Engineering economy lorie m. Cabanayan francisco d. Cuaresma

Case 1. Useful lives are the same for all alternatives and equal to the study period. 
 
 The most straightforward technique for comparing mutually exclusive alternatives when all 
useful lives are equal to the study period is to determine the equivalent worth of each alternative 
based on total investment at i = MARR. Then for investment alternatives, the one with the 
greatest positive equivalent worth is selected. And in the case of cost alternatives, the one with 
the least negative equivalent worth is selected. 
 
1
st
 example involves an investment project situation: 
Alternatives A and B are two mutually exclusive investment alternatives with estimated net cash 
flows as shown. Useful life of each alternative is 4 years. The MARR = 10% per year. 
Investment alternatives are those with initial (or front-end) capital investments that produce cash 
flows from increased revenue, savings through reduced costs, or both. 
 
Alternative 
A 
B 
Capital investment 
-$60,000 
-$73,000 
Annual revenues less expenses 
22,000 
26,225 
The PW values are: 
PW (10%)
A
= -$60,000 + $22,000 (P/A,10%,4) = $9,738 
PW (10%)
B
= -$73,000 + $26,000 (P/A, 10%, 4) = $10,131 
Rule 1.
When revenues and other economic benefits are present and vary among the alternatives, 
choose the alternative that maximizes overall profitability. That is select the alternative that has 
the greatest positive equivalent worth at i = MARR and satisfies all project requirements. 
Rule 2. 
When revenues and other economic benefits are not present or are constant among the 
alternatives, consider only the costs and select the alternative that minimizes total cost. That is 
select the alternative that has the least negative equivalent worth at i = MARR and satisfies all 
project requirements. 

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Since the PWA is > 0 at i=MARR, it is the base alternative and would be selected unless the 
additional capital associated with Alternative B is justified. In this case, Alternative B is 
preferred because it has a greater PW value.