EVALUATING ALTERNATIVES

• Most engineering projects and business ventures

can be accomplished by more than one feasible
method or alternative.
• Typically, the feasible alternatives being considered
require the investment of different amounts of
capital, and their annual revenues and costs may
vary, sometimes the alternatives may have different
useful lives.
• Because different levels of investment normally
produce varying economic outcomes, we must
perform an engineering economy study to
determine which one of the mutually exclusive
alternatives is preferred and how much capital
1
should be invested.
 EVALUATING ALTERNATIVES
• The selection of the right project for future
investment is a crucial decision for the long-
term survival of any company or organization.
• The selection of a wrong project may lead to
project failure or company collapse.
• Because we live in a world of finite resources,
it is NOT possible to carry out all the projects
an organization needs or wants.
• This then calls for the selection or ranking of
projects on the basis of benefits it would bring
to an organization.
2
 EVALUATING ALTERNATIVES
• This aspect focuses on comparing mutually
exclusive alternatives on the basis of
economic considerations alone.
• Therefore, the policy adopted is ‘the
feasible alternative that requires the
minimum investment of capital and
produces satisfactory functional results will
be chosen, unless the incremental capital
associated with an alternative having a larger
investment can be justified with respect to
its incremental savings (or benefits)’.
3
 EVALUATING ALTERNATIVES
• Previously, we have learnt that equivalent
worth methods (PW, AW and FW) convert
all relevant cash flows into equivalent
present, annual or future amounts at the
MARR.
• If a single project is under consideration, it
is acceptable (earns at least the MARR), if
the equivalent worth of the best feasible
alternative for doing it is greater than or
equal to 0; otherwise, it is NOT
acceptable. 4
 EVALUATING ALTERNATIVES
• If two or more mutually exclusive alternatives
are being compared and receipts or savings
(cash inflows) as well as costs (cash outflows)
are known, the feasible alternative that has
the highest net equivalent worth should be
selected, as long as that equivalent worth is
greater than or equal to zero.
• If only costs are known or are being
considered, when project revenues for all
alternatives are the same, that feasible
alternative which has the least negative
equivalent worth of costs should be selected. 5
 EVALUATING ALTERNATIVES
• There are two general situations:
o All the feasible alternatives under
consideration have identical useful lives.

o The alternatives have different useful lives.

Note: When the selection of one alternative

excludes the consideration of any other
alternative, the alternatives are called mutually
exclusive.
6
 EXAMPLES
1. Three mutually exclusive investment
alternatives for implementing an office automation
plan in an engineering design firm are being
considered. Investment alternatives are those with
an initial capital investment that produces positive
cash flows from increased revenue, savings through
reduced costs, or both. The study period is 10
years, and the useful lives of all three feasible
alternatives are also 10 years. Residual (salvage)
values of all alternatives are assumed to be zero at
the end of 10 years. If the firm’s MARR is 10% per
year, which alternative should be selected in view
of the following estimates?
7
EXAMPLES

8
 SOLUTION TO EXAMPLE ONE USING PW
For every analysis, firstly draw the cash flow
diagrams for all the alternatives.
For Alternative A:
S=$0
AR=$69000

0 1 2 3 4 5 6 7 8 6

P0A=$390,000

9
 SOLUTION TO EXAMPLE ONE USING PW
PWA (10%) = P0A + AA (P/A,i%,N)
= -$390,000 + $69,000 (P/A,10%,10)
= - $390,000 + $69,000 (6.1446)
= -$390,000 + $ 423,977.4
= $33,977.4 ~~ $33,977
PWB (10%) = P0B + AB (P/A,10%,10)
= -$920,000 + $167,000 (P/A,10%,10)
= - $920,000 + $167,000 (6.1446)
= -$920,000 + $ 1,026,148.2
= $106,148.2 ~~ $106,148
PWC (10%)= P0C + AC (P/A,10%,10)
= -$660,000 + $133,500 (P/A,10%,10)
= - $660,000 + $133,500 (6.1446)
= -$660,000 + $ 820,304.1
= $160,304.1 ~~ $160,304
Decision: Based on the PW method, alternative C would be selected. The order of
preference is C > B >A, where C > B means “ C is preferred to B”..
10
 SOLUTION TO EXAMPLE ONE USING AW
1. From Calculated Present Worth Method
AWA (10%) = [PWA (10%)] [(A/P, 10%, 10)]
= [$33,977] [0.1627]
= $5,528.0579 ~~ $5,528

AWB (10%) = [PWB (10%)] [(A/P, 10%, 10)]

= [$106,148] [0.1627]
= $17,270.2796 ~~ $17,270

AWC (10%) = [PWC (10%)] [(A/P, 10%, 10)]

= [$160,304] [0.1627]
= $26,081.4608 ~~ $26,081
Note: Annual Worth Method is sometimes called the Annual Cost (AC)
method when only costs are involved.
Based on this method, alternative C would also be selected. The order of
preference is C > B >A, where C > B means “ C is preferred to B”.
11
 SOLUTION TO EXAMPLE ONE USING AW
2. From Capital Recovery Method
Capital Recovery (CR), return on initial investment
= I (A/P, i%, N) – S (A/F, i%, N)
I = Initial Investment for the Project= P0
S = Salvage (Residual) value at end of study period
N = Project Study Period
Therefore, AW = R- E – CR
Where R = Annual equivalent receipts (or
Savings)
E = Annual equivalent Expenses
CR = Annual equivalent Capital 12
 SOLUTION TO EXAMPLE ONE USING AW
CRA = IA (A/P, i%, N) – SA (A/F, i%, N)
= 390,000 (A/P, 10%, 10) – 0 (A/F, 10%,
10)
= $[390,000 (0.1627) – 0 ]
= $ [390,000 (0.1627)]
= $63,453
Therefore, AWA (10%) = RA- EA – CRA (Where
RA-EA was given to be $69,000)
= $ [69,000 – 63, 453]
= $5,547 13
 SOLUTION TO EXAMPLE ONE USING AW
CRB = IB (A/P, i%, N) – SB (A/F, i%, N)
= 920,000 (A/P, 10%, 10) – 0 (A/F, 10%, 10)
= $[920,000 (0.1627) – 0 ]
= $ [920,000 (0.1627)]
= $149,684
Therefore, AWB (10%) = RB- EB – CRB (Where RB-
EB was given to be $167,000)
= $ [167,000 – 149,684]
= $17,316

14
 SOLUTION TO EXAMPLE ONE USING AW
CRC = IC (A/P, i%, N) – SC (A/F, i%, N)
= 660,000 (A/P, 10%, 10) – 0 (A/F, 10%, 10)
= $[660,000 (0.1627) – 0 ]
= $ [660,000 (0.1627)]
= $107,382
Therefore, AWC (10%) = RC- EC – CRC (Where RC-EC
was given to be $133,500)
= $ [133,500 – 107,382]
= $26,118
Based on this method, alternative C would also be
selected. The order of preference is C > B >A, where
C > B means “ C is preferred to B”. 15
 SOLUTION TO EXAMPLE ONE USING FW
1. From Calculated Present Worth Method
FWA (10%) = [PWA (10%)] [(F/P, 10%, 10)]
= [$33,977] [2.5937]
= $88,126.1449 ~~ $88,126

FWB (10%)= [PWB (10%)] [(F/P, 10%, 10)]

= [$106,148] [2.5937]
= $275,316.0676 ~~ $275,316

FWC (10%)= [PWB (10%)] [(F/P, 10%, 10)]

= [$160,304] [2.5937]
= $415,780.4848 ~~ $415,780
Based on this method, alternative C would also be selected. The
order of preference is C > B >A, where C > B means “ C is
preferred to B”. 16
 SOLUTION TO EXAMPLE ONE USING FW
2. FWA (10%) = P0A (F/P, 10%,10) + AA (F/A, 10%, 10) + SA
= - 390,000 (2.5937) + 69,000 (15.9374) + 0
= -$1,011,543 + 1,099,680.6 + 0 = $1,099,680.6 – 1011,543
= $88,137.6 ~~ $88,138

FWB (10%) = P0B (F/P, 10%,10) + AB (F/A, 10%, 10) + SB

= - 920,000 (2.5937) + 167,000 (15.9374) + 0
= -$2,386,204 + 2,661,545.8– 0 = $ 2,661,545.8 – 2,386,204
= $275,341.8 ~~ $275,342

FWC (10%) = P0C (F/P, 10%,10) + AC (F/A, 10%, 10) + SC

= - 660,000 (2.5937) + 133,500 (15.9374) + 0
= -$1711842 + 2,127,642.9 + 0 = $ 2,127,642.9 – 1,711,842
= $415,800.9 ~~ $415,801
Based on this method, alternative C would also be selected. The order of
preference is C > B >A, where C > B means “ C is preferred to B”.
17
 EXERCISE
1. A Company is going to install a new
plastic-molding press. Four different
presses are available. You should
observe that this is a set of four mutually
exclusive cost alternatives; that is, there
is an initial investment followed by
negative cash flows. The essential
differences in initial investment and
operating costs are shown below:

18
 EXERCISE1 CONTD
Press
A B C D
Investment $6,000 $7,600 $12,400 $13,000
(Installed)
Useful life 5 5 5 5
(years)
Annual
Operation and
maintenance
costs:
Power 680 680 1,200 1,260
Labour 6,600 6,000 4,200 3,700
Maintenance 400 450 650 500
Property taxes 120 152 248 260
and insurance
Total Annual $7,800 $7,282 $6,298 $5,720
Costs
19
 EXERCISE 1 CONTD
Each press will produce the same number of
units. However, because of different degrees
of mechanization, some require different
amounts and grades of labour and have
different operation and maintenance costs.
None is expected to have a salvage value and
the study period is 5 years. Any capital
invested is expected to earn at least 10%
before taxes. Which press (feasible alternative)
should be chosen?
20
 SOLUTION TO EXERCISE ONE USING PW
Draw the cash flow diagrams for all the alternatives.
PWA (10%) = -P0A -AA(P/A,10%,5)
=- $6,000 - $7,800 (P/A,10%,5) = -$6,000 - $7800
(3.7908)
= -$6,000 - $ 29,568.24 = -$35,568.24 ~~ - $35,568
PWB (10%) = -P0B - AB(P/A,10%, 5)
= -$7,600 -$7,282 (P/A,10%,5) =- $7,600 -$7,282 (3.7908)
= -$7,600 - $ 27,604.6056 = -$35,204.6056 ~~ - $35,205
PWC (10%) =- P0C - AC(P/A,10%, 5)
=- $12,400 - $6,298 (P/A,10%,5)=-$512,400-$6,298
(3.7908)
= -$12,400 -$ 23,874.4584 = -$36,274.4584 ~~ - $36,274
PWD (10%) = -P0D -AD(P/A,10%, 5)
=- $13,000 - $5,720 (P/A,10%,5) = -$13,000 -$5,720
(3.7908)
21
=- $13,000 - $ 21,683.376 = -$34,683.376 ~~ -$34,683
 SOLUTION TO EXERCISE ONE USING AW
1. From Calculated Present Worth Method
AWA (10%) = [PWA (10%)] [(A/P, 10%, 5)]
= -[$35,568] [0.2638]
= - $9,382.8384 ~~ - $9,383
AWB (10%) = [PWB (10%)] [(A/P, 10%, 5)]
= -[$35,205] [0.2638]
= -$9,287.079 ~~ -$9,287
AWC (10%) = [PWC (10%)] [(A/P, 10%, 5)]
= -[$36,274] [0.2638]
= - $9,569.0812 ~~ -$9,569
AWD (10%)= [PWD (10%)] [(A/P, 10%, 5)]
= -[$34,683] [0.2638]
= -$9,149.3754 ~~ - $9,149
Note: Based on this method, alternative D would also be selected.
Although this involves only cost, the largest value will also be
22
selected.
 SOLUTION TO EXERCISE ONE USING AW
2. From Capital Recovery Method
Capital Recovery (CR) = I (A/P, i%, N) – S (A/F, i%, N)
I = Initial Investment for the Project
S = Salvage (Residual) value at end of study period
N = Project Study Period
Therefore, AW = R- E – CR
Where R = Annual equivalent receipts (or Savings)
E = Annual equivalent Expenses
CR = Annual equivalent Capital Recovery

23
 SOLUTION TO EXERCISE ONE USING AW
Therefore,
CRA = IA (A/P, i%, N) – SA (A/F, i%, N)
= 6,000 (A/P, 10%, 5) – 0 (A/F, 10%, 5)
= $[6,000 (0.2638) – 0 ]
= $ [6,000 (0.2638)]
= $1,582.8
Therefore, AWA (10%) = RA - EA – CRA (Where RA -
EA was given to be -$7,800 because it is cost, not
revenue). RA - EAresulted to cost, which is negative.
= $ [-7,800 – 1,582.8] = - $9,382.8 ~~ - $9,383
(Please be careful, the positive or negative would
24
influence your decision).
 SOLUTION TO EXERCISE ONE USING AW
CRB = IB (A/P, i%, N) – SB (A/F, i%, N)
= 7,600 (A/P, 10%, 5) – 0 (A/F, 10%, 5)
= $[7,600 (0.2638) – 0 ]
= $ [7,600 (0.2638)]
= $2,004.88
Therefore, AWB (10%) = RB - EB – CRB (Where RB
- EB was given to be -$7,282)
= $ [-7,282 – 2,004.88]
= - $9,286.88 ~~ - $9,287
(The positive or negative would influence your decision)
25
 SOLUTION TO EXERCISE ONE USING AW
CRC = IC (A/P, i%, N) – SC (A/F, i%, N)
= 12,400 (A/P, 10%, 5) – 0 (A/F, 10%, 5)
= $[12,400 (0.2638) – 0 ]
= $ [12,400 (0.2638)]
= $3,271.12
Therefore, AWC (10%) = RC - EC – CRC (Where RC
- EC was given to be- $6,298)
= $ [-6,298 – 3,271.12]
= - $9,569.12 ~~ - $9,569
(The positive or negative would influence your
decision) 26
 SOLUTION TO EXERCISE ONE USING AW
CRD = ID (A/P, i%, N) – SD (A/F, i%, N)
= 13,000 (A/P, 10%, 5) – 0 (A/F, 10%, 5)
= $[13,000 (0.2638) – 0 ]
= $ [13,000 (0.2638)]
= $3,429.4
Therefore, AWD (10%) = RD - ED – CRD (Where RD - ED
was given to be -$5,720)
= $ [-5,720 – 3,429.4]
= - $9,149.4 ~~ - $9,149
(The positive or negative would influence your
decision). Based on this method, alternative D would
also be selected. 27
 SOLUTION TO EXERCISE ONE USING FW
1. From Present Worth Method
FWA (10%) = [PWA (10%)] [(F/P, 10%, 5)]
=- [$35,568] [1.6105] = -$57,282.264 ~~ -
$57,282

FWB (10%) = [PWB (10%)] [(F/P, 10%, 5)]

=- [$35,205] [1.6105] = -$56,697.6525 ~~ -
$56,698

FWC (10%)= [PWC (10%)] [(F/P, 10%, 5)]

=- [$36,274] [1.6105] = -$58,419.277 ~~ -
$58,419

FWD (10%) = [PWD (10%)] [(F/P, 10%, 5)] 28

=- [$34,683] [1.6105] = - $55,856.9715 ~~ -

 SOLUTION TO EXERCISE ONE USING FW
2. FWA (10%) = - P0A (F/P, 10%, 5) - AA (F/A, 10%, 5) + SA
= - 6,000 (1.6105) - 7,800 (6.1051) + 0
= - $ 9,663 - 47,619.78 + 0
= - $57,282.78 ~~ - $57.283
FWB (10%) = - P0B (F/P, 10%, 5) - AB (F/A, 10%, 10) + SB
= - 7,600 (1.6105) - 7,282 (6.1051) + 0
= - $ 12,239.8 - 44,457.3382 + 0
= - $56,697.138 ~~ - $56,697
FWC (10%) = - P0C (F/P, 10%, 5) - AC (F/A, 10%, 5) + SC
= - 12,400 (1.6105) - 6,298 (6.1051) + 0
= - $ 19,970.2 - 38,449.9198 – 0
= - $58,420.1198 ~~ - $58,420
FWD (10%) = - P0D (F/P, 10%, 5) - AC (F/A, 10%, 5) + SD
= - 13,000 (1.6105) - 5,720 (6.1051) + 0
= - $ 20,936.5 - 34,921.172 + 0
= - $55,857.672 ~~ - $55,858
Based on this method, alternative D would also be selected. 29
 DIFFERENT USEFUL LIVES
• In many cases, alternatives that require LARGER
investments of capital than others will have HIGHER
annual revenues (or LOWER costs when revenues are
equal), as well as LONGER USEFUL LIVES.
• Unequal lives among feasible alternatives somewhat
complicates their analysis and comparison.
• To make engineering economy studies in such cases,
we must adopt some procedure that will put the
feasible alternatives on a COMPARABLE basis.
• Two types of assumptions regarding the analysis
period are employed:
o The Repeatability Assumption
o The Coterminated assumption 30
 THE REPEATABILITY ASSUMPTION
• The Repeatability assumption involves two main
conditions:
o The analysis period over which the alternatives
are being compared is either indefinitely long or
equal to a common MULTIPLE of the lives of the
alternatives.
o The economic consequences that are estimated
to happen in an alternative’s INITIAL life span will
happen also in ALL SUCCEEDING life spans
(replacements), if any, for each feasible
alternative.
• The repeatability assumption has LIMITED USE in
engineering practice because actual situations
seldom meet both conditions.
31
 EXAMPLE ON THE REPEATABILITY
ASSUMPTION
1. The following data have been estimated for
two feasible investments, A and B, for which
revenues as well as costs are known and which
have different lives. If the minimum attractive
rate of return is 10%, show which feasible
alternative is more desirable by using equivalent
worth methods. Use the repeatability
assumption

32
 EXAMPLE ON THE REPEATABILITY
ASSUMPTION

A B
Investment (First Cost) $3,500 $5,000
Annual Revenue 1,900 2,500
Annual Cost 645 1,383
Useful life (years) 4 8
Salvage value at the end of useful life 0 0

33
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (PW)
Cash Flow Diagram of Alternative A S=$0
AR=$1,900

0 1 2 3 4 5 6 7 8

P0A=$3,500 AC=$645

F =$3,500
USING THE PW: 4A

Lowest common multiple is 8 yrs, which will be taken to be the study period
PWA (10%) = - P0A - AC (P/A, 10%, 8) + AR (P/A, 10%, 8) + 0 - (Reinvestment at year
4, P4A). Thus remains 4 years to complete, so that n will be 4, not 8 at this time.

Where AC = Annual Cost; AR = Annual Revenue and P0A is the First cos at year 0).
For the REINVESTMENT, the study period shows that A will be REINVESTED one
more time at the 4th year (Thus, N=4). Its negative because it is taken out of pocket,
34
just like P0.
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (PW CONTD)
Thus, Reinvestment (P4A) = - F4A (P/F, i%, 4); where (F4A= P0A)
PWA (10%) = -P0A - AC (P/A, 10%, 8) + AR (P/A, 10%, 8) + 0 - F4A
(P/F, i%, 4)
PWA (10%) = - 3500 - 645 (P/A, 10%, 8) + 1900 (P/A, 10%, 8) + 0
- 3500 (P/F, 10%, 4)
= - 3500 - 645 (5.335) + 1900 (5.335) + 0 - 3500 (0.6830)
= - 3500 – 3441.075 + 10136.5 + 0 – 2390.5
= $804.925

35
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (PW)
Cash Flow Diagram of Alternative B S=$0
AR=$2,500

0 1 2 3 4 5 6 7 8

P0B=$5,000
AC=$1383
USING THE PW:
Lowest common multiple is 8 yrs, which will be taken to be the study
period
PWB (10%) = - P0B - AC (P/A, 10%, 8) + AR (P/A, 10%, 8) + 0
Where AC = Annual Cost; AR = Annual Revenue and P0B is the First cost
(investment of B).
But for this case, there is no reinvestment because useful life=study period.36
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (PW CONTD)
PWB (10%) = - P0B - AC (P/A, 10%, 8) + AR (P/A, 10%, 8)
+0
PWB (10%) = - 5000 - 1383 (P/A, 10%, 8) + 2500 (P/A,
10%, 8) + 0
= - 5000 - 1383 (5.335) + 2500 (5.335) + 0
= - 5000 – 7378.305 + 13337.5 + 0
= $959.195
Decision: Since to make decision, you choose the
largest. Therefore, Alternative B would be selected
because it has the highest PW. 37
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (AW)
Using Annual Worth Method (there are two methods in this
case)
Method I: From Present Worth/Future Worth Method
FW= AW (F/A, i%, N); FW= PW (F/P, i%, N);
PW= AW (P/A, i%, N); PW= FW (P/F, i%, N)
AW= PW (A/P, i%, N); AW= FW (A/F, i%, N);
Since its PWA that has already been calculated:
AW= PW (A/P, i%, N);
AWA (10%) = [PWA (10%)] [(A/P, 10%, N)];
AWA (10%) = [NPWA (10%)] [(A/P, 10%, 8)]; = [$804] [0.1874]
= $150.6696 ~~ $151 38
 SOLUTION TO EXAMPLE ONE USING
REPEATABILITY ASSUMPTION (AW)
AWB (10%) = [PWB (10%)] [(A/P,
10%, 8)]
= [$959.195] [0.1874]
= $179.7531~~ $180
Decision: Alternative B would also
be selected because it has the
highest AW.
39
 EXERCISE TWO ON REPEATABILITY
2. A selection is to be made between two structural designs.
Because revenues do not exist (or can be assumed to be equal),
only negative cash flows (costs) are shown as follow:

Using the repeatability assumption, determine which structure is

better if the MARR is 15%, use (a) PW (b) AW

40
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (PW)
Cash Flow Diagram of Structure M
S=$0

0 1 2 3 10 20 30 50
40

P0M=$12,000
AC=$2,200
USING THE PW: F10,20,30,40M=$12,000
Lowest common multiple is 50 yrs, which will be taken to be the study period
PWM (15%) = - P0M - AC (P/A, 15%, 50) + 0 (P/F, 15%,50) - Reinvestments
Where AC = Annual Cost; AR = Annual Revenue and P0M is the First cost
(investment of M).
For the REINVESTMENT, the study period shows that M will be REINVESTED
three more times at the 10th, 20th, 30th and 40th year (Thus, N=10, 20, 30 and
41
40). Its negative because it is taken out of pocket, just like P0M.
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (PW CONTD)
Thus, Reinvestment = - F10M (P/F, i%,
40) - F20M (P/F, i%, 30) - F30M (P/F, i%,
20) - F40M (P/F, i%, 10)
PWM (15%) = - P0M - AC (P/A, 15%, 50)
+ 0 - F10M (P/F, i%, 40) - F20M (P/F, i%,
30) - F30M (P/F, i%, 20) - F40M (P/F, i%,
10)
PWM (15%) = -$ 30,579.76 42
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (PW)
Cash Flow Diagram of Structure N
S=$10,000

0 1 2 3 4 5 25 50
49

P0M=$40,000
AC=$1,000
USING THE PW: F25N=$40,000
Lowest common multiple is 50 yrs, which will be taken to be the study period
PWN (15%) = - P0N - AC (P/A, 15%, 50) + 10,000 (P/F, 15%,25) -
Reinvestments
Where AC = Annual Cost; AR = Annual Revenue and P0N is the First cost
(investment of N).
For the REINVESTMENT, the study period shows that N will be REINVESTED one
43
more time at the 25 year (Thus, N=25). Its negative because it is taken out of
th
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (PW CONTD)
Thus, Reinvestment = - F25N (P/F, i%, 25)
PWN (15%) = -P0N - AC (P/A, 15%, 50) + 10,000 (P/F, 15%,25)
- F25N (P/F, 15%, 25)
PWN (15%) = -40,000- 1,000 (P/A, 15%, 50) + 10,000 (P/F,
15%,25) - 40,000 (P/F, 15%, 25)
= -40,000 - 1,000 (6.661) + 10,000 (0.0304) - 40,000
(0.0304)
= - 40,000 – 6661 + 304 – 1216 ;
PWN (15%) = -$47,573
Decision: Since to make decision, you choose the highest, Therefore,
structure M would be selected because it has the largest PW. 44
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (AW)
Using Calculated Annual Worth Method (there are two
methods in this case):
Method I: From Present Worth/Future Worth Method
FW= AW (F/A, i%, N); FW= PW (F/P, i%, N);
PW= AW (P/A, i%, N); PW= FW (P/F, i%, N)
AW= PW (A/P, i%, N); AW= FW (A/F, i%, N);
Since its PWA that has already been calculated:
AWM= PWM (A/P, i%, N); Where N is the LCM
AWM (15%) = [PWM (15%)] [(A/P, 15%, N)];
AWM (15%) = [NPWM (15%)] [(A/P, 15%, 50)];
= -[$30,579.76] [0.1501]; AWM = - $4,590.022 ~~ - $4,590
45
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (AW)
AWN (15%) = [PWN (15%)] [(A/P, 15%, 50)]
= [-$47,573] [0.1501] = -
$7,140.7073~~ -$7,141
Since to make decision, you find the absolute
values of the net values of the alternatives, then
choose the highest, if revenues (positive
answers), and choose the lowest, if costs
(negative answers) are involved.
Decision: Structure M would also be selected
because it has the lowest AW. 46
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (AW CONTD)
Method II: Using Capital Recovery of Costs (CR)
Capital Recovery (CR) = I (A/P, i%, N) – S (A/F, i%, N)
I = Initial Investment for the Project
S = Salvage (Residual) value at end of study period
N = Project Study Period (Corresponding useful life)
Therefore, AW = R- E – CR
Where R = Annual equivalent receipts (or Savings)
E = Annual equivalent Expenses
CR = Annual equivalent Capital Recovery
47
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (AW CONTD)
CRM = I (A/P, i%, N) – S (A/F, i%, N);
Where N is the corresponding useful life of M and SM=0
= 12,000(A/P, 15%, 10) – 0 (A/F, 15%, 10)
= 12,000 (0.1993) – 0
= $2,391.6
Therefore, AWM (15%) = RM- EM – CRM
= -2,200 - 2, 391.6
AWM (15%) = - $4,591.6 ~~ - $4.592

48
 SOLUTION TO EXAMPLE TWO USING
REPEATABILITY ASSUMPTION (AW CONTD)
CRN = I (A/P, i%, N) - S (A/F, i%, N);
Where N is the corresponding useful life of N and
SN=10,000
= 40,000(A/P, 15%, 25) - 10,000 (A/F, 15%, 25)
= 40,000 (0.1547) - 10,000 (0.00470)
= 6,188 - 47 = -6,141
Therefore, AWN (15%) = RN - EN -CRN
= -1,000 + 6,141
AWN (15%) = $5,141
Decision: Structure M would also be selected. 49
 THE COTERMINATION ASSUMPTION(Study
Period<Useful Life)
• This technique truncates the
alternative at the end of the
study period, using an
estimated market value. This
assumes that the disposable
assets will be sold at the end of
the study period at that value.
50
 EXERCISE THREE ON COTERMINATION
3. Boiler A Boiler B
Investment Cost $50,000 $120,000
Useful life (years) 20 40
Salvage value@ $10,000 $20,000
end of useful life
Annual Costs $9,000 $6,000

Suppose the study period had been stated to be 20 years, and

the MARR is 10%. Which boiler would you recommend by using
cotermination assumption, assuming market value of B(MVB) at
the end of year 20 (EOY20) is $50,000. Use AW method.

51
 SOLUTION TO EXERCISE THREE ON
COTERMINATION
Please draw the cash flow diagrams for the alternatives.
S=$10,000
For Alternative A

0 1 2 3 4 5 10 20
15

P0A=$50,000
AC=$9,000

For Alternative B
MVB@EOY20=$50,000

0 1 2 3 4 5 10 20
15

P0B=$120,000
AC=$6,000
52
 SOLUTION TO EXERCISE THREE ON
COTERMINATION
This cotermination assumption applies only to Alternative
B, which has a forty-year useful life (twenty years less than
the study period).
AW(10%)A=-50,000(A/P,10%,20) - 9,000 + 10,000 (A/F,
10%,20)
= - 14,700
AW(10%)B=-(120,000(A/P,10%,20) - 6,000 + 50,000
(A/F,10%,20))
= -19,225
Decision: Therefore, select Boiler A to minimize costs.
53
 EXERCISE FOUR ON COTERMINATION
4. 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. If the MARR=10% per year, show which alternative
is more desirable by using cotermination assumption if the
analysis period of 6 years is used. Use FW method.

A B
Capital Investment $3,500 $5,000
Annual Cash Flow 1,255 1,480
Useful life (years) 4 6
Market value at 0 0
end of useful life

54