W10_FELIX_SELECTING INVESTMENT USING ERR & PAYBACK PERIODE

1.      Problem Recognition, Definition and Evaluation

Based from previous blog, we will evaluate the project economy using ERR (External rate of Return & Payback Period.

2.      Feasible alternatives

The alternative is same with previous blog i.e Weekly Blog (W-8) posting.

a.       Option A involves an initial investment of $ 1,908,199; earn revenue $ 628,395 on the first year, $ 832,394 on second year and $ 736,290 in the third year.

b.      Option B requires an initial investment of $ 737,921 and estimate earn $ 295.378 on the first year and $ 590,759 in the second year

Discount Rate  at 5%.

3.      The cash flow for each feasible alternatives

 

 

4.      Selection of the acceptable criteria.

Using the engineering economy ERR and Payback periode, we will analyze which one from both of the Investment will give the best profit.

5.      Analysis for the alternatives

Option A (Contractor A).

 

Option B (Contractor B).

 

As previous outcome Both Option can be accept since both have positive value NPV > 0, at MARR 5% and IRR > MARR.

However as an owner we need to make decision which one is better investment.

Option B only involves an initial investment of $737,921, and gives yielding a return of $900,906 two years in the future.

While option A, have $ 1,170,278 for additional capital cost, but return $2.303.109 in three years in the future.

According Engineering Economy Chapter 6, “Comparing and selection among alternatives” we shall analyses the incremental ∆ (B-A)

 

 

6.      Select the preferred alternative

From above analysis we can take conclusion NPV, for ∆ (A-B) still have positive value, and both IRR and ERR > than MARR (5%). So new technology from contractor A even though require more investment cost can be justified.

Additional question for project lifetime; “why i calculate project economic evaluation only for turnkey period (3 years for option A and 2 year for option B)”.  This question also can be answer by Chapter 6, section 6.5 “Useful lives are unequal among the alternatives”.

 

 

 

The result is same, option/Contractor A have NPV > than Option/Contractor B, thus Option A should be selected.

7.      Performance Monitoring & Post Evaluation of Result

Performance and the quality of these calculation will be proposed to management for further decision.

8.      Reference:

·         William G.Sullivan, and Elin M.Wicks (2012), Engineering Economics-Fifteen Edition, chapter 6, Comparison and Selection among alternative

·         Comparison by Rate of Return: ensc online. Retrieved from httphttp://www2.ensc.sfu.ca/undergrad/courses/ENSC301/Unit05/lecture5.html

·         Rodelas, JessaMarie. The external rate of Return Method. Retrieved from http://www.scribd.com/doc/80335485/The-External-Rate-of-Return-Method