Question

Discuss all methods of compering between two alternatives (EUAC, EUAB, NPW, etc.)

Answer 1

Methods of comparing between two Alternatives:

Present and Annual Worth

• Use the NPW Method to compare two or more alternatives and select the best

• Use the NAW Method to compare two or more alternatives and select the best

• Select and use a study period when alternative lives are different

• Do an incremental analysis for two alternatives

• Select challenger and defender for incremental analysis

• Use the Economics add-in for comparisons.

Rate of Return

• Given a set of projects and an investment budget, use the ROR method for selecting the best subset of projects.

• Use the ROR method to compare two or more alternatives and select the best.

• Select and use a study period when alternative lives are different

• Do an incremental analysis for comparing two or more alternatives.

• Use the Economics add-in for ROR comparisons.

Inflation

• Use the CPI to translate the general price levels between two points in time.

• Given the prices of a commodity at two points in time, compute the average annual escalation rate for the commodity. Use the geometric mean for the calculation.

• Express cash flow with real or actual dollars. Translate between the two.

• Compute real and market MARR values.

• Do economic analyses by hand for simple projects.

• Use the Economics add-in to do economic analyses for complex projects and comparisons.

Risk

• Given a list of mutually exclusive alternatives with random features of their cash flows find the distributions of the evaluation measure (NPW or NAW)

• Given the distribution of the evaluation measure, compute risk measures: standard deviation, information ratio, shortfall probability, risk percentile, and value at risk.

• Given probability distributions for the alternatives, plot a mean/standard deviation scatter diagram.

• Use the mean value criterion to make decisions about risky situations. Know when the mean value criterion is appropriate for deciding between alternatives.

• Use dominance to eliminate solutions. Know when dominance is valid and when it is an approximation.

• Use the risk measures to demonstrate the trade-offs between risk and return.