1. Construction Engineering 221 Economic Analysis
Alternate Selection
Construction Engineering 221
Economic Analysis

2. Alternate Selection
Ranking multiple projects when funds are sufficient to invest in more than one choice
Various ranking methods-
Largest present worth (NPV) descending
Lowest annual cost ascending
Smallest capitalized cost ascending
Can use ROR to order, but need to then do an incremental analysis

3. Alternate Selection Incremental analysis
Calculate the rate of return on the additional investment
Start by ordering all investments that exceed MARR in order of increasing initial cost
Cash flow from least cost option is subtracted from cash flows for higher priced option
Additional cash flow is compared to additional investment and tested against MARR

4. Alternate Selection
If all incremental rates or return exceed MARR, select option(s) with highest initial investment
Can be used in a similar way with Cost-Benefit ratios, but is seldom done

5. Alternate Selection
If alternatives have different lives, must consider the length of use (analysis horizon) and not the life of the asset.
If asset use is completed before life is used up, must know the disposition (salvage) value
If asset life will not extend to asset use, then must know replacement schedules

6. Alternate Selection
Multiple asset lives are just series of present value calculations set to equivalent use periods
Infinite horizon problems are just capitalized cost problems
Different lived assets require only minor adaptation from the types of problems we have done so far- must incorporate a salvage (P/F) or renewal (F/A*P/F) factor