Chapter 8 Choosing the Best Alternative

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Chapter 8Choosing the Best Alternative
2
Chapter Outline

• Incremental Analysis
• Graphical Technique in Solving problems with
  Mutually Exclusive Alternatives
• Using Spreadsheets in Incremental Analysis

3
Learning Objectives

• Define Incremental Analysis
• Apply Graphical Technique in solving Problems
  with Mutually Exclusive Alternatives
• Use Spreadsheets in Incremental Analysis

4
Vignette Tapping into Controversy

• Tappan Zee Bridge in New York
• Opened in 1955
• Design capacity 100,000 vehicles/day
• Estimated useful life 50 years
• Original cost 81 million
• Current traffic 135,000 vehicles/day

• Options
• Upgrading the existing bridge (Cost Over 1
  Billion)
• Will not adequately alleviate traffic congestion
• Building a new bridge (Cost 4 Billion)
• 33 bigger than existing bridge
• Possible additions light-rail tracks,
  traffic-based toll collection

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Vignette Tapping into Controversy

• If light-rail lanes have to be included for
  environmental concerns, how does it affect the
  minimum cost of public works project?
• Electronic toll collection can improve traffic
  flow, but there could be ethical issues in
  setting the toll.
• Should individuals pay a different toll based on
  income or number of people in the vehicle?
• Should tolls change with time of day or amount of
  congestion?
• What do you view as the primary ethical issues
  surrounding concepts like urban sprawl, eminent
  domain, and sustainable development?

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Mutually Exclusive Alternatives

• Only one alternative may be implemented
• All alternatives serve the same purpose
• Objective of incremental analysis is to select
  the best of these mutually exclusive alternatives

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Incremental Analysis

• Could be applied to rate of return (IRR), present
  worth (PW), equivalent uniform annual cost
  (EUAC), or equivalent uniform annual worth (EUAW)
  approaches.
• Higher-cost alternative Lower-cost
  alternative Increment between them
• The defender is the best alternative identified
  so far in the process, and challenger is the
  next higher-cost alternative to be evaluated.
• For a set of N mutually exclusive alternatives,
  (N - 1) challenger/defender comparisons must be
  made from N(N-1)/2 possibilities.

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Example Incremental AnalysisStudent Snack Cart
When PW of ?0 then PW of High and Low must be
the same.
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Example Incremental AnalysisStudent Snack Cart
PW(High-Low)-3090700(P/A,I,5) Solve for i ?
i4.3
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Example 8-2 Incremental Analysis using Graphical
Comparison
IRRIncrement
IRRY
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Example 8-3 Incremental Analysis using Graphical
Comparison
IRRC-B2
If MARR 9.6, Choose Alt. A If 9.6
MARR2, Choose Alt. B If 2 MARR
0, Choose Alt. C
IRRB-A9.6
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Example 8-4 Incremental Analysis using Graphical
Comparison
If 6.3 MARR 0, Choose Titanium If 15.3
MARR 6.3, Choose Stainless If MARR
15.3, Choose Brass
IRRTitanium - Stainless 6.3
IRRStainless - Brass15.3
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Example 8-5 Incremental Analysis(with Do-Nothing
option)
IRRY-Z3.5
If MARR23, Choose Do-Nothing If
23MARR11, Choose X If 11MARR3.5, Choose
Z If 2MARR0, Choose Y
IRRZ-X11
IRRX23
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Example 8-5 Incremental Analysis(without
Do-Nothing option)
IRRY-Z3.5
If MARR11, Choose X If 11MARR3.5, Choose
Z If 2MARR0, Choose Y
IRRZ-X11
IRRX23
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Example 8-6 Incremental Analysis using Graphical
Comparison
If MARR20, Choose Do-Nothing If
20MARR11, Choose B If 11MARR2, Choose
A If 2MARR0, Choose C
IRRC-A2
IRRA-B11
IRRB20
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Example 8-7 Incremental Analysis using Pair-wise
Comparisons

• Rearrange the alternatives in order of increasing
  cost

• Calculate IRR of the least expensive alternative
  to see if it is better than Do Nothing at MARR
  of 10
• PWD 0 -1000 117 (P/A, IRRD, 20)
• IRRD 9.94 lt 10
• Do Nothing is preferred, and is still the
  Defender.

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Example 8-7 Incremental Analysis using Pair-wise
Comparisons

• Calculate IRR of the next alternative, B, to see
  if it is better than Do Nothing at MARR of 10
• PWB 0 -2000 410 (P/A, IRRB, 20)
• IRRB 19.96 gt 10
• Alternative B is preferred, and is the new
  Defender.

• Compare Defender B with the next alternative, A.
  This comparison must be made incrementally.
• PWA-B 0 -(4000-2000)(639-410)(P/A,
  IRRA-B,20)
• IRRA-B 9.63 lt 10
• Alternative B is preferred, and is still the
  Defender.

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Example 8-7 Incremental Analysis using Pair-wise
Comparisons

• Compare Defender B with the next alternative, C.
  This comparison must be made incrementally.
• PWC-B 0 -(6000-2000)(761-410)(P/A,
  IRRC-B,20)
• IRRC-B 6.08 lt 10
• Alternative B is preferred and is still the
  Defender.

• Compare Defender B with the next alternative, E.
  This comparison must be made incrementally.
• PWE-B 0 -(9000-2000)(785-410)(P/A,
  IRRE-B,20)
• IRRE-B 0.67 lt 10
• Alternative B is preferred, and is the final
  selection.

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Elements in Comparing Mutually Exclusive
Alternatives

• Identify all alternatives.
• Construct an NPW or EUAW graph showing all
  alternatives on the same axes.
• Examine the line of maximum values and determine
  which alternative create it, and over what range.
• Determine the changeover point.
• Create a choice table to summarize the
  information.

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Choosing an Analysis Method

• All analysis methods provide consistent
  solutions.
• Rate of Return Analysis
• Easier to explain
• Most frequently used
• More difficult to calculate (without spreadsheet)
  
• Does not require a Minimum Attractive Rate of
  Return in calculation
• Present Worth or Annual Cash Flow Analysis
• Require a known Minimum Attractive Rate of Return
  in calculation
• Easier to calculate (without spreadsheet)

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Spreadsheet andIncremental Analysis