Alternative Selection
Construction Engineering 221
Economic Analysis
Alternative Selection
• Methods for comparing alternatives:
– Present worth method- best suited for:
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Same function
Mutually exclusive
Equal lives
Creating a rank order of values
Rules are probably not as rigid as the book states
Alternative Selection
• Methods for selections
– Capitalized cost
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Similar to present worth
Use for “infinitely lived” assets
Discount actors approach i when n is large
Used for large engineering projects
Compare maintenance costs of highways, dams,
etc
Alternative Selection
• Methods for selection
– Annual cost method
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Similar purpose
Unequal lives
Infinite renewal
Can generate a desirability ranking
Also called capital recovery method
Used in value engineering
Coverts all costs to annualized amount (EUAC)
Alternative Selection
• Method for selection
– Benefit-cost ratio
• When costs and benefits accrue to different groups
• NPV of all benefits/NPV of all costs regardless of
who pays or receives
• Can be difficult to assign costs and benefits
• Must have ratio greater than 1.0 to justify project
• Not generally used to rank alternatives (although it
can be)
• Used primarily in transportation planning
Alternative Selection
• Methods of selection
– Rate of Return Method
• MARR is a standard or constraint
• Compare actual ROR to MARR
• Used to narrow number of alternatives tot hose
exceeding a pre-set standard return level