SEE 08 Best alternative & economic life

Best alternative & economic life

8.1 Proposal Relationships

Independent proposal & dependent proposal
Forms of dependency

• Co-dependent.
• Mutually exclusive.
• Contingent

8.2 Dependent Proposals

Co-Dependent Proposals

when selecting any one from that set requires accepting the others.

• These should be combined into one proposal
• e.g., Specific programming language VS Its compiler

Mutually Exclusive Proposals

A pair of proposals are mutually exclusive, when selecting one from that pair negates accepting the other.

• These should be combined into one proposal.

Contingent Proposals

A pair of proposals are contingent, when selecting one from that pair requires accepting the other, but not the other way / reverse direction.

8.3 Design Alternative: mutually exclusive units

steps

1.List alternatives
2.Remove invalid alternatives

“Do Nothing” Alternative

Alternative A0 is called “Do nothing”
"Do nothing" should always be considered, except when

• You’re required to do something
  e.g., repair or replace broken equipment.
• You’re working with “new project” (without income)

Cash-Flow Streams for Alternatives

The cash-flow stream for any alternative (other than A0) will be the sum of the cash-flow streams of all proposals it contains.

8.4 Minimum Attractive Rate of Return (MARR)

the organization is confident it can achieve at
least that special rate of return.
AKA “Opportunity Cost”
If you’re confident you can get X% in B, all other alternatives should be evaluated against that X%.

PW(MARR)

= how much more / or less - valuable that alternative is than investing at the MARR

8.5 Algorithm of For-profit Decision Process

8.6 Decisions Based on Total Cash-Flow Streams

8.7 Rank on Rate of Return

• Calculate IRR for each proposal.
• Sort proposals in order of decreasing IRR.
• All proposals with IRR > MARR are selected