Engineering Economic Analysis Canadian Edition Chapter 8: Incremental Analysis

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.

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. High cost alternative  Low cost alternative = Difference between alternatives

Graphical Solution

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.

Incremental Analysis

Choosing an Analysis Method MARR Computations* Explanation NPV Required for calculation Simpler Depends EACF IRR For comparison More complex *Not an issue when using a spreadsheet. Do what the Organization requires. Occasionally augment with alternate methods where the method adds beneficial information.

Suggested Problems 8-4, 5, 18, 20, 23, 29, 31.