Professional Documents
Culture Documents
Comparing Alternatives
“The alternative that requires the minimum
investment of capital and will produce satisfactory
functional result will always be used unless there
are definite reasons why an alternative requiring a
larger investment should be adopted.”
Comparing Alternatives
1. Rate of Return on Additional Investment
(ROR)
2. Annual Cost (AC) Method
3. Equivalent Uniform Annual Cost (EUAC)
Method
4. Present Worth Cost (PWC) Method
5. Capitalized Method
6. Payback (Payout) Period Method
1. Rate of Return on Additional
Investment
𝐴𝑛𝑛𝑢𝑎𝑙 𝑁𝑒𝑡 𝑆𝑎𝑣𝑖𝑛𝑔𝑠
𝑅𝑂𝑅 =
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝐶1 = 𝑓1 (𝑥) ; 𝐶2 = 𝑓2 (𝑥)
where:
C1 = certain specified total cost applicable to Alternative 1
C2 = certain specified total cost applicable to Alternative 2
x = a common independent variable affecting Alt1 and Alt2
To Break-even:
• on Income and Expenses
Income = Expenses
Expenses = FC + VC
where:
FC = Fixed Costs
VC = Variable Costs
Exercises
1. Two machines are being considered for the production of a
particular part for which there is a long-term demand.
Machine A costs P50,000 and is expected to last 3 years
and have a P10,000 salvage value. Machine B costs P75,000
and is expected to last 6 years and have zero salvage value.
Machine A can produce a part in 18 seconds; Machine B
requires only 12 seconds per part. The out-of-pocket
hourly cost of operation is P38 for A and P30 for B. Monthly
maintenance costs are P200 for A and P220 for B.
If interest on invested capital is 25%, determine the number
of parts per year at which the machines are equally
economical. If the expected number of parts per year is
greater than this break-even quantity, which machine would
be favored?
Exercises
2. A manufacturer produces certain items at a labor
cost per unit of P315, material cost per unit is P100,
variable cost of P3.00 each. If the item has a selling
price of P995, how many units must be manufactured
each month for the manufacturer to break-even if the
monthly overhead is P461,600?
Exercises
3. A company is considering two alternatives with regard to an
equipment which it needs. The alternatives are as follows:
Alternative A: Purchase
Cost of equipment P700,000
Salvage value 100,000
Daily operating cost 500
Economic life, years 10
Alternative B: Rental at P1,500 per day.
At 18% interest, how many days per year must the equipment
be in use if Alternative A is to be chosen.
Exercises
4. A manufacturer produces certain items at a labor
cost of P115 each, material cost of P76 each and
variable cost of P2.32 each. If the item has a unit price
of P600, how many number of units must be
manufactured each month for the manufacturer to
break-even if the monthly overhead is P428,000.
BENEFIT/COST RATIO
Benefit/Cost (B/C) Ratio
• A method of selecting alternatives that is
most commonly used by government agencies
for analyzing the desirability of public
projects.
B/C Ratio
Benefits
• Are advantages, expressed in terms of pesos, which happen
to the owner.
• Favorable consequences of the project to the public.
Disbenefits
• Disadvantages, in term of pesos, to the owner.
• The negative consequences of a project to the public.
Costs
• Anticipated expenditures for construction, operation,
maintenance, etc.
• Monetary disbursement(s) required of the government.
B/C Ratio
𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 − 𝑑𝑖𝑠𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝐵/𝐶 =
𝑐𝑜𝑠𝑡𝑠
𝑖𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠
𝐵/𝐶 =
𝑖𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑐𝑜𝑠𝑡𝑠
Exercises
1. A nonprofit educational research organization is
contemplating an investment of P1.5M in grants to
develop new ways to teach people the rudiments of
profession. The grants would extend over a ten-year
period and would achieve an estimated savings of
P500,000 per year in professors’ salaries, student
tuition, and other expenses. The program would be an
addition to ongoing and planned activities, thus an
estimated P100,000 a year would have to be released
from other program to support the educational
research. A rate of return of 15% is expected. Is this a
good program?
Exercises
2. Four alternatives for providing electric power
supply to a small town have been identified with the
following annual benefits and costs:
Alternative Annual Benefits Annual Costs
A P1,528,000 P780,000
B 1,398,000 664,000
C 960,000 742,000
D 810,000 420,000