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2. Review: Chapter 5. Defining alternativesDetermining planning horizonComparison of alternatives: PW/FWComparison of alternatives: AW/CWComparison of alternatives: SIRSpecifying MARRSpring break!Comparison of alternatives: IRRComparison of alternatives: ERR. 3. Purpose. To compare mutually

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## Slide Set 5 Comparison of alternatives

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**1. **1 Slide Set 5 – Comparison of alternatives IEM 3503/IEM3513
Dr. Baski Balasundaram
Industrial Engineering & Management

**2. **2 Review: Chapter 5 Defining alternatives
Determining planning horizon
Comparison of alternatives: PW/FW
Comparison of alternatives: AW/CW
Comparison of alternatives: SIR
Specifying MARR
Spring break!
Comparison of alternatives: IRR
Comparison of alternatives: ERR

**3. **3 Purpose To compare mutually exclusive and collectively exhaustive alternatives based on economic measures of worth, under the assumption that each alternative is expected to provide the same service.
Generally, the cash flows to be considered are: first cost, annual costs, non-recurring costs, revenues, and salvage value.
The cash flow series can be finite or infinite.

**4. **4 Economic measures of worth: Recap PW(MARR), FW(MARR), AW(MARR), SIR(MARR)
a single alternative is considered viable (better than do-nothing) if PW(MARR) > 0
PW/FW/AW/SIR analyses will always be consistent with each other
CW(MARR)
simply the PW of an infinite life alternative
PBP
for two alternatives, one with a shorter PBP is better
supplementary method, not always consistent with PW analysis

**5. **5 Economic measures of worth: Recap IRR
a single alternative is considered viable if IRR > MARR
Consistent with PW under certain conditions
Recall issues with multiple roots
ERR
a single alternative is considered viable if ERR > MARR
Designed to avoid multiple roots

**6. **Approach Define the set of mutually exclusive and collectively exhaustive alternatives
Define the planning horizon
Develop the cash flow profiles for each alternative
Specify the MARR to be used
Compare alternatives using a specified measure of worth
Perform supplementary analysis
Select preferred alternative 6

**7. **Mutually exclusive, and exhaustive alt. When we say alternatives A, B, C, ... are mutually exclusive, it means
if any one is chosen, all others are eliminated
i.e., these alternatives are competing with each other to provide the same service, so we don’t select two or more of these
When we say alternatives A, B, C, ... are collectively exhaustive, it means one of these must be chosen (there is no alternative that has been left out from consideration, if do-thing is an alternative, it must be included in that list)
When we say alternatives are mutually exclusive and collectively exhaustive it means exactly one of these must be chosen
7

**8. **Options to alternatives: Example 1 A distribution center receives pallet loads of product, stores the product, and ships the product to various customer locations. If a new distribution is constructed, the following options (proposals) have been identified:
Moving materials from receiving to storage and from storage to shipping
lift trucks
automated guided vehicles (AGVs)
conveyor systems 8

**9. **Options to alternatives: Example 1 Placing and retrieval from storage
lift truck
automated storage and retrieval systems (ASRS)
operator driven S/R vehicle
operator driven, guided S/R vehicle
Storage
block stacking pallet loads
conventional pallet rack, type 1
conventional pallet rack, type 2
conventional pallet rack, type 3
conventional pallet rack, type 4
9

**10. **Options to alternatives: Example 1 Alternative designs for the material handling system at the distribution center can be obtained by combining options identified under 1,2, and 3.
one option (out of 3) for moving materials from receiving to storage area,
one option (out of 4) for placing materials in storage,
one option (out of 5) for the storage system,
one option (out of 4) for removing materials from storage, and
one option (out of 3) for moving materials from storage to shipping 10

**11. **Options to alternatives: Example 1 If every combination of options was permissible, we would have: 3 x 4 x 5 x 4 x 3 = 720 mutually exclusive and exhaustive alternatives.
If do-nothing was an option then we have 721 mutually exclusive and exhaustive alternatives
Typically not every combination is feasible
For example, a particular choice of a storage system might rule out certain options under placement/retrieval from storage. This will render some of the alternatives infeasible and they are eliminated
Budget limitations might further eliminate some combinations whose total initial investment exceeds the available budget 11

**12. **Planning horizon Alternatives are treated as mutually exclusive under the assumption that any one can substitute for any other
That is, they all provide the same service
A planning horizon (number of years/periods) is first determined over which the alternative will be in service
Economic comparison is carried out over this period 12

**13. **13 Different-life Alternatives
Machine A Machine B
First Cost $11,000 $18,000
Annual Operating Cost 3,500 3,100
Salvage Value 1,000 2,000
Life 6 years 9 years

**14. **14

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