Principles of engineering economics

We define the foundation for engineering economy to be set of principles that provide comprehensive doctrine (detail) for developing the methodology of applying Engineering economy in C E projects

Principle # 1
Developing alternatives
The choice or decision of doing any project is among alternatives. The alternatives need to be identified & then defined for subsequent analysis. Developing & defining alternatives for detail evaluation is important. Engineers & managers should place a high priority on this responsibility. Creativity & innovation are essential for this process
e.g. For excavation the alternatives can be
(a) By Machine
(b) Man power
(C) Machine + man power

Principle # 2
Focus of difference:

Only the differences in expected future out come among the alternatives are relevant to their compression & should be consider in the decision. Therefore this principle recommends future course of action on the differences among the possible alternatives

Principle # 3
Use of a consistent point of view

The prospective outcome of alternatives economic & other should be consistently developed from the define view point. It depends upon the type of organization initiating any project. For public sector organization priority will be different from the private sector organization. For a public sector values & services for max people in community will be preferred while for same project private sector will consider the rate of return on the investment made on that project

Principle # 4
Use a common unit of measure:

Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis & comparison of the alternatives
e.g. A non economic term, services or values should be converted to economic or in monitory unit. Unit of measurement & final unit must be in the same currency or unit of measurement

Principle # 5
Consider all relevant criteria
Selection of preferred alternatives requires a use of criterion. The decision process should be consider both out comes enumerated in the monitory unit & those expressed in some other unit of measurement or made explicit in a descriptive manner
In engineering economic analysis the primary criterion relates to the long term financial interest of the owner e.g. Motor ways & rail ways have generally long lives

Principle # 6
Make uncertainty explicit:

Uncertainty is inherent in projecting or estimating the future outcomes of alternatives & should be considered in the analysis & comparison. The magnitude & impact of future outcomes in any course of action are uncertain even if the alternative involves no change from current operation e.g. Future cash receipts & expensive will not be what eventually occur. Thus dealing with uncertainty is an imp expect of E.E analysis

Principle # 7
Revisit the decision or improving the decision:

Improve decision making results from an adaptive process to the extent practicable. The initial project outcome of selected alternative should be subsequently compared with actual results achieved. Decision even through relatively successful will have results different from the initial estimate of consequences learning from & adapting based on our experience is essential. Wither in private or public sector organization as they are the indicator of a good organization. Organization discipline is needed to ensure implement decision are routinely post evaluated & the results are used to improve future alternatives & quality of decision making therefore post evaluation highlight weakness in the Engg. Economy studies being done in any organization.