Engineering Finance

Solution Alternatives

The task of an engineer is to design solutions that meet the technical specifications of the project. Although it may be difficult to design a single solution, the engineer will often be in the position of evaluating several solutions that all satisfy the technical specifications. The solutions will differ primarily because of economics. In this section we describe the methods for selecting among alternative project solutions using economic criteria.

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  • Present and Annual Worth
    This lesson uses the present and annual worth criteria for selection between mutually exclusive alternatives. Both methods yield the same selection, but we will see that there are important differences in application and interpretation.
  • Rate of Return
    This lesson explores the rate of return method for comparing alternatives. We learn the important lesson that the rate of return method must be applied to increments of investment rather than directly to the individual alternatives.
  • Inflation
    Inflation of costs and revenues is inevitable in modern economies and it complicates economic decision making. Although the present worth, annual worth, and rate of return methods can be used when the effects of inflation are included, this lesson shows how the methods must be adjusted.
  • Comparisons with Risk
    This lesson extends the results of this section to the explicit consideration of risk. No deterministic analysis should be acceptable to the decision maker when there is significant uncertainty in the parameters of the analysis. The decision problem is made more difficult by risk, but the lesson shows how risk can be expressly included.



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Engineering Finance
by Paul A. Jensen
Copyright 2005 - All rights reserved

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