Lecture (2) (12-11-2023) Update

CB 719: Construction Economics & Feasibility Study 2023
Lecture (2)
Methods used to Evaluate Alternatives Financially
3- Future Worth Method:
It is one of the methods used to determine the most financially attractive
alternative between a number of alternatives. Through this method, the
future worth FW of each alternative is calculated. Then, alternatives to
be evaluated based on the calculated FW.
FW equals the equivalent value of all cash receipts/disbursements at the
alternative useful life (study period). If the calculated FW has a positive
sign, this will mean that the alternative produces a return greater than
the MARR. If the calculated FW equals zero this will mean that, the
alternative produces a return equal to the required MARR. If the
calculated FW has a negative sign, this will mean that the alternative
produces a return less than the MARR and it must be rejected.
Example 1:
A small contractor requires to purchase a scrapper with an initial cost of
120,000$. The scrapper has a useful life of five years with an expected
salvage value of 12,000$ at the end of the fifth year. The scrapper can
be billed out at 95$/hour. Operation costs 30$/hour in addition to
25$/hour for the operator. Considering 1,200 billable hours / year; you
are requested to calculate the FW of this scrapper purchase using MARR
of 20%.
Determine if the company should purchase this scrapper or not?
Solution:
Annual revenue = (95 – 30 – 25) *1,200 = 48,000$
(1)
FW = (48,000+12,000) + (-
120,000*(1+0.2)5+48,000*(1+0.2)4+48,000*(1+0.2)3+48,000*(1+
0.2)2+48,000*(1+0.2) = 70,599$.
The calculated FW has a positive sign then, the purchase of this scrapper
generates a return greater than the required MARR. The company may
invest in purchasing this scrapper.
Example 2:
A government office is installing a new automatic telephone system at a
cost of 120,000 EGP. There is an expectation that the system will help to
reduce the number of staff answering phones annually to be 40,000 EGP
in the first year, with 5,000 EGP saving less in each sub-sequent year
until the equipment is retired after six years. The expected salvage value
will be 10,000 EGP at the end of the six year. Considering MARR of
10% use the FW method to decide if this investment will be worthwhile
or not?
Solution:
(2)
FW = -120,000*(1+0.1)6 + 40,000*(1+0.1)5 + 35,000*(1+0.1)4 +

30,000*(1+0.1)3 + 25,000*(1+0.1)2 + 20,000*(1+0.1) + 25,000
= 20,257$
The calculated FW has a positive sign then; this investment will be
worthwhile for the company as it yields a return > required MARR.
Example 3:
A contractor has to select a project to participate in from two projects.
The contractor made a prediction for the two projects' cash flow order to
decide which one is the most financial attractive. Data regarding the two
projects is presented in the following table,
Expenses Payments
Project (1) – Duration (4 months)
E1 = 230,000 EGP P1 = 228,350 EGP
E2 = 300,000 EGP P2 = 294,500 EGP
E3 = 380,000 EGP P3 = 370,100 EGP
E4 = 400,000 EGP P4 = 410,000 EGP
Project (2) – Duration (5 months)
Adv. payment = 209,015.5 EGP
E1 = 131,000 EGP P1 = 232,185 EGP
E2 = 203,000 EGP P2 = 360,755 EGP
E3 = 369,000 EGP P3 = 464,840 EGP
E4 = 652,000 EGP P4 = 696,482.5 EGP
E5 = 727,000 EGP P5 = 836,150 EGP
Considering 15% MARR, use the FW method to decide the project
which the contactor should select.
Solution:
Sketch project (1) net cash flow profile,
(3)
Calculate project (1) FW,

FW = 410,000 + (370,000 – 400,000) *(1+0.15) + (294,500 – 380,000)
*(1+0.15)2 + (228,350 – 300,000) *(1+0.15)3 -230,000*(1+0.15)4 =
-248,815.9 EGP
Sketch project (2) net cash flow profile,
Calculate project (2) FW,

FW = 836,150 + (696,482.5 – 727,000) *(1+0.15) + (464,840 –
652,000) *(1+0.15)2 + (360,755 – 369,000) *(1+0.15)3 – (232,185 –
203,000) *(1+0.15)4 + (-131,000) * (1+0.15)5 + 209,012.5*(1+0.15)6 =
812,011.73 EGP
The FW for project (1) has a negative sign, therefore it must be rejected.
Project (2) is the project to be selected by the contractor.
(4)
Converting a uniform series cash flow to a future value:

Suppose a deposit of 1,000$/year will be made for the next three years
in a bank account that yields interest rate of 8% compounded annually.
If this deposit is made at the end of each year, how much cash will be at
the bank account at the end of the third year?
The first deposit will be made at end of the first year and an interest will
be due during second and third years (for two periods).
F1 = 1,000*(1+0.08)2 = 1,166$
The second deposit will be made at end of the second year and an
interest will be due during only the third year (for one period).
F2 = 1,000*(1+0.08) = 1,080$
The third deposit will be made at the end of the third year; therefore, it
earns zero interest.
F3 = 1,000$
Summing F1, F2 and F3 getting:
F = 1,166+1,080+1,000 = 3,246$
Using the next formula, results the same:
F = A* [(1+i)n-1]/i
A = Annual deposit = 1000$
(5)
F = 1,000*[(1+0.08)3-1]/0.08 = 3,246$
but,
P = F/(1+i)n
then,
P = A*[(1+i)n-1]/[i*(1+i)n]
4- Annual Equivalent Method:
When calculating NPV, a transformation for the future, year-by-year
cash flows into a lump-sum value expressed in today’s dollars, euros, or
any other relevant currency has been done. Sometimes it will be more
helpful to reverse the calculation, by transforming a lump sum of
investment today into an equivalent stream of future cash flows (annual
equivalent).
The annual equivalent is calculated by converting the cash
receipts/disbursements into a uniform series of annual cash flows over
the study period (alternative useful life).
If the calculated annual equivalent has a positive sign, this will mean
that the alternative generates a return > required MARR .If it equals
zero, this will mean that the alternative generates a return equal to the
MARR. If it has a negative sign, then the alternative generates a return
< required MARR and must be rejected.
Example 4:
A concrete mix company needs to purchase a patch plant and has
narrowed its selection down to two alternatives. The first one is a new
patch plant for 65,000$ with a useful life of seven years and an expected
salvage value of 15,000$ at the end of seventh year.
(6)
The second one is to purchase a used patch plant for 50,000$ with a
useful life of four years and an expected salvage value of 5,000$ at end
of fourth year.
If the annual profits are 17,000$/year for either plant, considering
MARR of 18%, you are required to calculate the annual worth for the
two patch plants then, decide which plant should the company purchase?
Solution:
For the new patch plant: The useful life is 7 years. The purchase price
is 65,000$. The salvage value is 15,000$.
Convert the purchase price into a uniform series of annual cash flows:
App = P*i*(1+i)n/[(1+i)n-1]
= -65,000*[0.18*(1+0.18)7]/[(1+0.18)7-1] = -17,054$
Convert the salvage value into a uniform series of annual cash flows:
Asv = F*i /[(1+i)n-1]
= 15,000*0.18/[(1+0.18)7-1] = 1,235$
The annual profit for the new patch plant is already a uniform series of
cash flows then:
Aequivalent = -17,054 + 1,235 + 17,000 = 1,181$.
(7)
For the used patch plant: The useful life is 4 years. The purchase price
is 50,000$. The salvage value is 5,000$
Convert the purchase price to a uniform series of annual cash flows:

App = P*i*(1+i)n/[(1+i)n-1]
= -50,000*0.18*(1+0.18)4/[(1+0.18)4-1] = -18,587$
Convert the salvage value to a uniform series of annual cash flows:
Asv = F*i /[(1+i)n-1]
= 5,000*0.18/[(1+0.18)4-1] = 959$
The annual profit for the used patch plant is already a uniform series of
cash flows, then:
Aequivalent = -18,587 + 959 + 17,000 = -628$.
The new patch plant has a positive sign annual equivalent value; then
the company should purchase the new patch plant.
Example 5:
A school manager decides to purchase a new bus for student's
transportation and also to be rented by others during the summer
holidays for travelling. The selection of the new bus was narrowed
between three kinds of buses A, B and C. The purchase price for bus A
(8)
is 500,000 EGP with a useful life of five years and an expected salvage
value at end of fifth year equals 15% from its purchase price. The
expected revenue from renting this bus is 135,000 EGP/year.
For bus B, the purchase price is 750,000 EGP with a useful life of seven
years and an expected salvage value at end of the seventh year equals
150,000 EGP. The expected revenue from renting this bus is 165,000
EGP/year.
Finally, bus C purchase price is 850,000 EGP with a useful life of six
years and an expected salvage value at end of the sixth year equals
230,000 EGP. The expected revenue from renting this bus is 180,000
EGP/year. Considering MARR of 14%, determine which bus should the
school manager purchase based on their annual worth?
Solution:
For Bus A: convert the purchase price to a uniform series of annual cash
flows:
APP = P*i*(1+i)n/[(1+i)n-1]
=-500,000*0.14*(1+0.14)5/[(1+0.14)5-1] = -145,675 EGP
ASV = F*i/[(1+i)n-1]
= (0.15*500,000) *0.14/ [(1+0.14)5-1] = 11,351 EGP
Then, Aequivalent for bus A:
Aequivalent= -145,675 + 11,351 + 135,000 = -676EGP
For Bus B: convert the purchase price to a uniform series of annual cash
flows:
(9)
APP= -750,000*0.14*(1+0.14)7/[(1+0.14)7-1] = -175,000 EGP

ASV= (150,000) *0.14/ [(1+0.14)7-1] = 14,000 EGP
Then, Aequivalent for bus B:
Aequivalent = -175,000 + 14,000 + 165,000 = 4,000 EGP
For Bus C: convert the purchase price to a uniform series of annual cash
flows:
APP= -850,000*0.14*(1+0.14)6/[(1+0.14)6-1] = -219,000 EGP
ASV= (230,000) *0.14/ [(1+0.14)6-1] = 27,058 EGP
Then, Aequivalentfor bus C:
Aequivalent = -219,000 + 27,058 + 180,000 =-11,942 L.E
Bus B, has a positive annual equivalent value therefore, the school
manager should purchase bus B.
(10)
5- Internal Rate of Return (IRR) (return on investment):

The IRR is the interest rate calculated if NPV equals zero. When using
this method to determine the most financially attractive alternative, the
alternative with the highest positive rate of return value will be chosen.
If the IRR is greater than the MARR; the NPV, FW and annual
equivalent are all will be greater than zero. If the IRR is equal to the
required MARR; the NPV, FW and annual equivalent are all will be
equal to zero. If the IRR of an alternative is less than the required
MARR; the NPV, FW and annual equivalent are all will be less than
zero.
Example 6:
A company is seeking to purchase a 50-ton telescopic crane at a cost of
120,000$ with a useful life of five years and an expected salvage value
of 12,000$ at end of fifth year. The crane can be billed out at 125$/hour.
It costs 40$/hour to operate the crane and 35$/hour for the operator.
Consider 800 billable hour/year, determine the IRR for purchasing this
crane. If the company's MARR is 20%, should the company purchase
this crane or not?
Solution:
First calculate the annual profit generated from the crane:
Hourly profit = 125 - 40 - 35 =50$/hour
Annual profit = 50*800 = 40,000$/year
(11)
NPV = -120,000 + 40,000 / (1+i) + 40,000 / (1+i)2 + 40,000 / (1+i)3 +

40,000 / (1+i)4 + (40,000+12,000) / (1+i)5 = Zero
Using trial and error get: (i = 26%).
The calculated IRR > required MARR then, the company should
purchase this crane.
Example 7:
A budget of 200,000$ is likely to be invested by a company through
three investment opportunities as follows: investment A requires an
initial cost of 110,000$. Investment B requires an initial cost of 75,000$.
Investment C requires an initial cost of 35,000$. Each investment has
only one-year useful life.
Taking into consideration that, any un-used portion of fund will be
located in a bank account that yields 6% annual interest and that, the
company is allowed to invest in each investment only once. Considering
a required MARR of 18%.
Determine the most financially attractive investment approach for the
company characterized by highest IRR.
Solution:
• At first: alternatives will be converted into a number of mutually

exclusive alternatives, shown in next table in order to determine the
feasible ones.
(12)
Alternative Decision of Investment Status

1 Do Nothing Yes
2 A Yes
3 B Yes
4 C Yes
5 A&B Yes
6 A&C Yes
7 B&C Yes
8 A&B&C No
Only alternative (nu.8) is in-feasible because of budget limitation. The

do-nothing alternative is included as an alternative (1) because the
company may not invest in any alternative.
First, calculate the company’s earned interest if it invested at either of
A or B or C investments separately:
IA = 110,000*0.18 = 19,800$
IB = 75,000*0.18 = 13,500$
IC = 35,000*0.18 = 6,300$
Any un-used portion of capital will be located at a bank account that
yields 6% annual interest. Then, for each alternative the company's
interest earned, will be calculated as follow:
For alternative 1:
The total budget will be located at the bank account that yields 6%
annual interest.
For alternative 2:
110,000$ will be invested in investment A and the remaining 90,000$
will be located at the bank account.
The bank account interest earned = 90,000*(0.06) = 5,400$.
(13)
Total interest earned from the alternative = 19,800+5,400 = 25,200$.

The alternative FW = 200,000+25,200 = 225,200$
F = P (1+i)1
225,200 = 200,000 (1+ i) then, i(alternative 2) = 12.6%
For alternative 3:
75,000$ will be invested in investment B and the remaining 125,000$
F = P (1+i)1
For alternative 4:
35,000$ will be invested in investment C and the remaining 165,000$
(14)

F = P (1+i)1
For alternative 5:
185,000$ will be invested in investment A & B and the remaining
15,000$ will be located at the bank account.
The bank account interest earned = 15,000*(0.06) = 900$.
Total interest earned from the alternative = 19,800 + 13,500 + 900 =
34,200$.
F = P (1+i)1
(15)
For alternative 6:
145,000$ will be invested in investment A & C and the remaining
Total interest earned from the alternative = 19,800 + 6,300+3,300 =
29,400$.
F = P (1+i)1
For alternative 7:
110,000$ will be invested in investment B & C and the remaining
Total interest earned from the alternative = 13,500 + 6,300+5,400 =
25,200$.
(16)
F = P (1+i)1
Results are shown in the next table:
Alternative Decision of Investment Rate of return %
1 Do Nothing 6
2 A 12.6
3 B 10.5
4 C 8.1
5 A&B 17.1
6 A&C 14.7
7 B&C 12.6
Alternative 5, has the highest IRR value therefore, the company should
select this alternative for investment.
Example 8:
A construction company has to invest in one of two projects. Data
regarding the two projects is presented in the following table.
Knowing that the two projects duration is 4 months. Decide which
project is the most financially attractive for the company to select?
Expenses Payments
Project (1)
E1 = 30,000 EGP P1 = 58,350 EGP
E2 = 70,000 EGP P2 = 66,150 EGP
E3 = 80,000 EGP P3 = 75,600 EGP
(17)
E4 = 20,000 EGP P4 = 39,900 EGP

Project (2)
E1 = 40,000 EGP P1 = 68,350 EGP
E2 = 90,000 EGP P2 = 96,150 EGP
E3 = 100,000 EGP P3 = 85,600 EGP
E4 = 25,000 EGP P4 = 45,360 EGP
Solution:
Sketch project (1) net cash flow,
Calculate IRR at NPV = zero,

NPV = -30,000 / (1+i) + (58,350-70,000)/(1+i)2 + (66,150-
80,000)/(1+i)3 + (75,600-20,000)/(1+i)4 + 39,900/(1+i)5 = 0
Using trial & error, i = 13.05%
Sketch project (2) net cash flow,
Calculate IRR at NPV = zero,

NPV = -40,000 / (1+i) + (68,350-90,000)/(1+i)2 + (96,150-
100,000)/(1+i)3 + (85,600-25,000)/(1+i)4 + 45,360/(1+i)5 = 0
Using trial & error, i = 16.7%
Project (2) is the most financially attractive one.
(18)
6- Payback Period Without Interest:

By this method alternatives are evaluated based on the time period
needed to recover their initial costs.
The interest due on the alternative initial cost is ignored. If the
calculated payback period equals or exceeds the alternative useful life,
the salvage value will be ignored to. If the payback period is less than
the alternative useful life, this indicates that the alternative will recover
its initial cost.
To compare between alternatives, the smallest payback period
alternative will be the most financially attractive one.
Example 9:
A company decides to purchase an administration building in order to
use it as an administrative site. A building arises for the company with a
purchase price of 500,000 EGP. The expected service and maintenance
costs for this building are 5,000 EGP / year. If the company purchased
this building, it can save 20,000 EGP annually which has been spent
before in renting similar building.
The building useful life is twenty-five years and that the expected
salvage value equals the building purchasing price.
Determine the building payback period without interest and find out if
the building generates enough revenue to recover its initial cost or not?
Solution:
Calculate the annual profit :
Annual profit = 20,000 – 5,000 = 15,000 EGP/year
(19)
The payback period n = the number of years needed to recover the initial
cost.
n = purchase price/annual profit = 500,000/15,000 = 34 year
The payback period > building useful life then, purchasing the building
will not generate enough revenue to recover its initial cost and the
company should not purchase the building.
Example 10:
Three investments data are shown in the next table and a company is
deciding to may/or not invest in one of them.
Year Investment A Investment B Investment C
0 -1000 -2000 -2000
1 500 500 900
2 500 600 900
3 0 500 900
4 0 400 900
5 0 3500 900
• Using the payback period without interest method which investment
should the company choose?
• How would the decision be different when using the NPV method
considering 20% MARR?
• Which investment should be chosen if these investments are being
considered high risk using both of the above methods?
Solution:
• Using the pay back without interest method:

For investment A:
The payback period will be 2 years as the sum of the net cash flows to
this date = -1000+500+500 = zero.
(20)
For investment B:
this date = -2000+500+600 +400+500= 0.
For investment C:
this date = -2000+900+900+900 = 700$.
Then, based on the payback period without interest method, investment
A is the most financially attractive investment characterized with the
shortest payback period.
• Using the NPV method

For investment A:
NPV = -1000 + 500/ (1+ 0.2) + 500/(1+0.2)2 = -236.5$

For investment B:
NPV = -2000 + 500/ (1+ 0.2) + 600/ (1+0.2)2 + 500/ (1+0.2)3 +

400/ (1+0.2)4 + 3500/ (1+0.2)5 = 713$
(21)
For investment C:
NPV = -2000 + 900/ (1+ 0.2) + 900/ (1+0.2)2 + 900/ (1+0.2)3 +

900/ (1+0.2)4 + 900/ (1+0.2)5 = 692$
Then, based on the NPV method, investment B is the most financially
attractive investment characterized with the highest positive NPV
value.
• Considering the high risk of all alternatives:

Investment A has the shortest payback period and a negative NPV.
Investment B is preferred than investment C because it's NPV is greater
by (713-692=21$).
Investment C is preferred than investment B on the payback period
without interest as it is shorter.
Given that the investments are risky then, the company should
recover the initial cost quickly as possible. Therefore, it must forgo the
additional 21$ gained on investment B and invest in investment C.
(22)
7- Payback Period with Interest:

The payback period with interest evaluates alternatives based on how
long it takes to payback their initial costs including the interest at the
required MARR. The payback period is identified at the point of time at
the sum of the net cash flows including interest on the outstanding
investment is non-negative (zero or positive).
This is done by finding out the date when the NPV of all cash receipts/
disbursements) is equal or greater than zero.
If the payback period is equal or greater than the alternative useful life,
the salvage value will be ignored. If the payback period is less than the
alternative useful life, then the alternative will be able to recover its
initial cost-plus interest at the required MARR.
For a payback period less than or equal to the alternative's useful life,
this guarantees a return equal or greater than the MARR.
When comparing alternatives based on their payback period with
interest, the alternative with the smallest payback period will be selected
as the most financially attractive one.
Example 11:
A company needs to purchase a crane that costs 120,000$ with an
expected useful life five years. The crane can be billed out at 105$/hour.
It costs 40$/hour to operate the crane and 35$/hour for the operator.
Considering 1,600 billable hours / year and MARR of 20%, determine
the payback period with interest for that crane.
Does the crane generate enough revenue to recover its initial cost while
generating a return of at least 20%?
(23)
Solution:
First calculate the annual profit:
Hourly profit = 105 – 40 - 35 = 30$/hour
Annual profit = 30*1600 = 48,000$/year
Convert the annual profits to their present values:

P0 = -120,000$
P1 = 48,000/(1+0.2) = 40,000$
P2 = 48,000/(1+0.2)2 = 33,333$
P3 = 48,000/(1+0.2)3 = 27,778$
P4 = 48,000/(1+0.2)4 = 23,148$
P5 = 48,000/(1+0.2)5 = 19,290$
The payback period of the crane is four years because in the fourth year
(NPV = -120,000+40,000+33,333+27,778+23,148 = 4,259$> = zero).
The payback period is less than that crane useful life then, its purchase
will generate enough return to recover its initial costs plus interests.
(24)
8- Incremental Rate of Return Method:

Through this method, alternatives are evaluated by: calculating the IR
for the differences in the net cash flow, setting NPV = zero and then,
predicting the (IR incremental), comparing it with the MARR following
the next steps:
1. Ranking all alternatives based on their initial costs from lower to
higher.
2. Considering the alternative with the lower initial cost as the current
best alternative.
3. Calculate the IR incremental in between the current best alternative
and the next higher initial cost one.
• If the IR incremental equals to or less than the MARR, the

current best alternative remains as it is and the competing
alternative will be ignored.
• If the IR incremental is higher than the MARR, the competing

alternative becomes the current best alternative while the former
alternative will be ignored.
4. The process continued until all alternatives are compared then, the
alternative stands at last, is the most financially attractive alternative.
Example 12:
The next table shows data related to five mutually exclusive alternatives.
The useful life for all alternative is 20 years. Consider 16% MARR,
identify the most financially attractive alternative using the IR
incremental method.
(25)
Alternatives A B C D E
Initial Cost ($) 5,000 4,500 6,000 3,500 1,000
Revenue ($) 459 410 761 117 785
Solution:
• Ranking alternatives based on their initial costs: E, D and B, A

and C.
• Alternatives evaluation:
Alternative E with D:
Initial cost difference = 3,500 – 1,000 = 2,500$
Revenue difference = 785 – 117 = 668$
Calculate the IR incremental,

NPVincremental = -2,500 + 668/(1+i) + 668/(1+i)2 + 668/(1+i)3
668/(1+i)4 + 668/(1+i)5…. + 668/(1+i)20 = Zero
Using trial and error method: i = 26.5% > MARR
The best current alternative E will be ignored and alternative D becomes
the current best alternative.
Alternative D with B:
(26)

293/(1+i)4 + 293/(1+i)5…. + 293/(1+i)20 = Zero
Using trial and error method: i = 29.5% > MARR
The best current alternative D will be ignored and alternative B becomes
the current best alternative.
Alternative B with A:
Initial cost difference = 5,000 – 4,500 = 500$

NPVincremental = -500 + 49/(1+i) + 49/(1+i)2 + 49/(1+i)3
49/(1+i)4 + 49/(1+i)5…. + 49/(1+i)20 = Zero
(27)
Using trial and error method: i = 7.5% < MARR then, the best current
alternative B remains to be the best current alternative and alternative A
will be ignored.
Alternative B with C:

351/(1+i)4 + 351/(1+i)5…. + 351/(1+i)20 = Zero
Using trial and error method: i = 23% > MARR
The best current alternative B will be ignored and the company should
select alternative C as it is the most financially attractive alternative.
Example 13:
A construction company decides to invest in one of the given projects
data, see next table.
Projects A B C D
Initial Cost 1,210,000 1,510,000 950,000 1,340,000
Expected Annual Profit 143,000 385,000 250,000 255,000
(28)
Salvage Value 165,000 210,000 180,000 225,000
Considering 20% MARR, identify the most financially attractive project

based on the IR incremental method. Knowing that, the useful life of
each project is five years.
Solution:
• Ranking alternatives based on their initial costs: Project C, A, D

and B.
• Alternatives evaluation:
Alternative C with A:
Initial cost difference = 1,210,000 – 950,000 = 260,000$
Annual profit difference = 250,000 – 143,000 = 107,000$
Salvage value difference = 180,000 – 165,000 = 15,000$

NPV incremental = -260,000 + 107,000/(1+i) + 107,000/(1+i)2 +
107,000/(1+i)3 + 107,000/(1+i)4 + 122,000/(1+i)5 = Zero
Using trial and error method: i = 30.9 %
(29)
Then, alternative C will be ignored and alternative A becomes the

current best alternative.
Alternative A with D:
Initial cost difference = 1,340,000 – 1,210,000 = 130,000$
Salvage value difference = 225,000 –165,000 = 60,000$

112,000/(1+i)3 + 112,000/(1+i)4 + 172,000/(1+i)5 = Zero
Using trial and error method: i = 33 %
Then, alternative A will be ignored and alternative D becomes the
current best alternative.
Alternative D with B:
Initial cost difference = 1,510,000 – 1,340,000 = 170,000$
Salvage value difference = 225,000 – 210,000 = 15,000$
(30)

130,000/(1+i)3 + 130,000/(1+i)4 + 145,000/(1+i)5 = Zero
Using trial and error method: i = 31.5 %
Alternative B is the most financially attractive alternative. The
construction company should select it.
Example 14:
The next table represents the expected cash flow data (in EGP)
regarding two construction projects that a contractor is looking forward
to execute one of them.
Consider 10% MARR, take a decision which project should the
contractor select as the most financially attractive, using two different
methods the IR incremental is one of them.
Month 1 2 3 4 5 6
Project A
Expenses 100,000 150,000 275,000 180,000 60,000 -
Payments 258,750 284,625 186,300 62,100 87,975
Project B
Expenses 150,000 350,000 425,000 250,000 - -
Payments 495,000 668,250 129,250
(31)
Solution:
• Using the IR incremental method:

Consider project A as the current best alternative as its (initial cost) first
expense is least than project B first expense.
Project A cash flow:
Project A net cash flow:
Project B cash flow:
Project B net cash flow:
(32)
Calculating IR incremental:
NPV incremental = -50,000/(1+i) + 36,250/(1+i)2 - 415,375/(1+i)3 +

411,950/(1+i)4 + 2,100/(1+i)5 + 41,275/(1+i)6 = Zero
Using trial and error method: i = 4.54 % < MARR then, project A is
the most financially attractive alternative.
• Using FW method:
FWA = 87,975 + 2,100* (1+0.1) + 6,300*(1+0.1)2 + 9,625*(1+0.1)3 +
108,750*(1+0.1)4 - 100,000*(1+0.1)5 = 108,889 EGP
FWB = 129,250 + 418,250*(1+0.1)2 – 425,000*(1+0.1)3 +
145,000*(1+0.1)4 - 150,000*(1+0.1)5 = 40,375 EGP
Project A is the most financially attractive alternative.
(33)
Sheet (2)
1. A construction company needs to purchase a new back hoe and has
narrowed the selection between two pieces of equipment. The first
back hoe costs 100,000$ and has an hourly operation cost of 31$ and a
35,000$ salvage value at the end of three years. The second back hoe
costs 65,000$ and has an hourly operation cost of 36$ and no salvage
value at the end of the three years. The operator cost is 29$ per hour.
The revenue from either back hoe is 95$ per hour. Using 1200 billable
hours per year and 20% MARR, calculate the NPV for both back
hoes. Which back hoe should the company select?
2. Based on the IR incremental for problem 1, which back hoe should the
company selects?
3. Based on the FW for problem 1, which back hoe should the company
selects?
(34)

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CB 719: Construction Economics & Feasibility Study 2023

FW = -120,000*(1+0.1)6 + 40,000*(1+0.1)5 + 35,000*(1+0.1)4 +

Calculate project (1) FW,

Calculate project (2) FW,

Converting a uniform series cash flow to a future value:

Convert the purchase price to a uniform series of annual cash flows:

APP= -750,000*0.14*(1+0.14)7/[(1+0.14)7-1] = -175,000 EGP

5- Internal Rate of Return (IRR) (return on investment):

NPV = -120,000 + 40,000 / (1+i) + 40,000 / (1+i)2 + 40,000 / (1+i)3 +

• At first: alternatives will be converted into a number of mutually

Alternative Decision of Investment Status

Only alternative (nu.8) is in-feasible because of budget limitation. The

Total interest earned from the alternative = 19,800+5,400 = 25,200$.

The bank account interest earned = 165,000*(0.06) = 9,900$.

E4 = 20,000 EGP P4 = 39,900 EGP

Calculate IRR at NPV = zero,

Calculate IRR at NPV = zero,

6- Payback Period Without Interest:

• Using the pay back without interest method:

• Using the NPV method

NPV = -1000 + 500/ (1+ 0.2) + 500/(1+0.2)2 = -236.5$

NPV = -2000 + 500/ (1+ 0.2) + 600/ (1+0.2)2 + 500/ (1+0.2)3 +

NPV = -2000 + 900/ (1+ 0.2) + 900/ (1+0.2)2 + 900/ (1+0.2)3 +

• Considering the high risk of all alternatives:

7- Payback Period with Interest:

Convert the annual profits to their present values:

8- Incremental Rate of Return Method:

• If the IR incremental equals to or less than the MARR, the

• If the IR incremental is higher than the MARR, the competing

Initial Cost ($) 5,000 4,500 6,000 3,500 1,000

Revenue ($) 459 410 761 117 785

• Ranking alternatives based on their initial costs: E, D and B, A

Calculate the IR incremental,

Revenue difference = 410 – 117 = 293$

Calculate the IR incremental,

Calculate the IR incremental,

Calculate the IR incremental,

Initial Cost 1,210,000 1,510,000 950,000 1,340,000

Expected Annual Profit 143,000 385,000 250,000 255,000

Salvage Value 165,000 210,000 180,000 225,000

Considering 20% MARR, identify the most financially attractive project

• Ranking alternatives based on their initial costs: Project C, A, D

Calculate the IR incremental,

Then, alternative C will be ignored and alternative A becomes the

Calculate the IR incremental,

Calculate the IR incremental,

• Using the IR incremental method:

Project A net cash flow:

Project B cash flow:

Project B net cash flow:

NPV incremental = -50,000/(1+i) + 36,250/(1+i)2 - 415,375/(1+i)3 +

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FW = -120,000(1+0.1)6 + 40,000(1+0.1)5 + 35,000*(1+0.1)4 +

APP= -750,0000.14(1+0.14)7/[(1+0.14)7-1] = -175,000 EGP