Comparison of alternatives:-
For most of the engineering projects, equipments etc., there are more than one feasible alternative. It is the duty of the project management team (comprising of engineers, designers, project managers etc.) of the client organization to select the best alternative that involves less cost and results more revenue. For this purpose, the economic comparison of the alternatives is made. The different cost elements and other parameters to be considered while making the economic comparison of the alternatives are initial cost, annual operating and maintenance cost, annual income or receipts, expected salvage value, income tax benefit and the useful life. When only one, among the feasible alternatives is selected, the alternatives are said to be mutually exclusive.

As already mentioned in module-1, the cost or expenses are generally known as cash outflows whereas revenue or incomes are generally considered as cash inflows. Thus in the economic comparison of alternatives, cost or expenses are considered as negative cash flows. On the other hand the income or revenues are considered as positive cash flows. From the view point of expenditure incurred and revenue generated, some projects involve initial capital investment i.e. cash outflow at the beginning and show increased income or revenue i.e. cash inflow in the subsequent years. The alternatives having this type of cash flow are known as investment alternatives. So while comparing the mutually exclusive investment alternatives, the alternative showing maximum positive cash flow is generally selected. In this case, the investment is made at the beginning to gain profit at the future period of time. Example for such type alternatives includes purchase of a dozer by a construction firm. The construction firm will have different feasible alternatives for the dozer with each alternative having its own initial investment, annual operating and maintenance cost, annual income depending upon the production capacity, useful life, salvage values etc. Thus the alternative which will yield more economic benefit will be selected by the construction firm. There are some other projects which involve only costs or expenses throughout the useful life except the salvage value if any, at the end of the useful life. The alternatives having this type of cash flows are known as cost alternatives. Thus while comparing mutually exclusive cost alternatives, the alternative showing minimum negative cash flow is generally selected. Example for such type alternatives includes construction of a government funded national highway stretch between two regions. For this project there will be different feasible alternatives depending upon length of the stretch, type of pavement, related environmental, social and regulatory aspects etc. Each alternative will have its initial cost of construction, annual repair and maintenance cost and some major repair cost if any, at some future point of time. The alternative that will exhibit lowest cost will be selected for the construction of the highway stretch.

The differences in different parameters namely initial capital investment, annual operation cost, annually generated revenue, expected salvage value, useful life, magnitude of output and its quality, performance and operational characteristics etc. may exist among the mutually exclusive alternatives. Thus the economic analysis of the mutually exclusive alternatives is generally carried out on the similar or equivalent basis since each of the feasible alternatives will meet the desired requirements of the project, if selected.

The economic comparison of mutually exclusive alternatives can be carried out by different equivalent worth methods namely present worth method, future worth method and annual worth method. In these methods all the cash flows i.e. cash outflows and cash inflows are converted into equivalent present worth, future worth or annual worth considering the time value of money at a given interest rate per interest period.