Year Machine X Machine Y Y-X

0 -200 -700 -500

1 95 120 25
2 95 120 25
3 95 120 25
4 95 120 25
5 95 120 25
6 -55 120 175
7 95 120 25
8 95 120 25
9 95 120 25
10 95 120 25
11 95 120 25
12 145 270 125
IRR 43.26% 14.32% 1.32%
Interest Rate Machine X Machine Y
0 $840.00 $890.00 NPW Graph
1.322 $751.87 $751.66
2 $710.89 $687.31 1000
3 $655.08 $599.69
800
4 $604.26 $519.90
5 $557.92 $447.12 600
6 $515.57 $380.61
7 $476.80 $319.72 400
8 $441.26 $263.90
200
9 $408.61 $212.62
10 $378.56 $165.44 0
11 $350.87 $121.96 01.3222 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
12 $325.30 $81.83 -200
13 $301.66 $44.72
-400
14 $279.77 $10.37
15 $259.46 -$21.49 i%
16 $240.58 -$51.08
17 $223.02 -$78.60
18 $206.65 -$104.23
19 $191.38 -$128.14 We can see from the
20 $177.10 -$150.47
NPW Graph

Machine X
Machine Y

9 10 11 12 13 14 15 16 17 18 19 20

We can see from the graph that for MARR greater than 1.3%, Machine X is the right choice,
and for MARR values less than 1.3%, Machine Y is the right choice.
EXAMPLE 8-4 : A pressure vessel can be made out of brass, stainless steel, or titanium. The first cost and
expected life for each material are:

Brass Stainless Steel Titanium

Cost $100,000 $175,000 $300,000
Life, in years 4 10 25

The pressure vessel will be in the nonradioactive portion of a nuclear power plant that is expected
to have a life of 50 to 75 years. The public utility commission and the power company have not
yet agreed on the interest rate to be used for decision making and rate setting. Build a choice
table for the interest rates to show where each material is the best.

SOLUTION

The pressure vessel will be replaced repeatedly during the life of the facility, and each material
has a different life. Thus, the best way to compare the materials is using EUAC (see Chapter 6).
This assumes identical replacements.
Figure 8-4 graphs the EUAC for each alternative. In this case the best alternative at each
interest rate is the material with the lowest EUAC. (We maximize worths, but minimize costs.)
The Excel function is
PMT(interest rate, life, −first cost)

The factor equation is

EUAC = first cost(A/ P, i, life)

EUAC - Titanium, EUAC - Stainless and

EUAC - Brass
60000

50000

40000 EUAC - Titanium

EUAC - Stainless
30000 EUAC - Brass

20000

10000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Interest Rate
 10000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Interest Rate

Because these alternatives have different-length lives, calculating the incremental IRRs is
best done using the spreadsheet function GOAL SEEK (see the last section of this chapter). The
choice table for each material is:
Interest Rate Best Choice
0% ≤ i ≤ 6.3% Titanium
6.3% ≤ i ≤ 15.3% Stainless steel
15.3% ≤ i Brass
um. The first cost and

hat is expected

ch material Interest Rate EUAC - Titanium EUAC - Stainless

0 $12,000.00 $17,500.00
1 $13,622.03 $18,476.86
2 $15,366.13 $19,482.14
3 $17,228.36 $20,515.34
4 $19,203.59 $21,575.92
5 $21,285.74 $22,663.30
6 $23,468.02 $23,776.89
7 $25,743.16 $24,916.06
8 $28,103.63 $26,080.16
9 $30,541.88 $27,268.52
10 $33,050.42 $28,480.44
nd 11 $35,622.07 $29,715.25
12 $38,249.99 $30,972.23
13 $40,927.78 $32,250.67
14 $43,649.52 $33,549.87
15 $46,409.82 $34,869.11
16 $49,203.78 $36,207.69
UAC - Titanium 17 $52,027.03 $37,564.90
UAC - Stainless
18 $54,875.65 $38,940.06
UAC - Brass
19 $57,746.19 $40,332.48
20 $60,635.62 $41,741.48
EUAC - Brass
$25,000.00
$25,628.11
$26,262.38
$26,902.70
$27,549.00
$28,201.18
$28,859.15
$29,522.81
$30,192.08
$30,866.87
$31,547.08
$32,232.64
$32,923.44
$33,619.42
$34,320.48
$35,026.54
$35,737.51
$36,453.31
$37,173.87
$37,899.09
$38,628.91
The following information refers to three mutually exclusive alternatives. The decision maker
wishes to choose the right machine but is uncertain what MARR to use. Create a choice table that
will help the decision maker to make the correct economic decision.

Machine X Machine Y Machine Z

Initial Cost 200 700 425
Uniform Annual Benefit 65 110 100
Useful Life, in years 6 12 8

In this example, the lives of the three alternatives are different. Thus we cannot directly use the
present worth criterion but must first make some assumptions about the period of use and the
analysis period. As we saw in Chapter 6, when the service period is expected to be continuous
and the assumption of identical replacement reasonable, we can assume a series of replacements
and compare annual worth values just as we did with present worth values. There is a direct
relationship between the present worth and the equivalent uniform annual worth. It is
EUAW = NPW(A/ P, i, n)

We will make these assumptions in this instance, and instead of plotting NPW, we shall
plot EUAW. This was done on a spreadsheet using the Excel function = benefit + PMT (interest
rate, life, initial cost), and the result is Figure 8-5.

EUAW - Machine X, EUAW - Machine Y

and EUAW - Machine Z
60

40

20
EUAW - Machine X
0 EUAW - Machine Y
0 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425 EUAW - Machine Z
-20

-40

-60

-80
Interest rate

The EUAW graph shows that for low values of MARR, Y is the correct choice. Then, as
MARR increases, Z and finally X become the preferred machines. This can be expressed in a
choice table read directly from the graph. If the “do nothing” alternative is available, the table is
the following:
If MARR >= 23% do nothing
If 23% >= MARR >= 10% choose X
If 10% >= MARR >= 3.5% choose Z
If 3.5% >= MARR >= 0% choose Y

If the “do nothing” alternative is not available, then the table reads
If MARR ≥ 10% choose X
If 10% ≥ MARR ≥ 3.5% choose Z
If 3.5% ≥ MARR ≥ 0% choose Y

The choice now is back in the decision maker’s hands. There is still the need to determine
MARR, but if the uncertainty was, for example, that MARR was some value in the range
12 to 18%, it can be seen that for this problem it doesn’t matter. The answer is Machine X
in any event. If, however, the uncertainty of MARR were in the 7 to 13% range, it is clear
the decision maker would have to determine MARR with greater accuracy before solving this
problem.
 EUAW - EUAW - EUAW -
Interest rate Machine X Machine Y Machine Z
0 $31.67 $51.67 $46.88
1 $30.49 $47.81 $44.46
2 $29.29 $43.81 $41.98
3 $28.08 $39.68 $39.46
4 $26.85 $35.41 $36.88
5 $25.60 $31.02 $34.24
6 $24.33 $26.51 $31.56
7 $23.04 $21.87 $28.83
8 $21.74 $17.11 $26.04
9 $20.42 $12.24 $23.21
10 $19.08 $7.27 $20.34
placements 11 $17.72 $2.18 $17.41
12 $16.35 -$3.01 $14.45
13 $14.97 -$8.29 $11.44
14 $13.57 -$13.67 $8.38
15 $12.15 -$19.14 $5.29
16 $10.72 -$24.69 $2.15
17 $9.28 -$30.33 -$1.02
18 $7.82 -$36.04 -$4.23
19 $6.35 -$41.83 -$7.48
20 $4.86 -$47.69 -$10.76
Machine Y 21 $3.36 -$53.61 -$14.08
Z 22 $1.85 -$59.60 -$17.43
23 $0.32 -$65.65 -$20.81
24 -$1.21 -$71.75 -$24.22
25 -$2.76 -$77.91 -$27.67

EUAW - Machine X
EUAW - Machine Y
5 EUAW - Machine Z
IRR from UAB & Investment 10%

The following information is for five mutually exclusive alternatives that have 20-year useful lives.
The decision maker may choose any one of the options or reject them all. Prepare a choice
table.
Alternatives
A B C
Cost 4000 2000 6000
Uniform annual benefit 639 410 761

Cash Flow Year A B C

0 -4000 -2000 -6000
1 639 410 761
2 639 410 761
3 639 410 761
4 639 410 761
5 639 410 761
6 639 410 761
7 639 410 761
8 639 410 761
9 639 410 761
10 639 410 761
11 639 410 761
12 639 410 761
13 639 410 761
14 639 410 761
15 639 410 761
16 639 410 761
17 639 410 761
18 639 410 761
19 639 410 761
20 639 410 761

IRR 15% 20% 11%

NPW-A, NPW-B, NPW

NPW-E
10000

8000

6000

4000
 NPW-A, NPW-B, NPW
NPW-E
10000

8000

6000

4000

2000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 1
-2000

-4000

-6000
Interest Rate

Placing these numbers in a choice table:

If
If
If
If
t have 20-year useful lives.
l. Prepare a choice

D E
1000 9000
117 785

D E Interest Rate NPW-A

-1000 -9000 0 $8,780.00
117 785 1 $7,531.11
117 785 2 $6,448.57
117 785 3 $5,506.71
117 785 4 $4,684.22
117 785 5 $3,963.35
117 785 6 $3,329.28
117 785 7 $2,769.58
117 785 8 $2,273.80
117 785 9 $1,833.14
117 785 10 $1,440.17
117 785 11 $1,088.57
117 785 12 $772.97
117 785 13 $488.82
117 785 14 $232.18
117 785 15 -$0.29
117 785 16 -$211.47
117 785 17 -$403.86
117 785 18 -$579.59
117 785 19 -$740.55
117 785 20 -$888.34

10% 6%

NPW-A, NPW-B, NPW-C, NPW-D and

NPW-E
0

0 NPW-A
NPW-B
0
NPW-C
 NPW-A, NPW-B, NPW-C, NPW-D and
NPW-E
0

0 NPW-A
NPW-B
0 NPW-C
0 NPW-D
NPW-E
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
0

0
Interest Rate

ng these numbers in a choice table:

MARR ≥ 20% do nothing
20% ≥ MARR ≥ 9.6% select B
9.6% ≥ MARR ≥ 2% select A
2% ≥ MARR ≥ 0% select C
NPW-B NPW-C NPW-D NPW-E
$6,200.00 $9,220.00 $1,340.00 $6,700.00
$5,398.68 $7,732.67 $1,111.33 $5,165.76
$4,704.09 $6,443.44 $913.12 $3,835.88
$4,099.76 $5,321.76 $740.66 $2,678.82
$3,572.03 $4,342.24 $590.07 $1,668.41
$3,109.51 $3,483.74 $458.08 $782.84
$2,702.67 $2,728.61 $341.98 $3.89
$2,343.55 $2,062.04 $239.50 -$683.70
$2,025.44 $1,471.61 $148.72 -$1,292.75
$1,742.70 $946.82 $68.04 -$1,834.09
$1,490.56 $478.82 -$3.91 -$2,316.85
$1,264.96 $60.09 -$68.29 -$2,748.79
$1,062.47 -$315.75 -$126.08 -$3,136.49
$880.15 -$654.16 -$178.10 -$3,485.57
$715.48 -$959.80 -$225.09 -$3,800.84
$566.33 -$1,236.65 -$267.66 -$4,086.42
$430.82 -$1,488.15 -$306.33 -$4,345.86
$307.38 -$1,717.27 -$341.55 -$4,582.20
$194.63 -$1,926.56 -$373.73 -$4,798.09
$91.35 -$2,118.24 -$403.20 -$4,995.82
-$3.47 -$2,294.25 -$430.26 -$5,177.38
 Interest Rate
Your cat’s summer kitty-cottage needs a new roof. 0
You are considering the following two proposals 1
and feel a 15-year analysis period is in line with your 2
cat’s remaining lives. (There is no salvage value for 3
old roofs.) 4
5
Thatch Slate 6
First Cost 20 40 7
Annual upkeep 5 2 8
Service life, in years 3 5 9
10
11
12
13
EUAC - Thatch and EUAC - Slate 13.73
14
18
15
16
16
14 17
12 18
10 19
EUAC - Thatch
8 20
EUAC - Slate
6
4
2
0
0 2 4 6 8 10 12 3 15 17 19
3.7
1
Interest Rate

Because these alternatives have different-length lives, calculating the incremental IRRs is
best done using the spreadsheet function GOAL SEEK (see the last section of this chapter). The
choice table for each material is:
Interest Rate Best Choice
0% ≤ i ≤ 13.73% Slate
13.73% ≤ i Thatch
Using Equivalent Uniform Annual Cost:
EUAC Th = $5 + $20 (A/P, 12%, 3) = $5 + $20 (0.4163) = $13.33
EUAC SL = $2 + $40 (A/P, 12%, 5) = $2 + $40 (0.2774) = $13.10
Fred should choose slate over thatch to save $0.23/yr in costs.

To find incremental ROR, find i such that EUAC SL − EUAC TH = 0. At i = 12%

$0 = $2 + $40 (A/P, i * , 5) − [$5 + $20 (A/P, i * , 3)] −$3 + $40 (0.2774) − $20 (0.4163) =
which is = −$3 + $40 (A/P, i * , 5) − $20 (A/P, i * , 3) At i = 15%
−$3 + $40 (0.2983) − $20 (0.4380) =
Using Linear Interpolation: ΔROR = 12 + 3[–0.23/(–0.23 − 0.172)] = 13.72%
Choice table:
If 0 < MARR ≤ 13.72 Select Slate
If 13.72 < MARR ≤ 100 Select Thatch
EUAC - Thatch EUAC - Slate
$11.67 $10.00
$11.80 $10.24
$11.94 $10.49
$12.07 $10.73
$12.21 $10.99
$12.34 $11.24
$12.48 $11.50
$12.62 $11.76
$12.76 $12.02
$12.90 $12.28
$13.04 $12.55
$13.18 $12.82
$13.33 $13.10
$13.47 $13.37
$13.58 $13.58
$13.61 $13.65
$13.76 $13.93
$13.91 $14.22
$14.05 $14.50
$14.20 $14.79
$14.35 $15.08
$14.49 $15.38
$40 (0.2774) − $20 (0.4163) = −$0.23 < $0 so 12% too low

$40 (0.2983) − $20 (0.4380) = $0.172 > $0 so 15% too high

Cash Flow Year Thatch Slate Slate - Thatch
0 -20 -40 -20
1 -5 -2 3
2 -5 -2 3
3 -25 -2 23
4 -5 -2 3
5 -5 -42 -37
6 -25 -2 23
7 -5 -2 3
8 -5 -2 3
9 -25 -2 23
10 -5 -42 -37
11 -5 -2 3
12 -25 -2 23
13 -5 -2 3

14 -5 -2 3
15 -25 -42 -17

8%