Engineering Economics

A final issue concerns the treatment of uncertainty. One method for explicitly introducing risk considerations is to treat benefits and costs as random variables which may be described by probability distributions. For exam-ple, an estimate of fire losses might consider the following events: no fire, minor fire, intermediate fire, and major fire. Each event has…

There are two considerations in determining benefit-cost criteria. The first pertains to project acceptability, while the second pertains to project selection. Project acceptability may be based on benefit-cost dif-ference or benefit-cost ratio. Benefit-cost ratio is a measure of project worth in which the monetary equivalent bene-fits are divided by the monetary equivalent costs. The first criterion requires that…

Direct losses are measured or estimated statistically or by a priori judgment. Actuarial fire-loss data collected nationally or for a particular industry may be used, pro-viding it is adequately specific and the collection mecha-nism is reliable. More often, an experienced judgment of potential losses is made, sometimes referred to as the max-imum probable loss (MPL). Indirect losses, if considered, are…

The identification of benefits and costs depends on the particular project under consideration. Thus, in the case of fire prevention or control activities, the benefits are based on fire losses prior to such activities. Fire losses may be classified as direct or indirect. Direct economic losses are property and contents losses. Indirect losses in-clude such things…

Benefit-cost analysis, also referred to as cost-benefit analysis, is a method of comparison in which the conse-quences of an investment are evaluated in monetary terms and divided into the separate categories of benefits and costs. The amounts are then converted to annual equivalents or present worths for comparison. The important steps of a benefit-cost analysis are        1.   Identification…

Rate of return is, by definition, the interest rate at which the present worth of the net cash flow is zero. Com-putationally, this method is the most complex method of comparison. If more than one interest factor is involved, the solution is by trial and error. Microcomputer programs are most useful with this method. The calculated…

To compare alternatives by annual cost, all cash flows are changed to a series of uniform payments. Current ex-penditures, future costs or receipts, and gradients must be converted to annual costs. If a lump-sum cash flow occurs at some time other than the beginning or end of the eco-nomic life, it must be converted in a…

In a present worth comparison of alternatives, the costs associated with each alternative investment are all converted to a present sum of money, and the least of these values represents the best alternative. Annual costs, future payments, and gradients must be brought to the present. Converting all cash flows to present worth is of-ten referred to as discounting….

Provision for inflationmay be made in two ways: (1) estimate all future costs and benefits in constant prices, and use a discount rate which represents the opportunity cost of capital in the ab-sence of inflation; or (2) estimate all future benefits and costs in current or inflated prices, and use a discount rate which includes an…