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Video Lecture 10 Comparing Alternatives

This document discusses several methods for comparing alternative investment options: 1. The rate of return on additional investment method compares the rate of return for alternatives requiring different initial investments. The alternative with the higher rate of return is preferred. 2. The annual cost method compares the total annual costs (including interest) of alternatives. The alternative with the lowest annual cost is preferred. 3. The equivalent uniform annual cost method converts irregular cash flows into equivalent uniform annual costs to facilitate comparison across alternatives. The alternative with the lowest equivalent uniform annual cost is preferred. 4. The present worth cost method discounts net cash outflows to the present to determine each alternative's present worth cost. The alternative with the lowest present worth

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37 views7 pages

Video Lecture 10 Comparing Alternatives

This document discusses several methods for comparing alternative investment options: 1. The rate of return on additional investment method compares the rate of return for alternatives requiring different initial investments. The alternative with the higher rate of return is preferred. 2. The annual cost method compares the total annual costs (including interest) of alternatives. The alternative with the lowest annual cost is preferred. 3. The equivalent uniform annual cost method converts irregular cash flows into equivalent uniform annual costs to facilitate comparison across alternatives. The alternative with the lowest equivalent uniform annual cost is preferred. 4. The present worth cost method discounts net cash outflows to the present to determine each alternative's present worth cost. The alternative with the lowest present worth

Uploaded by

jerromecymouno.garcia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COMPARING ALTERNATIVES

METHODS OF COMPARING ALTERNATIVES:


1. Rate of Return on Additional Investment method
Rate of return on additional investment =
If then rate of return on additional investment is satisfactory, then the
alternative requiring a bigger investment is more economical and should be
chosen.
2. The Annual Cost (AC)Method
To apply this method, the annual cost of the alternatives including
interest is determined. The alternative with the least annual cost is chosen.
This pattern, like the rate of return on additional investment pattern applies
only to alternatives which has a uniform cost data for each year and a single
investment of capital at the beginning of the first year of the project life.
3. The equivalent uniform annual cost (EUAC) Method.
In this method, all cash flows (irregular or uniform) must be
converted to an equivalent annual cost that is a year-end amount which
is the same each year. The alternatives with the least equivalent uniform
annual cost is preferred. When the EUAC method is used, the equivalent
uniform annual cost of the alternatives must be calculated for one life
cycle only. This method is flexible and can be used for any of alternative
selection problems. This method is a modification of annual cost pattern.
4. The Present Worth Cost (PWC) Method
In comparing alternatives by this method, determine the present
worth on the net cash outflows for each alternative for the same period
of time. The alternative with the least present worth of cost is selected.
5. The Capitalized Method
The capitalized method is a variation of the present worth cost
pattern. This method is used for alternatives having long lives. To use
this method, determine the capitalized cost all the alternatives and
choose that one with the least capitalized cost.

6. Payback (payout) Period method


To use this method, The payback period of each alternative is
computed. The alternative with the shortest payback period is
adapted. This method is seldom used.
EXAMPLE
1.A company is considering two types of equipment for its manufacturing
plant. Personal data are as follows:
Type A Type B
First cost Php200,000 Php300,000
Annual operating cost 32,000 24,000
Annual labor cost 50,000 32,000
Insurance and property taxes 3% 3%
Payroll Taxes 4% 4%
Estimated Life 10 10
If the minimum required rate of return is 15% which equipment should be
selected?
2. Choose from the two machines which is more economical
Machine A Machine B
First cost Php8,000 Php14,000
Salvage value 0 2,000
Annual operation 3,000 2,400
Annual maintenance 1,200 1,000
Taxes and insurance 3% 3%
Life, years 10 15

Money is worth at least 16%.


ASSIGNMENT
1. An oil company is being offered a special coating for the gasoline underground
tank installation in its service stations which will increase the life of the tank from
the usual 10 years to 15 years. The cost of the special coating will increase the cost
of the 40,000-tank to 58,000. Cost of installation for either of the tanks is P24,000.
If the salvage value for both is zero, and interest rate is 26%, would you recommend
the use of the special coating?
2. An electric cooperative is considering the use of a concrete electric pole in the
expansion of its power distribution lines. A concrete pole costs 18,000 each and will
last 20 years. The company is presently using creosoted wooden poles which cost
12,000 per pole and will last 10 years. If money is worth 12 percent, which ole
should be used? Assume annual taxes amount to 1 percent of first cost and zero
salvage value in both cases.

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