8

COMPARISON AND
SELECTION AMONG
ALTERNATIVES II

Muhammad Aljalali, Ph.D.

 The Study (Analysis) Period
2

Case 1:
Useful lives are the same for all alternatives and equal to
the study period.

Case 2:
Useful lives are different among alternatives and at least
one does not match the study period.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
3

Repeatability assumption
Study analysis period

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
4

Repeatability Assumption
1. The study period over which the alternatives
are being compared is either indefinitely long
or equal to a common multiple of the lives of
the alternatives.
2. The economic consequences that are estimated
to happen in an alternatives initial useful life
span will also happen in all succeeding life
spans (replacements).

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
5

Repeatability Assumption
B A

N=4 N=3
Common
multiple A
3 6 9 N = 12

B
4 8 N = 12

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
6

Study Period (Coterminated Assumption)

1. Useful life > Study period

2. Useful life < Study period
a) Cost alternatives,
b) Investment alternatives

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
7

Study Period < Useful Lives

Study period = 4 years

SA
A
N=4 N=5
SB

B
N=4 N=8

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
8

Useful Life A < Study Period < Useful Life B

Study Period = 7 years

SA
A
N=5 N=7

SB

B N=8
N=7
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
9

Study Period > Useful Lives

Study Period = 10 years

A
N=5 N = 10

SB

B
N=8 N = 10

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
10

Example 9.1
The following data have been estimated for two
mutually exclusive investment alternatives, A and B,
associated with a small engineering project for which
revenues as well as expenses are involved.
they have useful lives of four and six years,
respectively.
If the MARR = 10% per year, show which
alternative is more desirable by using equivalent
worth methods.
Use repeatability assumption.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
11

Example 8.1

A B
Capital investment $3,500 $5,000
Annual revenue 1,900 2,500
Annual expenses 645 1,020
Useful life (years) 4 6
Market value at end of useful life 0 0

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
12

Solution 8.1
A B
$1,255 $1,480

N=4 N=6

$3,500 $5,000

Using PW method:
Using repeatability assumption,
common multiple = 12 years
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
13

Solution 8.1
A
$1,255

4 8 N = 12

$3,500 $3,500 $3,500

PW(10%)A = $3,500
$3,500 (P/F,10%,4)
$3,500 (P/F,10%,8)
+ $1,255 (P/A,10%,12)
PW(10%)A = $1,028
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
14

Solution 8.1
B
$1,480

6 N = 12

$5,000 $5,000

PW(10%)B = $5,000
$5,000 (P/F, 10%, 6)
+ $1,480 (P/A, 10%, 12)
PW(10%)B = $2,262
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
15

Solution 8.1
A B
$1,255 $1,480

N=4 N=6

$3,500 $5,000

PW(10%)A = $1,028 PW(10%)A < PW(10%)B

PW(10%)B = $2,262 Alternative B is desirable

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
16

Solution 8.1
A B
$1,255 $1,480

N=4 N=6

$3,500 $5,000
Using AW method:
Using repeatability assumption (useful life)
AW(10%)A = $1,028 (A/P,10%,12) = $151
AW(10%)B = $2,262 (A/P,10%,12) = $332
AW(10%)A < AW(10%)B Alternative B is desirable
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
17

Solution 8.1
A B
$1,255 $1,480

N=4 N=6

$3,500 $5,000
Using AW method:
without repeatability assumption,
AW(10%)A = $3,500 (A/P,10%,4) + $1,255 = $151
AW(10%)B = $5,000 (A/P,10%,6) + $1,480 = $332
AW(10%)A < AW(10%)B Alternative B is desirable
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
18

Example 8.2
You are a member of an engineering project team that is designing a new
processing facility.
Your present design task involves the portion of the catalytic system which
requires pumping a hydrocarbon slurry that is corrosive and contains
abrasive particles.
For final analysis and comparison, you have selected two fully lined slurry
pump units, of equal output capacity, from different manufacturers.
Each unit has the larger diameter impeller required and an integrated
electric motor with solid state controls.
Both units will provide the same level of service (support) to the system
but have different useful lives and costs.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
19

Example 8.2
Pump Model
SP240 HEPS9
Capital investment $33,200 $47,600

Annual expenses
Electrical energy -2,165 -1,720

Maintenance $1,100 in year 1, and $500 in year 4, and

increasing increasing
$500/yr thereafter $100/yr thereafter
Useful life (years) 5 9

Salvage value (end of useful life) 0 5,000

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
20

Example 8.2

The new processing facility is needed by your firm at least

as far into the future as the strategic plan forecasts
operating requirements.
The MARR is 20% per year.
Based on this information, which model slurry pump should
be select?

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
21

Example 8.2

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
22

Solution 8.2

Repeatability assumption using AW method:

AW(20%)SP240 = -$33,200 (A/P,20%,5) - $2,165
[$1,100 + $500 (A/G,20%,5)] = -$15,187
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
23

Solution 8.2

Repeatability assumption using AW method:

AW(20%)HEPS9 = -$47,600 (A/P,20%,9) + $5,000 (A/F,20%,9)
$1,720 - [$5,00 (P/A,20%,6) + $100 (P/G,20%,6)]
(P/F, 20%, 3) (A/P, 20%, 9) = -$13,622
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
24

Solution 8.2

Repeatability assumption using AW method:

AW(20%)SP240 = $15,187
AW(20%)HEPS9 = $13,622
AW(20%)HEPS9 > AW(20%)SP240 Alternative HEPS9 is preferred
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
25

The Imputed Market Value Technique

Applied when: study period < Useful life

The imputed (implied) market value.
Based on logical assumption about the value of the
remaining useful life of an asset.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
26

Example 8.3

Resolve Example 8.2 using:

a) Study period of 5 years,
b) What is the market value of pump model HEPS9 at
the end of year five that make two alternatives
equivalent?

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
27

Example 8.3(a)

Study period = 5 years using PW method:

PW(20%)SP240 = $33,200 [$2,165 + $1,100 + $500 (A/G,20%,5)]
(P/A,20%,5) = $45,417
PW(20%)HEPS9 = $47,600 $1,720 (P/A,20%,5)
$5,00 (P/F,20%,4) $600 (P/F,20%,5) = $53,226

PW(20%)SP240 > PW(20%)HEPS9 Alternative SP240 is preferred

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
28

Example 8.3(b)

Market value of HEP9

PW(20%)SP240 = $45,417
PW(20%)HEPS9 = $53,226
PW(20%)SP240 = PW(20%)HEPS9
$45,417 = $53,226 + MV (P/F,20%,5)
$45,417 = $53,226 + MV (0.4019)
MV = ($53,226 - $45,417) / 0.4019 = $19,430
If we can achieve MV of HEPS9 at the end of year five greater than
$19,430 then HEPS9 is preferred.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
29

Example 8.4

A selection to be made between two structural designs.

Because revenues do not exist (or can be assumed to
be equal), only negative cash flow amounts (costs) and
the market value at the end of useful life are
estimated, as follows:

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
30

Example 8.4
Structure M Structure N
Capital Investment $12,000 $40,000
Market Value 0 $10,000
Annual Expenses $2,200 $1,000
Useful life (years) 10 25

Using the repeatability assumption and the CW method

of analysis, determine which structure is better if the
MARR is 15% per year.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Useful Lives are Unequal among the
Alternatives
31

Solution 8.4
Structure M Structure N
Capital Investment $12,000 $40,000
Market Value 0 $10,000
Annual Expenses $2,200 $1,000
Useful life (years) 10 25

AW(15%)M = $12,000 (A/P, 15%, 10) $2,200 = $4,592

AW(15%)N = $40,000 (A/P,15%,25) + $10,000 (A/F,15%,25)
$1,000 = $7,141

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Useful Lives are Unequal among the
Alternatives
32

Solution 8.4
Structure M Structure N
Capital Investment $12,000 $40,000
Market Value 0 $10,000
Annual Expenses $2,200 $1,000
Useful life (years) 10 25

CW(15%)M = AWM / i = $4,592 / 0.15 = $30,613

CW(15%)N = AWN / i = $7,141 / 0.15 = $47,607

Based on the CW of each structural design, alternative M should be selected

because it has the lesser negative value ($30,613).
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Personal Finance
33

Example 8.5
You have decided to purchase a new automobile with a hybrid-fuel
engine and a six-speed transmission.
After the trade-in of your present car, the purchase price of the new
automobile is $30,000.
This balance can be financed by an auto dealer at 2.9% APR with
payments over 48 months.
Alternatively, you can get a $2,000 discount on the purchase price if
you finance the loan balance at an APR of 8.9% over 48 months.
Should you accept the 2.9% financing plan or accept the dealers
offer of a $2,000 rebate with 8.9% financing? Both APRs are
compounded monthly.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Personal Finance
34

Solution 8.5
The objective is to minimize the monthly car payment.

2.9% financing monthly payment:

$30,000(A/P,2.9%/12,48 months) = $30,000(0.0221) = $663.00 per month

8.9% financing monthly payment:

$30,000(A/P,8.9%/12,48 months) = $28,000(0.0248) = $694.90 per month

Therefore the 2.9% payment is preferred.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Personal Finance
35

Example 8.6
Suppose you start a savings plan in which you save $500 each year for 15
years. You make your first payment at age 22 and then leave the
accumulated sum in the savings plan (and make no more annual payments)
until you reach age 65, at which time you withdraw the total accumulated
amount. The average annual interest rate youll earn on this savings plan is
10%.
A friend of yours (exactly your age) from Minnesota State University waits
10 years to start savings plan. (That is, she is 32 years old.) She decides to
save $2,000 each year in an account earning interest at the rate of 10%
per year. She will make these annual payments until she is 65 years old, at
which time she will withdraw the total accumulated amount.
How old will you be when your friends accumulate savings amount
(including interest) exceeds yours? State any assumptions you think are
necessary.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Personal Finance
36

Solution 8.6

F = $500(F/A,10%,15)(F/P,10%,N 36)

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Personal Finance
37

Solution 8.6

F = $2,000(F/A,10%,N 31)

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Personal Finance
38

Solution 8.6
N = 65 years
Your plan:
F65 = $500(F/A,10%,15)(F/P,10%,29)
F65 = $500(31.772)(15.863) = $251,999.62

Your friends plan

F 65= $2,000(F/A,10%,34) = $2,000(245.477) = $490,954
Your friend's plan is better than yours.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Personal Finance
39

Solution 8.6
N = ? (when the two plans are equal) (F = F )
N Your Plans F Friends F
36 $15,886 $12,210
38 $19,222 $18,974
39 $21,145 $22,872
40 $23,259 $27,159
By the time you reach age 39, your friends accumulated savings will exceed
yours.
If you had deposited $1,000 instead of $500, you would be over 76 years
when your friends plan surpassed yours.
Moral: Start savings early.
8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.
 Post Evaluation of Results
40

Are the planned objectives and milestones being

(or have been) attained by the project?
Is corrective action required to bring the project in
line with the expectations?
What can be learned from the selected (and
implemented) project that will improve estimating
for future projects?

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.

 Homework
41

Self homework:
Examples 6-10, 6-14, 6-16 in the

textbook.
Class homework:
Problems 6-34, 6-35, 6-36, 6-38, 6-
39, 6-51, 6-63, 6-64, 6-65, 6-66.

8. Comparison and Selection among Alternatives II Muhammad Aljalali Ph.D.