Engineering Economics Blog

An engineering economy study involves many elements: problem identification, definition of the
objective, cash flow estimation, financial analysis, and decision making. Implementing a structured procedure is the best approach to select the best solution to the problem.

The steps in an engineering economy study are as follows:

    1.    Identify and understand the problem; identify the objective of the project. 
    2.    Collect relevant, available data and define viable solution alternatives. 
    3.    Make realistic cash flow estimates. 
    4.    Identify an economic measure of worth criterion for decision making.
    5.    Evaluate each alternative; consider noneconomic factors; use sensitivity analysis as needed. 
    6.    Select the best alternative. 
    7.    Implement the solution and monitor the results. 

Technically, the last step is not part of the economy study, but it is, of course, a step needed to meet the project objective. There may be occasions when the best economic alternative requires more capital funds than are available, or significant noneconomic factors preclude the most economic alternative from being chosen. Accordingly, steps 5 and 6 may result in selection of an alternative different from the economically best one. Also, sometimes more than one project may be selected and implemented. This occurs when projects are independent of one another.

In this case, steps 5 through 7 vary from those above.  Figure 1–1  illustrates the steps above for  one alternative. Descriptions of several of the elements in the steps are important to understand.

⇒ Steps in an Engineering Economy Study - Problem Description and Objective Statement, Alternatives, Cash Flows, Engineering Economy Analysis, Selection of the Best Alternative.

Figure 1–1  Steps in an engineering economy study.