COMPARING ALTERNATIVES
AND
BENEFIT/COST RATIO
Prepared by Frances Angela G. Monton, BSIE
Content
01 Comparing Alternatives
02 Benefit/Cost Ratio
COMPARING
ALTERNATIVES
Prepared by Frances Angela G. Monton, BSIE
COMPARING ALTERNATIVES
The fundamental principle on which alternatives should be used is stated as
follows:
The alternative that requires the minimum investment of capital and will
produce a satisfactory functional result will always be used unless there are
definite reasons why an alternative requiring a larger investment should be
adopted.
METHODS IN COMPARING
ALTERNATIVES
Rate of Return on Additional Investment
Annual Cost
Equivalent Uniform Annual Cost
Present Worth Cost
Capitalized
Payback Period
Methods in Comparing Alternatives
Rate of Return on Annual
Additional Investment Cost (AC)
The formula for this is: To apply this method, the annual
cost of the alternatives, including
interest on investment, is
determined. The alternative with the
If the rate of return is least annual cost is chosen.
satisfactory, then the alternative
requiring a bigger investment is
more economical and should be
chosen.
Methods in Comparing Alternatives
Equivalent Uniform Present Worth
Annual Cost (EUAC) Cost (PWC)
All cash flows, irregular or In using this method, determine the
uniform, must be converted to present worth of the net cash
an equivalent uniform annual outflows for each alternative for the
cost. The alternative with the same period of time. The alternative
least EUAC is preferred. When with the least present worth of cost
this method is used, the EUAC of is selected.
the alternatives must be
calculated for one life cycle only.
Methods in Comparing Alternatives
Capitalized Payback
Method Period
A variation of the PWC method. The payback period of each
This is used for alternatives alternative is computed. The
having long lives. To use this alternative with the shortest
method, determine the payback period is adopted.
capitalized cost of all the
alternatives and choose the one
with the least capitalized cost.
Example
A company is considering two types of equipment for its manufacturing plant.
Pertinent data are as follows:
If the minimum rate of return is 15%, which equipment should be selected?
BENEFIT/COST RATIO
Prepared by Frances Angela G. Monton, BSIE
BENEFIT/COST RATIO
The Benefit/Cost (B/C) Ratio method of analysis is based on the ratio of the
benefits to costs associated with a particular project.
Benefits – advantages expressed in terms of pesos which happens to the owner.
Disbenefits – when projects under consideration involves disadvantages to the
owner
Example
The National Government intends to build a dam and start a hydroelectric
project in the Cagayan Valley at a total cost of P455,500,000. The project will be
financed by soft foreign loan with a rate of interest of 5% per year. The annual
cost for operation, maintenance, and distribution facilities, and others would
total P15,100,000. Annual revenues and benefits are estimated to be
P56,500,000.
If the structures are expected to last for 50 years with no salvage value,
determine the B/C ratio of the project.
ALTERNATIVE COMPARISON
BY BENEFIT/COST ANALYSIS
In computing the B/C ration for a given alternative, the benefits and costs used in
the calculation represent the differences between the alternatives.
Example
Two routes are under consideration for a new highway. Route A would be
located about five miles from the central business district would require longer
travel distances by local commuter traffic. Route B would pass directly through
the downtown area and, although its construction cost would be higher, it
would reduce the travel time and distance for local commuters. The costs for
the two routes are as follows:
If the roads are assumed to last 30 years with no salvage value, which route
should be accepted on the basis of a benefit/cost ratio analysis using an
interest of 15%.
REFERENCES
Blank, L., & Tarquin, A. (2020). Basics of Engineering Economy (3rd ed.). McGraw-
Hill Higher Education (International)
Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall.
