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Principles of Engineering Economic Analysis: 1-3
Note: non-monetary considerations may result in a different alternative being chosen.
1. Money has a time value.
-We prefer money sooner than later.
2. Make economically justified investments.
-Evaluate future benefits or reduced costs that will be realized, & compare with investment costs.
3. Choose the mutually exclusive investment that maximizes economic worth.
Principles of Engineering Economic Analysis: 4-7
4. Two investment alternatives are equivalent if they have the same economic worth.
-Cash flows can be equally worthy, even with different values in different years.
5. Marginal revenue must exceed marginal cost.
-Do not invest unless added revenues are > added costs.
6. Keep investing while added incremental investments yield returns > investor’s TVOM.
-Use someone else’s $ if you can earn more by investing than you have to pay for it.
7. Consider only differences in cash flows among investment alternatives.
-Common costs or revenues are ignored.
Principles of Engineering Economic Analysis: 8-10
8. Compare investment alternatives over a common period of time.
-Do not use different time periods, even if alternatives have different life-cycles.
9. Risks & returns tend to be positively correlated.
-The higher the risks, the greater the returns need to be to justify investment.
10. Past costs are irrelevant, unless they impact future costs.
-Prior investments are completely ignored in engineering economic analysis.
-The only thing that matters is future costs and benefits.
-Unless it is government spending because the public gets mad
Engineering Economic Analysis
Systematic evaluation of the economic merits of proposed solutions to engineering problems
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