Engineering Economic Analysis Chapter 8 INCREMENTAL ANALYSIS Partial Coverage Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Incremental Analysis Required for examining three or more alternatives. Defined as the examination of differences between alternatives to determine if the increased costs are justified by the increased benefits. This course: only consider Incremental Rate of Return High cost alt. - Low cost alt. = Difference between alt. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Elements of Rate of Return Analysis Identify all acceptable alternatives that fulfill similar system outcomes. Arrange the alternatives in ascending order of investment. Compute the rate of return for each alternative. Discard alternatives where ROR < MARR. Make a pair-wise analysis of the contender and present selection. For investment: If ΔROR ≥ MARR select the contender If ΔROR < MARR keep the present selection Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Choosing an Analysis Method MARR Computations* Explanation PW Required for calculation Less Depends AW ROR For comparison More *Not an issue when using a spreadsheet. Do what the Organization requires. Occasionally augment with alternate methods where the method adds beneficial information. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Engineering Economic Analysis Chapter 9 OTHER ANALYSIS TECHNIQUES Selected topics Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Four Topics Future worth analysis - Skip Benefit-cost ratio analysis - Skip Payback period - Yes Sensitivity and breakeven analysis - Skip Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Payback Period Important Points Approximate economic analysis method Prior to payback the effect of timing is ignored After payback all economic consequences are ignored Will not necessarily produce a recommended alternative consistent with equivalent worth and rate of return methods Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

How many years are required to get my money back? Payback Period The period of time required for the profit or other benefits of an investment to equal the cost of the investment. How many years are required to get my money back? Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Example 1 Consider two projects with the flows shown at the left Compute the cumulative cash flows for each For example, by the end of Yr 1 for Alt A, the Cumulative amount is -1000+200 = 800 The time at which the cumulative amount equals 0 is the payback period Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Example 1 We can see the Payback Period is between 2 and 3 years for both options Graphically, we can easily see that Alt B’s Payback period is smaller than Alt A’s Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.