Chapter 8: Incremental Analysis Engineering Economic Analysis Canadian Edition

8-2 Chapter 8 … nDefines incremental analysis and describes how it differs from NPV, EACF, and IRR methods. nDevelops a graphical technique for solving problems involving mutually exclusive choices.

8-3 High cost alternative  Low cost alternative = Difference between alternatives Incremental Analysis nUseful for analyzing two or more alternatives. nDefined as the examination of differences between alternatives to determine if the increased costs are justified by the increased benefits.

8-4 Graphical Solution

8-5 Elements of Incremental Analysis nIdentify all acceptable alternatives that fulfill the required system outcomes. nConstruct a graph of NPV versus discount rate for the alternatives. nDetermine the alternative for which the NPV is a maximum for various levels of the discount rate (MARR). nDetermine the discount rate values where the maximum NPV changes from one alternative to another. nCreate a choice table to summarize.

8-6 Incremental Analysis

8-7 Choosing an Analysis Method MethodMARRComputations*Explanation NPVRequired for calculation SimplerDepends EACFRequired for calculation SimplerDepends IRRFor comparison More complexDepends Do what the Organization requires. Occasionally augment with alternate methods where the method adds beneficial information. *Not an issue when using a spreadsheet.

8-8 Suggested Problems n8-4, 5, 18, 20, 23, 29, 31.