2. Description of the problem & Role in decision-making
Steps of tackling a problem through economic analysis:
==1 - Problem description → Objectives statement==
Through this phase, you choose the main factors included in this problem
==2 - Collection of data → Coming up with alternatives==
Through this step, you need to collect relevant, available data and define viable solution alternatives which means one or multiple approaches to meet the objective of your project.
==3 - Make realistic cash flow estimates==
Give an estimated cost for each criterion you have mentioned during the alternatives you came up with.
| ==Types of cash== | Single( non-recurring) | Recurring | Fixed/ Variable |
|---|---|---|---|
| Characteristics | the kind of cash that is paid once. | the kind of cash that should be paid repetitively following a system(monthly, yearly..) | ==Fixed==: the one that stays relatively fixed like salaries, rent… \n ==Variable==: the one that is related to production and sales such as supplies, hourly wages |
==4 - Identify an economic measure of worth criterion for decision-making==
Since the estimates of cash flow amounts and timing are about the future, they will be somewhat different than what is actually observed, due to changing circumstances and unplanned events. In short, the variation between an amount or time estimated now and that observed in the future is caused by the stochastic (random) nature of all economic events.
\n ==5 -== ==Evaluate each alternative; consider non-economic factors; use sensitivity analysis as needed. \n Select the best alternative.==
During this phase, you need to evaluate each alternative, considering STEEPLE factors and using the ^^Sensitivity analysis ^^is utilized to determine how a decision might change according to varying estimates, especially those expected to vary widely. And based on those factors, you select the best alternative.
\n ==6 - Implement the solution and monitor the results.==
Implementation of tasks and monitor and evaluate the results you got out of the tasks you have planned.
→ The time value of money explains the change in the amount of money over time for funds that are owned (invested) or owed (borrowed). This is the most important concept in the engineering economy.