 1STSEM-2022-2023
COLLEGE OF ENGINEEERING
DEGREE PROGRAM BSCE COURSE NO. ENG ECON
SPECIALIZATION SE/CEM/TE/WRE COURSE TITLE ENGINEERING ECONOMICS
YEAR LEVEL 2nd Year TIME FRAME WK NO. IM NO. 6
I. UNIT TITLE/CHAPTER TITLE

6. DECISION UNDER CERTAINTY
II. LESSON TITLE

6.1. Evaluation of Mutually Exclusive Alternatives
6.2. Evaluation of Independent Projects
III. LESSON OVERVIEW

This chapter treats several valuation methods which are useful in deciding
among economic alternatives. This applies the application on money-time relationships
with calculations; concept of internal rate of return and external return; the use of the
benefit-cost ratio for the evaluation of the public project; and the minimum attractive
rates of return in engineering projects. Also, this chapter provide solving problems
combining the different methods on money-time relation.
IV. DESIRED LEARNING OUTCOMES

At the end of the topic, the students should be able to:
1. Apply the money-time relationship by using different methods.
2. Solve problems on present worth, future worth, annual worth methods.
3. Compare the concept of internal rate of return and external return.
4. Understand the payback period and discounted payback period method of project
evaluation and selection, including the calculations.
5. Demonstrate the use of the benefit-cost ratio for the evaluation of the public project
and calculations.
6. Solve problems combining the different methods.
7. Analyze the minimum attractive rates of return in engineering projects.
V. LESSON CONTENT A. Introduction
A future amount of money converted to its equivalent value now has a present worth
(PW) that is always less than that of the future cash flow, because all P/F factors have a value
less than 1.0 for any interest rate greater than zero. For this reason, present worth values are
often referred to as discounted cash flows (DCF), and the interest rate is referred to as the
discount rate. Besides PW, two other terms frequently used are present value ( PV ) and net
present value ( NPV ).
Up to this point, present worth computations have been made for one project or
alternative. In this chapter, techniques for comparing two or more mutually exclusive
alternatives by the present worth method are treated. Two additional applications are covered
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here—future worth and capitalized cost. Capitalized costs are used for projects with very long
expected lives or long planning horizons.
To understand how to organize an economic analysis, this chapter begins with a
description of independent and mutually exclusive projects as well as revenue and cost
alternatives.
A. Formulating Alternatives
The evaluation and selection of economic proposals require cash fl ow
estimates over a stated period of time, mathematical techniques to calculate the
measure of worth and a guideline for selecting the best proposal. From all the
proposals that may accomplish a stated purpose, the alternatives are formulated. This
progression is detailed in Figure 5–1. Up front, some proposals are viable from
technological, economic, and/or legal perspectives; others are not viable. Once the
obviously nonviable ideas are eliminated, the remaining viable proposals are fleshed
out to form the alternatives to be evaluated. Economic evaluation is one of the primary
means used to select the best alternative(s) for implementation.
A parallel can be developed between independent and mutually exclusive

evaluation. Assume there are m independent projects. Zero, one, two, or more may be
selected. Since each project may be in or out of the selected group of projects, there

are a total of 2m mutually exclusive alternatives. This number includes the DN

alternative, as shown in Figure 5–1. For example, if the engineer has three diesel
engine models (A, B, and C) and may select any number of them, there are 23 = 8
alternatives: DN, A, B, C, AB, AC, BC, ABC. Commonly, in real-world applications,
there are restrictions, such as an upper budgetary limit, that eliminate many of the 2 m
alternatives. Independent project analysis without budget limits is discussed in this
chapter.
Finally, it is important to recognize the nature of the cash flow estimates before
starting the computation of a measure of worth that leads to the final selection. Cash
flow estimates determine whether the alternatives are revenue- or cost-based. All the
alternatives or projects must be of the same type when the economic study is
performed.
• Mutually exclusive alternatives: Only one of the proposals can be selected.
For terminology purposes, each viable proposal is called an alternative.
• Independent projects: More than one proposal can be selected. Each viable
proposal is called a project
The do-nothing (DN) proposal is usually understood to be an option when the

evaluation is performed. The DN alternative or project means that the current approach
is maintained; nothing new is initiated. No new costs, revenues, or savings are
generated.
B. Evaluation of Mutually Exclusive Alternatives
It is very easy to use the present worth method to choose the best project among
a set of mutually exclusive projects when the service lives are the same. One just
computes the present worth of each project using the MARR. The project with the
greatest present worth is the preferred project because it is the one with the greatest
profit.
An engineering economy study must be performed to determine which one to
choose among mutually exclusive alternatives and how much capital to invest
because of different levels of investment produce varying economic outcomes.
The selection algorithm given below will always yield the maximum total return
on the total amount invested.
Terminologies
I = the investment cost of a project
R = the measure of revenues present worth, EUAS, etc.) from the project.
If the extra benefits obtained by investing additional capital are better than those
that could be obtained from investment of the same capital elsewhere in the company
at the MARR, the investment should be made. If this is not the case, we obviously
would not invest more than the minimum amount of capital required, including the
possibility of nothing at all. Stated simply, our rule will keep as much as possible
invested at a rate of return equal to or greater than the
MARR.

Rule 1. When revenues and other economic benefits are present and vary among the alternatives, choose the
alternative that maximizes overall profitability. That is select the alternative that has the greatest
positive equivalent worth at i = MARR and satisfies all project requirements.
Rule 2. When revenues and other economic benefits are not present or are constant among the
alternatives, consider only the costs and select the alternative that minimizes total cost. That is select the
alternative that has the least negative equivalent worth at i = MARR and satisfies all project requirements.
Case 1. Useful lives are the same for all alternatives and equal to the study
period.
• The most straightforward technique for comparing mutually exclusive alternatives when
all useful lives are equal to the study period is to determine the equivalent worth of each
alternative based on total investment at i = MARR. Then for investment alternatives, the
one with the greatest positive equivalent worth is selected. And in the case of cost
alternatives, the one with the least negative equivalent worth is selected.
1st example involves an investment project situation:
Alternatives A and B are two mutually exclusive investment alternatives with estimated
net cash flows as shown. Useful life of each alternative is 4 years. The MARR = 10% per
year. Investment alternatives are those with initial (or front-end) capital investments that
produce cash flows from increased revenue, savings through reduced costs, or both.
Alternative
A B
Capital investment -$60,000 -$73,000
Annual revenues less expenses 22,000 26,225
The PW values are:

PW (10%)A = -$60,000 + $22,000 (P/A,10%,4) = $9,738
PW (10%)B = -$73,000 + $26,000 (P/A, 10%, 4) = $10,131
Since the PWA is > 0 at i=MARR, it is the base alternative and would be selected
unless the additional capital associated with Alternative B is justified. In this case, Alternative
B is preferred because it has a greater PW value.
Alternativ A = $22,000 Alternativ A = $26,225
$13,000
The extra benefits obtained by investing the additional $13,000 of capital in B, have a
present worth of:

$10,131 - $9,738 = $393

That is, PW (10%)diff = -$13,000 + $4,225 (P/A, 10%, 4) = $393 And the additional
capital invested in B is justified.
2nd example involves a cost project situation:
Alternatives C and D are two mutually exclusive cost alternatives with estimated net
cash flows as shown over a three-year life. MARR at 10% per year. Cost alternatives are
those with all negative cash flows except for a possible positive cash flow element from
disposal of assets at the end of the projects‟ useful life. It occurs when the organization must
take some action and the decision involves the most economical way of doing it (e.g. the
addition of environmental control capability to meet new regulatory requirements).
End of Alternative
Year C D
0 - -
P380,000 P415,000
1 - -
P38,100 P27,400
2 - -
P39,100 P27,400
3 - -
P40,100 P27,400
3a 0 P26,000
a
Market Value
At MARR = 10% per year
PW (10%) C = - P477,077
PW (10%) D = - P463,607
Alternative D is preferred to C because it has the lesser PW of costs. Hence the lower
annual expenses obtained by investing the additional P35,000 of capital in Alternative D has
a present worth of - 463,607 – (- P477,077) = P13,470. Therefore, the additional capital
invested in Alternative D is justified.
Case 2. Useful lives are different among alternatives and at least one do not
match the study period.
When the useful lives of mutually exclusive alternatives are different, the
repeatability assumption and co-terminated assumption maybe used.
The repeatability assumption involves two main conditions:

1. The study period over which the alternatives are being compared is either
indefinitely long or equal to a common multiple of the lives of the alternatives.
2. The economic consequences that are estimated to happen in an alternative‟s
initial useful life span will also happen in all succeeding life spans (replacements) The

co-terminated assumption uses a finite (limited) and identical study period for all
alternatives. This planning horizon, combined with appropriate adjustments to the
estimated cash flows, puts the alternatives on a common and comparable basis.
Guidelines:
1. Useful life < Study period
a. Cost alternatives: contracting for the service or leasing the needed equipment
for the remaining years maybe appropriate or repeat part of the useful life of the
original alternative, and then use an estimated market value to truncate it at the
end of the study period.
b. Investment alternatives: Assumption used here is that all cash flows will be
reinvested in other opportunities available to the firm at the MARR to the end of the
study period.
2. Useful life > Study period: The most common technique is to truncate the
alternative at the end of the study period using an estimated market value, that
the disposable assets will be sold at the end of the study period at that value.
Sample Problem. The following data have been estimated for two mutually exclusive
investment alternatives, A and B, associated with a small engineering project for which
revenues as well as expenses are involved. They have useful lives of four and six years,
respectively. If the MARR = 10% per year, show which alternative is more desirable by using
equivalent worth methods. Use the repeatability assumption.
A B
Capital investment -3,500 -5,000
Annual revenue 1,900 2,500
Annual expenses -645 -1,020
Useful life (years) 4 6
Market value at end of 0 0
useful life
Solution: LCM = 12 years ‘

Alt. A.
PW (10%) = -3,500 – 3,500 [(P/F, 10%, 4) + (P/F, 10%, 8)] + (1,900 – 645)(P/A, 10%,12)
= $1,028
Alt. B.
PW (10%) = -5,000 – 5,000 (P/F, 10%, 6) + (2,500 – 1,020) (P/A, 10%, 12)
= $2,262
Based on the PW method we would select Alternative B because it has the larger
value.
Suppose that the above problem is modified such that an analysis period of 6 years is
used (co-terminated assumption) instead of 12 years.

Solution: Use the FW to analyze the situation.
Alt. A.
FW (10%) = [-3,500 (F/P, 10%, 4) + (1,900 – 645) (F/A, 10%, 4)] (F/P, 10%, 2)
= $847
Alt. B.
FW (10%) = -5,000 (F/P, 10%, 6) + (2,500 – 1,020) (F/A, 10%, 6)
= $2,561
Based on the FW of each alternative at the end of the six-year stuffy period, we would
select Alt. B because it has the larger value.
Other Method
We shall say that project 1 dominates project 2 if I1 ≤ I2 and R1 ≥ R2. Clearly, a
dominated project can never be the best of a mutually exclusive set. Further, for any
two projects-a standard and a challenger-define the incremental rate of return of the
challenger as
∆𝑖∗ = 𝑅𝑐ℎ𝑎𝑙𝑙𝑒𝑛𝑔𝑒𝑟 − 𝑅𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑
𝐼𝑐ℎ𝑎𝑙𝑙𝑒𝑛𝑔𝑒𝑟 − 𝐼𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑
Step 1 Eliminate any project whose investment exceeds the budget.
Step 2 Arrange the surviving projects in ascending order of investment (break
any investment-ties arbitrarily). Now eliminate any project that is
dominated by another project; the candidates that remain will be in
ascending order both of investment and of return. Compute i* for each
candidate.
Step 3 Eliminate from further consideration any candidate having i* < MARR.
Step 4 From the surviving candidates, select as the standard that candidate
which has the smallest investment.
Step 5 Compute the incremental rate of return of the challenger that immediately
succeeds the standard in the list of candidates.
Step 6 If ∆𝑖∗ ≤ 𝑀𝐴𝑅𝑅eliminate this challenger from further consideration and
repeat step 5 for the next challenger; if ∆𝑖∗ > 𝑀𝐴𝑅𝑅, eliminate the old
standard from further consideration, replace it with this challenger as the
new standard, and repeat step 5.
Step 7 Select the one surviving candidate: it is the best alternative.
Example 1
The KLN Company is attempting to determine the economically best size of
processor machine for their facilities. The six alternative machine sizes which are
feasible. Each machine has a life of 100 years and no salvage value, so that i* = R/I.
The company has a total capital budget of P350 000 and a MARR of 15%. Which
machine should they buy?

The Extended machine is unacceptable according to step 1 of the selection

algorithm, and the Economy machine is unacceptable according to step 3. The
application of steps 5 and 6 to the four surviving candidates; step 7 gives Delux as the
winner.
Let us examine the logic of the selection algorithm, on the assumption that the
company can realize 15% (the MARR) by implementing the do-nothing alternative.
Consider the first comparison in Table 9-4. Super costs A I = P100 000 more than
Regular, and yields A/R = P11 000 more per year. If the company chose Super, it Let
us examine the logic of the selection algorithm, on the assumption that the company
can realize 15% (the MARR) by implementing the do-nothing alternative. Super costs
A I = P100 000 more than Regular, and yields AR = P11 000 more per year. If the
company chose Super, it
(15% - 11%)(P 100 000) = P4000 per year
Or, looked at in a slightly different way, if the Regular machine is purchased, at

a saving of 100 000, the company will earn P25 000 a year on the machine, plus 15%
x P100 000 = P15 000 a year on the do-nothing alternative. This is a total annual return
of $40 000 on a total investment of $200 000. The same total investment in the Super
machine will earn only $36 000 a year. In this first comparison, it so happens that the

economically superior machine has the larger i*-value. Note however, that the eventual
winner, Delux, has a smaller i*-value than Regular. As we have seen, when purchase
prices differ, a mere comparison of i*-values is not decisive; one must also consider
what will be done with any funds left over from the purchase of the cheaper machine.
Example 2
Using a 10% interest rate, determine which alternative, if any, should be
selected, based on net present worth.
Alternative A B
First Cost P5,300 P10,700
Uniform Annual Benefit 1,800 2,100
Useful life 4 years 8 years
Solution
Alternative A:
NPW = 1,800(P/A, 10%, 8) - 5,300 - 5,300(P/F, 10%, 4)

= $683.10
Alternative B:
NPW = 2,100(P/A, 10%, 8) - 10,700
= $503.50
Select alternative A
Example 3.
Mantuer Manufacturing Company is attempting to determine the "best7'-sized
milling machine for their production shop. Five alternative sizes are available. Mantuer
has a budget of $250 000, and MARR = 15%. Which size machine should they
purchase? Assume that n = 100 years and that the ultimate salvage value is zero for
each machine.
This situation involves mutually exclusive projects. The selection algorithm gives:
Step 1 Eliminate Super Delux.
Step 2 See Table above.
Step 3 Eliminate Economy.

Steps 4 through 6 Compare Super against Regular:
∆𝒊∗ = 𝟑𝟔 𝟎𝟎𝟎 − 𝟐𝟓 𝟎𝟎𝟎 = 𝟏𝟏% < 𝑴𝑨𝑹𝑹

𝟐𝟎𝟎 𝟎𝟎𝟎 − 𝟏𝟎𝟎 𝟎𝟎𝟎
hence, eliminate Super. Compare Delux against Regular:
∆𝒊∗ = 𝟒𝟓 𝟎𝟎𝟎 − 𝟐𝟓 𝟎𝟎𝟎 = 𝟏𝟔. 𝟔𝟕% > 𝑴𝑨𝑹𝑹

𝟐𝟐𝟎 𝟎𝟎𝟎 − 𝟏𝟎𝟎 𝟎𝟎𝟎
hence, Delux becomes the new standard.
Step 7 Select Delux.
In this case, $30 000 will be left over from the original $250 000 budget.
C. Evaluating of Independent Projects

The alternative to investing money in an independent project is to “do nothing.” Doing
nothing doesn’t mean that the money is not used productively. In fact, it would be used
for some other project, earning interest at a rate at least equal to the
MARR.
For independent projects, each PW is considered separately, that is, compared with
the DN project, which always has PW = 0. The selection guideline is as follows:
One or more independent projects: Select all projects with PW = 0 at the MARR. The
independent projects must have positive and negative cash flows to obtain a PW value
that can exceed zero; that is, they must be revenue projects. All PW analyses require a
MARR for use as the i value in the PW relations.
The term project is used to identify each independent option. We use the term bundle
to identify a collection of independent projects. The term mutually exclusive alternative
continues to identify a project when only one may be selected from several.
There are two exceptions to purely independent projects: A contingent project is one
that has a condition placed upon its acceptance or rejection. Two examples of contingent
projects A and B are as follows: A cannot be accepted unless B is accepted; and A can
be accepted in lieu of B, but both are not needed. A dependent project is one that must
be accepted or rejected based on the decision about another project(s).
For example, B must be accepted if both A and C are accepted. In practice, these
complicating conditions can be bypassed by forming packages of related projects that are
economically evaluated themselves as independent projects along with the remaining,
unconditioned projects.
By nature, independent projects are usually quite different from one another. For
example, in the public sector, a city government may develop several projects to choose
from: drainage, city park, metro rail, and an upgraded public bus system.
Remember:
The best project is the one with the minimum present worth of cost as opposed to the
maximum present worth. Two conditions should hold for this to be valid:
(1) All projects have the same major benefit, and
(2) the estimated value of the major benefit clearly outweighs the projects’
costs, even if that estimate is imprecise.
Therefore, the “do nothing” option is rejected. The value of the major benefit is
ignored in further calculations since it is the same for all projects. We choose the
project with the lowest cost, considering secondary benefits as offsets to costs.
However, the present worth of any money invested at the MARR is zero, since
the present worth of future receipts would exactly offset the current disbursement.
Consequently, if an independent project has a present worth greater than zero, it is
acceptable. If an independent project has a present worth less than zero, it is
unacceptable. If an independent project has a present worth of exactly zero, it is
considered marginally acceptable.
Example 4
A mechanical engineer is considering building automated materials-handling
equipment for a production line. On the one hand, the equipment would substantially
reduce the manual labor currently required to move items from one part of the
production process to the next. On the other hand, the equipment would consume
energy, require insurance, and need periodic maintenance.
Alternative 1: Continue to use the current method. Yearly labor costs are $9200.
Alternative 2: Build automated materials-handling equipment with an expected
service life of 10 years.
First cost $15 000

Labour $3300 per year
Power $400 per year
Maintenance $2400 per year
Taxes and insurance $300 per year
If the MARR is 9 percent, which alternative is better? Use a present worth

comparison. The investment of $15 000 can be viewed as yielding a positive
cash flow of 2800 = 9200 - (3300 + 400 + 2400 + 300) per year in the form of a
reduction in cost.
PW = -15 000 + [9200 - (3300 + 400 + 2400 + 300)](P/A,9%,10) = -15 000 +

2800(P/A,9%,10) @2 = -15 000 + PV (0.09,10,- 2800) = -15 000 +
2800(6.4176) = 2969.44
The present worth of the cost savings is approximately $3000 greater than the
$15 000 first cost. Therefore, alternative 2 is worth implementing.
Example 5
A university lab is a research contractor to NASA for in-space fuel cell
systems that are hydrogen and methanol-based. During lab research, three
equal-service machines need to be evaluated economically. Perform the
present worth analysis with the costs shown below. The MARR is 10% per year.
Electric-Powered Gas-Powered Solar-Powered

First cost, $ -4500 3500 -6000
Annual operating cost (AOC), $/year -900 -700 -50
Salvage value S, $ 200 350 100
Life, years 8 8 8
Solution
These are cost alternatives. The salvage values are considered a “negative”
cost, so a + sign precedes them. (If it costs money to dispose of an asset, the
estimated disposal cost has a - sign.) The PW of each machine is calculated at
i = 10% for n = 8 years. Use subscripts E , G , and S .
PWE = -4500 – 900 (P/A ,10%,8) + 200 (P/F ,10%,8) = $ - 9208

PWG = -3500 – 700 (P/A ,10%,8) + 350 (P/F ,10%,8) = $ - 7071
PWS = -6000 – 50 (P/A ,10%,8) + 100 (P/F ,10%,8) = $ - 6220
The solar-powered machine is selected since the PW of its costs is the lowest;
it has the numerically largest PW value.
The procedure to conduct a capital budgeting study using PW analysis is as follows:

1. Develop all mutually exclusive bundles with a total initial investment that
does not exceed the capital limit b.
2. Sum the net cash flows NCFjt (net cash flow) for all projects in each
bundle j(j = 1, 2, . . . , 2 m ) and each year t ( t = 1, 2, . . . , n j ). Refer to the initial
investment of bundle j at time t = 0 as NCFj0.
NCF= cash inflow – cash outflow
3. Compute the present worth value PW j for each bundle at the MARR.
PWj = PW of bundle net cash flows - initial investment
= ∑𝑡𝑡==𝑛1𝑗 𝑁𝐶𝐹𝑗𝑡 (𝑃𝐹 , 𝑖, 𝑡) − 𝑁𝐶𝐹𝑗0
4. Select the bundle with the (numerically) largest PWj value.
Selecting the maximum PWj means that this bundle has a PW value larger than
any other bundle. Any bundle with PW j = 0 is discarded, because it does not
produce a return of at least the MARR.
Example 6
The projects review committee of Microsoft has $20 million to allocate next year
to new software product development. Any or all of five projects in Table 12–1 may
be accepted. All amounts are in $1000 units. Each project has an expected life of
9 years. Select the project(s) if a 15% return is expected.
TABLE Five Equal-Life Independent Projects ($1000 Units)

Project Initial Investment, $ Annual Net Cash Flow, $ Project Life, Years
A -10,000 2870 9
B -15,000 2930 9
C -8,000 2680 9
D -6,000 2540 9
E -21,000 9500 9
Solution
Use the procedure above with b = $20,000 to select one bundle that maximizes
present worth. Remember the units are in $1000.
1. There are 25 = 32 possible bundles. The eight bundles that require no more
than $20,000 in initial investments are described in columns 2 and 3 of Table. The
$21,000 investment for E eliminates it from all bundles.
TABLE Summary of Present Worth Analysis of Equal-Life Independent Projects ($1000

Units)
2. The bundle net cash flows, column 4, are the sum of individual project net cash
flows.
3. Use Equation for PW to compute the present worth for each bundle. Since the
annual NCF and life estimates are the same for a bundle, PW j reduces to
PWj = NCFj (P/A ,15%,9) - NCFj0
4. Column 5 of Table above summarizes the PWj values at i = 15%. Bundle 2 does not
return 15%, since PW2 < 0. The largest is PW7 = $10,908; therefore, invest $14
million in C and D. This leaves $6 million uncommitted.
This analysis assumes that the $6 million not used in this initial investment will return
the MARR by placing it in some other, unspecified investment opportunity.
VI. LEARNING ACTIVITIES
Additional Information
https://www.youtube.com/watch?v=-kcjunUmrKM
https://www.youtube.com/watch?v=2tGcIELpeQU
https://www.youtube.com/watch?v=NgmzrHpfK3Y
VII. EVALUATION (Note: Not to be included in the student’s copy of the IM)
VIII. ASSIGNMENT
(PS No. 6)Answer the following questions in a HANDWRITTEN FORM using the format
1. There are five projects have been identified for possible implementation by JTG company
that makes ice cube machine. The total present worth of the initial investment for each
project is shown. Determine which bundles are possible, provided the budget limitation
is (a) $34,000 and (b) $45,000.
2. Tilson Dairies operates several cheese plants. The plants are all old and in need of
renovation. Tilson’s engineers have developed plans to renovate all of them. Each project
would have a positive present worth at the company’s MARR. Tilson has $3.5 million
available to invest in these projects. The following facts about the potential renovation
projects are available:
Project First Cost Present Worth

A: Renovate plant 1 $0.8 million $1.1 million
B: Renovate plant 2 $1.2 million $1.7 million
C: Renovate plant 3 $1.4 million $1.8 million
D: Renovate plant 4 $2.0 million Which projects $2.7 million
should Tilson accept?
3. The Clearwater Company has a budget of $500000 which can be spent on the five
independents projects. If MARR = 20%, how should the budget be allocated?
4. Independent projects identified as A, B, C, and D, develop all of the mutually exclusive

bundles. Projects B and C perform the same function with different processes; both
should not be selected.
IX. REFERENCES
ARREOLA, M. Engineering Economy. Second Edition. Manila: KEN, Inc.
BESAVILLA, V. I. 1989. Engineering Economics. Cebu City Philippines: VIB Publishers.
BLANK, L and TARQUIN, A. 2012. Engineering Economics. New York, USA:McGraw-Hill

Companies Inc.
CUARESMA, F.D. 1995-2000. Handouts in Engineering Economy.
CUARESMA, F.D. 2002. Economics of Precision Irrigation Systems. Paper delivered

during the Training on Precision Irrigation Systems for High Productivity and Efficient
Water Management, 4-6 Sept. 2002.
SULLIVAN, William G., Bontadelli James A, and Wicks, Elin M.. 2000. Engineering
Economy. 11th Edition. McMillan Pub. Co., New York: (recommended text book)
KASNER, E. Essentials of Engineering Economy. New York: Mc. Graw-Hill Book Co.
RIGGS, J.L., D.D. BEDWORTH., and S.U. RANDHAWA, S.U.1998. 4th Ed. Engineering
Economics . New York: Mc Graw-Hill.
STA. MARIA, H. Engineering Economy Reviewer. Third Edition.
SEPULVEDA, J., SOUDER, W., GOTTFRIED, S.. Theory and Problems of Engineering
Economics. McGraw-Hill Companies:USA. 1984
THUESEN, G.J. and W.J. FABRICKY, W. J. Engineering Economy. New Jersey: Prentice
Hall, Inc. 1989.
Websites:
www.toolkit.cch.com/text/P06_6500.asp CCH Business Owner's Toolkit
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Eng Econ Im 6

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Eng Econ Im 6

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

IM No.: ENG ECON – 1STSEM-2022-2023

DEGREE PROGRAM BSCE COURSE NO. ENG ECON

SPECIALIZATION SE/CEM/TE/WRE COURSE TITLE ENGINEERING ECONOMICS

YEAR LEVEL 2nd Year TIME FRAME WK NO. IM NO. 6

I. UNIT TITLE/CHAPTER TITLE

II. LESSON TITLE

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES

V. LESSON CONTENT A. Introduction

purposes only and not for commercial distribution,”

A parallel can be developed between independent and mutually exclusive

purposes only and not for commercial distribution,”

are a total of 2m mutually exclusive alternatives. This number includes the DN

The do-nothing (DN) proposal is usually understood to be an option when the

B. Evaluation of Mutually Exclusive Alternatives

purposes only and not for commercial distribution,”

1st example involves an investment project situation:

The PW values are:

purposes only and not for commercial distribution,”

$10,131 - $9,738 = $393

2nd example involves a cost project situation:

At MARR = 10% per year

The repeatability assumption involves two main conditions:

purposes only and not for commercial distribution,”

Solution: LCM = 12 years ‘

purposes only and not for commercial distribution,”

Solution: Use the FW to analyze the situation.

purposes only and not for commercial distribution,”

The Extended machine is unacceptable according to step 1 of the selection

(15% - 11%)(P 100 000) = P4000 per year

Or, looked at in a slightly different way, if the Regular machine is purchased, at

purposes only and not for commercial distribution,”

NPW = 1,800(P/A, 10%, 8) - 5,300 - 5,300(P/F, 10%, 4)

purposes only and not for commercial distribution,”

Steps 4 through 6 Compare Super against Regular:

∆𝒊∗ = 𝟑𝟔 𝟎𝟎𝟎 − 𝟐𝟓 𝟎𝟎𝟎 = 𝟏𝟏% < 𝑴𝑨𝑹𝑹

hence, eliminate Super. Compare Delux against Regular:

∆𝒊∗ = 𝟒𝟓 𝟎𝟎𝟎 − 𝟐𝟓 𝟎𝟎𝟎 = 𝟏𝟔. 𝟔𝟕% > 𝑴𝑨𝑹𝑹

C. Evaluating of Independent Projects

First cost $15 000

If the MARR is 9 percent, which alternative is better? Use a present worth

PW = -15 000 + [9200 - (3300 + 400 + 2400 + 300)](P/A,9%,10) = -15 000 +

Electric-Powered Gas-Powered Solar-Powered

PWE = -4500 – 900 (P/A ,10%,8) + 200 (P/F ,10%,8) = $ - 9208

The procedure to conduct a capital budgeting study using PW analysis is as follows:

PWj = PW of bundle net cash flows - initial investment

= ∑𝑡𝑡==𝑛1𝑗 𝑁𝐶𝐹𝑗𝑡 (𝑃𝐹 , 𝑖, 𝑡) − 𝑁𝐶𝐹𝑗0

4. Select the bundle with the (numerically) largest PWj value.

TABLE Five Equal-Life Independent Projects ($1000 Units)

TABLE Summary of Present Worth Analysis of Equal-Life Independent Projects ($1000

Project First Cost Present Worth

4. Independent projects identified as A, B, C, and D, develop all of the mutually exclusive

ARREOLA, M. Engineering Economy. Second Edition. Manila: KEN, Inc.

BESAVILLA, V. I. 1989. Engineering Economics. Cebu City Philippines: VIB Publishers.

BLANK, L and TARQUIN, A. 2012. Engineering Economics. New York, USA:McGraw-Hill

CUARESMA, F.D. 1995-2000. Handouts in Engineering Economy.