Comparison of Alternatives

Most decisions are based on economic criteria. In-vestments are unattractive, unless it seems likely they will be recovered with interest. Economic decisions can be di-vided into two classes:

1.   Income-expansion—that is, the objective of capitalism

2.   Cost-reduction—the basis of profitability

engineering economic analysis are pri-marily concerned with cost-reduction decisions, finding the least expensive way to fulfill certain requirements, or minimizing the sum of expected fire losses plus invest-ment in fire protection.

There are four common methods of comparing alter-native investments: (1) present worth, (2) annual cost, (3)   rate of return, and (4) benefit-cost analysis. Each of these is dependent on a selected interest rate or discount rate to adjust cash flows at different points in time.