---
title: "Principles of engineering economics and decision making"
subject: "Engineering Economics"
chapter: 1
key: "semester_6/engineering_economics:principles-ee-help-decision"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/principles-ee-help-decision
site: BCT Engineering
---

# Principles of engineering economics and decision making

Engineering Economics · Chapter 1: Introduction

- Asked in: 2069 Poush
- Video: [Introduction to Engineering Economics - Engineering Economics Lightboard](https://www.youtube.com/watch?v=9yj6CtMUsYU) — Engineering Economics Guy
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/principles-ee-help-decision
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-1

## Question

What are the principles of engineering economics? How does it help to decision making process?

## Short answer

Principles: develop alternatives, focus on differences, use time value of money, common unit, and consider uncertainty. It aids decisions by converting cash flows to comparable present worth, ranking alternatives numerically, and incorporating non-monetary factors for a defensible choice.

## Answer

#### Principles of engineering economics
1. Develop the alternatives (including "do nothing").
2. Focus on the differences between alternatives.
3. Use a consistent viewpoint.
4. Use a common unit of measure (money).
5. Consider all relevant criteria, monetary and non-monetary.
6. Make uncertainty explicit.
7. Revisit the decision and compare the results with the estimates.
8. Money has a time value; compare cash flows at the same time.

#### How it helps the decision-making process
Engineering economics fits into a rational decision process:

```text
 Recognise problem
        |
 Define goals and alternatives
        |
 Estimate cash flows of each
        |
 Select criterion (PW, AW, IRR, B/C)
        |
 Analyse, compare, include risk
        |
 Select best alternative
        |
 Implement and post-audit
```

- It forces the problem to be defined clearly and many alternatives to be listed.
- It converts the cost and benefit of each alternative to a comparable money basis by considering time value of money.
- Tools such as PW, AW, IRR, B/C ratio, payback and break-even give a clear numerical ranking.
- Sensitivity and risk analysis show how safe the decision is if estimates change.
- It combines money results with non-monetary factors for the final choice.
- A post-audit compares the actual and predicted results and improves future decisions.

Therefore the decision is objective, consistent and defensible rather than guesswork.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. Which is NOT a principle of engineering economics?
   A. Develop the alternatives
   B. Use a common unit of measure
   C. Make uncertainty explicit
   D. Ignore uncertainty in estimates
   Answer: D. Uncertainty must be made explicit. (Key point: Principles)

2. The purpose of a post-audit is to:
   A. Compare actual results with estimates and improve future decisions
   B. Select the first alternative
   C. Estimate cash flows
   D. Define the problem
   Answer: A. It closes the loop of the decision process. (Key point: Post-audit)

3. Which order is correct?
   A. Analyse, then define goals
   B. Define goals and alternatives, estimate cash flows, select criterion, analyse, select best
   C. Implement, then compare alternatives
   D. Select best, then estimate cash flows
   Answer: B. A rational process runs from problem to implementation. (Key point: Decision process)

## Related in Engineering Economics

- [Define engineering economics and its principles](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adefine-ee-principles) — Engineering Economics, chapter 1, asked 3×
- [Importance of engineering economics for engineers](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aimportance-ee-decision-making) — Engineering Economics, chapter 1, asked 2×
- [Define engineering economics; capitalistic or socialistic economy](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adefine-ee-capitalistic-socialistic) — Engineering Economics, chapter 1
- [IRR by trial and error; investment decision](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Airr-trial-error-25000) — Engineering Economics, chapter 3
- [Explain decision tree analysis](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Aexplain-decision-tree) — Engineering Economics, chapter 6, asked 5×
- [Decision tree for plant improvement alternatives](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adecision-tree-plant-alternatives) — Engineering Economics, chapter 6, asked 2×

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