Comparison and Selection among Alternatives

This course serves as a core module in engineering economics, systematically teaching methods for scientifically comparing and optimizing decisions among multiple types of investment projects under resource constraints. The course begins by establishing the foundation for project comparability, focusing on three typical scenarios: mutually exclusive projects, independent projects, and mixed projects, constructing a complete analytical framework and decision-making process.

For mutually exclusive projects (where only one can be selected), the course elaborates on comparison methods for two situations: projects with identical lifespans and those with different lifespans. When lifespans are the same, the core method is incremental analysis (also known as the differential method). This involves evaluating the economic indicators (such as ΔNPV or ΔIRR) corresponding to the incremental cash flow to assess the rationality of additional investment, avoiding potential misinterpretations from direct comparisons. When lifespans differ, the course emphasizes the least common multiple method and the annual worth method. The annual worth method (including Net Annual Value, NAV, and Annual Cost, AC) converts cash flows into equivalent uniform annual series, providing a direct and effective comparison tool for projects with varying lifespans.

For independent projects (where projects do not affect each other), the focus is on optimization and portfolio selection under constraints such as capital. The course details two core approaches: first, the method of transforming independent projects into mutually exclusive combinations, which involves enumerating all feasible combinations and selecting the one with the highest net present value under the given constraints; second, the efficiency indicator ranking method, which ranks projects based on indicators like the Net Present Value Ratio (NPVR) or Internal Rate of Return (IRR) and selects them in order within the capital limit to maximize fund efficiency.

Addressing the more complex scenario of mixed projects (which include both mutually exclusive groups and independent projects), the course guides students in establishing a hierarchical analytical system: first, select the optimal project within each mutually exclusive group using the incremental or annual worth method; then treat these group-optimal projects as a set of independent projects; finally, apply decision-making methods for resource-constrained independent projects to identify the overall optimal portfolio.

Upon completing this course, students will systematically master core tools ranging from annual worth calculations and differential analysis to portfolio optimization and ranking decisions. They will be able to comprehensively apply these methods to practical areas such as engineering investment evaluation, equipment replacement decisions, and R&D project portfolio management, developing rigorous and systematic economic decision-making skills for multi-project scenarios.