LECTURE 11

COMPARING ALTERNATIVES
ESECON230
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 COMPARING ALTERNATIVES

The fundamental principle on which alternative should be used is stated as follows.

“The alternative that requires the minimum investment of
capital and will produce satisfactory functional result will always be
used unless there are definite reasons why an alternative requiring a
larger investment should be adopted.”
METHODS OR PATTERNS IN
COMPARING ALTERNATIVES
1. ANNUAL COST (AC) METHOD
To apply this method, the annual cost of alternatives including
interest on investment is determined. The alternative with the least
annual cost is chosen. This pattern, like the rate of return on
additional investment pattern, 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
2. RATE OF RETURN ON ADDITIONAL
INVESTMENT METHOD

ROR≥ MARR (Choose the alternative with larger capital)

ROR ≤ MARR (Choose the alternative with lesser capital investment)

If the rate of return on additional investment is satisfactory, then,

the alternative requiring a bigger investment is more
economical and should be chosen.
3. PRESENT WORTH COST (PWC) METHOD

In comparing alternatives by this method, determine the

present worth of the net cash outflows for each alternative for
the same period of time. The alternative with least present worth of
cost is selected.
In this method, the present worth of all cash flows each
alternative is computed for the same study period.
SAMPLE PROBLEM
Based on estimates the data for two types of bridges with different
lives are given. If the minimum attractive rate of return 9%,
determine which project is more desirable
TIMBER BRIDGE STEEL BRIDGE
First Cost P 50,00 P 140,000
Salvage P 2000 P 10, 000
Life in years 12 years 36 years
Annual Maintenance P 6000 P 2500
Sol’n:
By Annual Cost Method

Timber Bridge: Steel Bridge:

TOTAL P 12,883.23 TOTAL P 15,650.56

AC of TB < AC of SB  choose Timber Bridge

By ROR on Additional Investment
Timber Bridge: Steel Bridge:

TOTAL P 8,383.23 TOTAL P 3,050.56

Additional Investment on steel Bridge = P 140,000 – P 50, 000 = P 90,000

ROR on Additional Investment < MARR

 choose Timber Bridge
By PWC Method
Timber Bridge:
Time: 36 years

PW of First Replacement
First

PW of Second Replacement
Second

Third
TOTAL P 137,767.57
TOTAL P 1,053.76
By PWC Method
Steel Bridge:
Time: 36 years

First

TOTAL P 166,529.41
TOTAL P 449.41

PWC of Timber Bridge > PWC of Steel Bridge

 choose Timber Bridge
Seatwork
Assignment
Choose from the two machines which is more economical. Money is worth at least
16%
Machine A Machine B
First Cost P 8,000 P 14,000
Salvage Value 0 P 2,000
Annual Operation P 3,000 P 2,400
Annual Maintenance P 1,200 P 1,000
Taxes and Insurance 3% 3%
Estimated Life 10 YEARS 15 YEARS
 THANK YOU!
ESECON230
SCHEDULE

INSTRUCTOR