Comparison and Selection among Alternatives

Engineering Economics; Introduction to Multi-Scheme Comparison and Selection Methods

Created byXiaofeng WANG

Last updated 12/2025

English

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What you'll learn

Understand the role and application scenarios of multi-alternative comparison in engineering economic decision-making
Master the basic concepts and general procedures of multi-alternative comparison
Apply commonly used economic evaluation criteria to the comparison of multiple alternatives
Understand potential ranking inconsistencies among different evaluation criteria
Use the equivalence principle to make alternatives with different service lives or scales comparable
Master the basic decision rules for step-by-step elimination and selection of alternatives
Select the economically optimal alternative under given constraints

Course content

1 section • 11 lectures • 1h 0m total length

Overview of Alternative Comparison and Selection7:11
Explore multi-planning versus single-planning, and master mutual support and control plans along with independent and combination plans through feasibility tests and selection methods like difference, annual increase, and collective penetration.
Principle of the “Incremental Method” with a Simple Example.5:53
Apply the incremental method to compare two feasible investment plans using the quantitative method, performing absolute efficiency tests, calculating differences, and evaluating the investment income rate to select the plan.
Incremental Net Present Value Method4:15
Assess three investment options A, B, and C using a limit indicator on investment and annual income to test feasibility, then incrementally compare feasible options and select A.
Incremental Payback Period Method2:59
Compare two projects using the incremental payback period to assess feasibility. Compute payback for A (about 3.54 years) and B (3 years) and apply incremental analysis to choose feasible project.
Incremental Internal Rate of Return Method.9:05
Apply ZengMiao's incremental internal revenue method to compare Plan A and Plan B, perform an absolute economic effect test, then use the incremental plan to decide feasibility via limit values.
Alternative Approach to Incremental IRR3:47
Explore an alternative incremental IRR approach that uses limit values to compare the internal yield with the standard yield, determining project feasibility without computing the exact IRR.
Annual Worth Method for Alternatives with Unequal Service Lives4:50
Compare non-equivalent mutual funding for life-sustaining periods using the annualization, minimum contribution ratio, and common period methods to analyze net cash flow and determine the lowest annual cost.
Present Worth Method for Alternatives with Unequal Service Lives6:31
Apply the present worth method to compare alternatives with unequal service lives, using 30-year cycles to evaluate plan a and plan b costs and identify the lowest cost option.
Grouping Method for Converting Independent Alternatives into Mutually Exclusive5:43
Discover how to group independent plans into mutually exclusive combinations under unlimited resources. Compare the mutual-support method and the efficiency index to find the most profitable combination within a limit.
Ranking Method Using Efficiency Indicators for Independent Alternatives5:47
Apply the efficiency index to rank independent alternatives by investment efficiency, select the top combinations under an investment limit, and apply mutualization of independent plans to maximize annual income.
Comparison and Selection of Mixed Alternatives4:05
Explore the mixed solution comparison method, combining independent and complementary options to optimize selections under investment limits, using A and C as a practical example.

Requirements

Before studying this part, learners should have a basic understanding of engineering economics, including the concepts of cash flows, the time value of money, and equivalence principles. They should be familiar with common economic evaluation indicators and their basic calculation methods, and be able to interpret cash flow diagrams. A general awareness of engineering project decision-making and basic quantitative analysis skills is also required to effectively compare and select among multiple alternatives.

Description

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.

Who this course is for:

The learners for this part typically include undergraduate and graduate students majoring in engineering management, civil engineering, industrial engineering, and related fields; practicing engineers and project managers involved in project planning and investment decision-making; financial analysts and cost engineers engaged in project evaluation; and professionals preparing for engineering economics–related courses, certifications, or professional training.