Choosing the Best
Alternative
Chapter 8: Newnan, Eschenbach, and Lavelle
Dr. Hurley’s AGB 555 Course
Dealing With Multiple
Alternatives for Investment
• When multiple alternatives exist for investment, it is useful to
graph that investment in terms of interest rate and present
worth (PW), equivalent uniform annual cost (EUAC), or
equivalent uniform annual worth (EUAW)
• From this you can develop a choice table that tells you which
alternative to choose at a particular rate
• When you dealing with PW and EUAW you choose the highest value,
while EUAC would require you to choose the lowest value
Elements in Comparing
Mutually Exclusive Alternatives
• Identify all alternatives
• Make sure to include the status quo or do nothing option in the
analysis
• Graph PW, EUAC, or EUAW for each alternative on the same
axis
• Examine the envelope (best line) for particular ranges of
interest rates where the ranges are found by looking at where
alternatives cross each other
• Calculate the changeover points for when one alternative
begins to exceed another alternative
• You can do this visually or more accurately by calculating the
incremental internal rate of return for the two crossing
alternatives
• Create a choice table
Incremental ChallengerDefender Comparisons
• Alternatives are ranked from lowest cost to highest cost
• The lowest cost alternative starts out as the first defender
• Make sure the initial alternative has an IRR greater than MARR
• Next calculate the incremental internal rate of return between
the two lowest cost alternatives that have not been excluded
• Choose the best alternative based on the rules given in the
previous chapter
• The one that is considered the best becomes the defender for the
next pairwise comparison
• Continue the comparison until no more can be made
Spreadsheet Tools for Examining
Multiple Alternatives
• There are two useful tools in Excel to help you graphically
examine multiple alternatives
• Goal Seek allows you to solve for interest rates that cannot be
easily solved for by hand/formula
• Data Table allows you to run many different alternative interest
rates at a single time which will allow you to develop your graphs
more quickly especially when your returns are not constant over
the life of the investment