Alternatives are developed from project proposals to accomplish a stated purpose. The logic of alternative formulation and evaluation is depicted in Figure (4-1). Some projects are economically and technologically viable, and others are not. Once the viable projects are defined, it is possible to formulate the alternatives. Alternatives are one of two types: mutually exclusive or independent. Each type is evaluated differently.
§ Mutually exclusive (ME). Only one of the viable projects can be selected. Each viable project is an alternative. If no alternative is economically justifiable, do nothing (DN) is the default selection.
§ Independent. More than one viable project may be selected for investment. (There may be dependent projects requiring a particular project to be selected before another, and/or contingent projects where one project may be substituted for another.)
An alternative or project is comprised of estimates for the first cost, expected life, salvage value, and annual costs. Salvage value is the best estimate of an anticipated future market or trade-in value at the end of the expected life. Salvage may be estimated as a percentage of the first cost or an actual monetary amount; salvage is often estimated as nil or zero. Annual costs are commonly termed annual operating costs (AOC) or maintenance and operating (M&O) costs. They may be uniform over the entire life, increase or decrease each year as a percentage or arithmetic gradient series, or vary over time according to some other expected pattern.
A mutually exclusive alternative selection is the most common type in engineering practice. It takes place, for example, when an engineer must select the one best diesel-powered engine from several competing models. Mutually exclusive alternatives are, therefore, the same as the viable projects; each one is evaluated, and the one best alternative is chosen. Mutually exclusive alternatives compete with one another in the evaluation. All the analysis techniques compare mutually exclusive alternatives. Present worth is discussed in the remainder of this chapter.
The do-nothing (DN) option is usually understood to be an alternative when the evaluation is performed. If it is absolutely required that one of the defined alternatives be selected, do nothing is not considered an option. (This may occur when a mandated function must be installed for safety, legal, or other purposes.) Selection of the DN alternative means that the current approach is maintained; no new costs, revenues, or savings are generated.
Independent projects are usually designed to accomplish different purposes, thus the possibility of selecting any number of the projects. These projects (or bundles of projects) do not compete with one another; each project is evaluated separately, and the comparison is with the MARR.
Finally, it is important to classify an alternative’s cash flows as revenue-based or cost-based. All alternatives evaluated in one study must be of the same type.
§ Revenue. Each alternative generates cost and revenue cash flow estimates, and possibly savings, which are treated like revenues. Revenues may be different for each alternative. These alternatives usually involve new systems, products, and services that require capital investment to generate revenues and/or savings. Purchasing new equipment to increase productivity and sales is a revenue alternative.
§ Cost. Each alternative has only cost cash flow estimates. Revenues are assumed to be equal for all alternatives. These may be public sector (government) initiatives, or legally mandated or safety improvements. Cost alternatives are compared to each other; do-nothing is not an option when selecting from mutually exclusive cost alternatives.
Figure (4-1): Logical progression from proposals to alternatives to selection.