TABLE OF CONTENTS Gerald A. Fleischer
Industrial and Systems Engineering
University of Southern California
As is the case with other types of capital allocation decisions, engineering economy rests on the proposition that refusal to expend scarce resources is rarely, if ever, the most prudent course of action. Rather, the problem is one of choosing from among a variety of investment alternatives in order to satisfy the decision makers intermediate and longer term objectives. The operative word is economy, and the essential ingredient in economy is consideration of the economic consequences of alternatives over a measured period of time, the planning horizon. This chapter is dedicated to the principles and procedures for evaluating the economic consequences of engineering plans, programs, designs, policies, and the like. The effects of income taxes and relative price changes ( inflation ) are also considered.
Before developing the mathematical models appropriate to evaluating capital proposals, it will be useful to identify the fundamental principles that give rise to the rationale of capital allocation. Moreover, some of these principles lead directly to the quantitative techniques developed subsequently.
Only feasible alternatives should be considered. The capital budgeting analysis begins with determination of all feasible alternatives, since courses of action that are not feasible, because of certain contractual or technological considerations, are properly excluded.
Using a common unit of measurement (a common denominator) makes consequences commensurable. All decisions are made in a single dimension, and money units dollars, francs, pesos, yen, and so forth seem to be most generally suitable. Of course, not...
