Alternate Selection
Construction Engineering 221
Economic Analysis

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

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

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

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

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