Choosing the Best Alternative in Engineering Economic Analysis

Practice vocabulary flashcards covering graphical methods, choice tables, and incremental rate of return analysis for selecting among mutually exclusive engineering alternatives.

Mutually Exclusive Alternatives

A set of candidate alternatives from which a decision-maker can select at most one.

Line of Best Values

The upper envelope (for present worth or EUAW) or lower envelope (for EUAC) plotted across interest rates that indicates which alternative is best over each interest rate range.

Choice Table

A structured summary table indicating which project alternative is optimal over defined ranges of interest rates or Minimum Attractive Rates of Return ($\text{MARR}$).

Changeover Points

The intersection points where the economic evaluation curves of two competing alternatives cross, marking the interest rate threshold where the preferred alternative changes.

Graphical Evaluation Procedure for Mutually Exclusive Alternatives

A five-step method consisting of: 1. Identify all alternatives; 2. Build $\text{NPW}$, $\text{EUAW}$, or $\text{EUAC}$ graph on the same axes; 3. Examine line of best values to determine the best alternative over each range; 4. Determine intersection/changeover points; and 5. Create a choice table.

EUAC Minimization Criterion

The decision rule applied to cost-only alternatives stating that the alternative with the lowest Equivalent Uniform Annual Cost ($\text{EUAC}$) is the best choice.

EUAW Curve Linearity

The graphical characteristic where Equivalent Uniform Annual Worth ($\text{EUAW}$) curves plotted against interest rate remain closer to linear than Present Worth ($\text{PW}$) curves.

Incremental Analysis

An economic evaluation procedure based on pair-wise comparisons where alternatives are ordered by increasing initial cost and higher-cost challengers are evaluated against an established defender using incremental cash flows.

Defender (Incremental Analysis)

The currently accepted baseline alternative (initially the 'Do Nothing' alternative) that an alternative with higher initial cost must economically justify replacing.

Challenger (Incremental Analysis)

The next higher-cost alternative evaluated against the current defender to determine if its incremental rate of return ($\Delta\text{IRR}$) exceeds the $\text{MARR}$.

'Do Nothing' Alternative

The baseline option that involves zero expenditure and zero benefit ($\text{PW} = 0$), which serves as the initial defender in incremental analysis and is preferred when all alternatives yield an $\text{IRR} < \text{MARR}$.

Initial Cost Ordering Rule

The mandatory first step in incremental rate of return analysis requiring that all alternatives be arranged in order of strictly increasing initial cost before conducting pair-wise comparisons.

Incremental Rate of Return ($\Delta\text{IRR}$)

The interest rate at which the incremental present worth between a higher-cost challenger and a defender equals zero ($\Delta\text{PW} = 0$).

Known MARR Analysis Guideline

The decision guideline stating that when the $\text{MARR}$ is known, Present Worth ($\text{PW}$) or equivalent annual methods are easier to compute than incremental Internal Rate of Return ($\text{IRR}$).

Unknown or Approximate MARR Analysis Guideline

The decision guideline stating that when the $\text{MARR}$ is unknown or known only approximately, a graphical approach resulting in a choice table is often sufficient, using spreadsheets to solve for intersection limits.

Example 8-7 Incremental Analysis Selection

Given a $\text{MARR}$ of $10\%$ over $20\,\text{years}$, Alternative D has an $\text{IRR}_D = 9.94\% < 10\%$ (keeping 'Do Nothing' as defender), Alternative B has an $\text{IRR}_B = 19.96\% > 10\%$ (becoming the new defender), and challengers A ($\Delta\text{IRR}_{A-B} = 9.63\%$), C ($\Delta\text{IRR}_{C-B} = 6.08\%$), and E ($\Delta\text{IRR}_{E-B} = 0.67\%$) all fail to exceed $10\%$, making Alternative B the final selection.