chapter 8: incremental analysis engineering economic analysis canadian edition
TRANSCRIPT
Chapter 8:
Incremental Analysis
Engineering Economic AnalysisCanadian Edition
8-2EECE 450 — Engineering Economics
Chapter 8 … Defines incremental analysis and describes
how it modifies the NPV, EACF, and IRR methods we have covered previously.
Develops a graphical technique for solving problems involving mutually exclusive choices.
8-3EECE 450 — Engineering Economics
High cost alternative Low cost alternative = Difference between alternatives
Incremental Analysis Useful for analyzing two or more alternatives. Defined as the examination of differences
between alternatives to determine if the increased costs are justified by the increased benefits.
8-4EECE 450 — Engineering Economics
Graphical SolutionSystem A System B B-A
Initial cost: $125,000 $165,000Annual net benefit: $35,000 $37,500
Salvage value: $12,500 $5,000Lifetime (years): 8 12
MARR: 11.5%Equal lifetime= 24
NPV (equal)= $91,134.85 $94,201.78 $3,066.93IRR (equal)= 23.14% 20.33% 12.65%
NPV Comparison for Systems A & B
-$100,000
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
0% 5% 10% 15% 20% 25%
Discount Rate
Net
Pre
sen
t V
alu
e
NPV A
NPV B
8-5EECE 450 — Engineering Economics
Elements of Incremental Analysis Identify all acceptable alternatives that fulfill
the required system outcomes. Construct an NPV profile (graph of NPV
versus discount rate) for the alternatives. Determine which alternative maximizes the
NPV at various levels of the discount rate (MARR).
Determine the discount rate values at which the maximum NPV changes from one alternative to another.
Create a choice table to summarize.
8-6EECE 450 — Engineering Economics
Incremental AnalysisA B C D E
Initial investment: -$4,000.00 -$2,000.00 -$6,000.00 -$1,000.00 -$9,000.00Uniform Annual Benefits: $639.00 $410.00 $761.00 $117.00 $785.00
Uniform Annual Costs: $0.00 $0.00 $0.00 $0.00 $0.00Life (years): 20 20 20 20 20
Salvage: $0.00 $0.00 $0.00 $0.00 $0.00MARR: 6%
IRR= 15.00% 19.96% 11.15% 9.94% 6.01%NPV= $3,329.28 $2,702.67 $2,728.61 $341.98 $3.89
Accept Alternative= A
Alternatives
Alternative NPV versus Discount Rate
-$8,000
-$6,000
-$4,000
-$2,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
0% 5% 10% 15% 20% 25%
Discount Rate
Ne
t P
res
en
t V
alu
e
NPV A
NPV B
NPV C
NPV D
NPV E
8-7EECE 450 — Engineering Economics
Choosing an Analysis Method
Method MARR Computations* Explanation
NPV Required for calculation
Simpler Depends
EACF Required for calculation
Simpler Depends
IRR For comparison
More complex Depends
Do what the Organization requires. Occasionally augment with alternate methods where the method adds beneficial information.
*Not an issue when using a spreadsheet.
8-8EECE 450 — Engineering Economics
Suggested Problems 8-4, 5, 18, 20, 23, 29, 31.