The construction economic studies can be classified into the following two types:
- Primary economic comparisons
- Time based studies
Primary economic comparisons
Here the effects of time are irrelevant. All the factors influencing the decisions are already present. There are two types of economic comparisons: Present economic studies and Break-even analysis
A) Present economic studies
Important applications of present economic studies in construction are
- selection of plant and equipment
- selection of material and construction methods
B) Break-even analysis
The break-even analysis is a graphical representation which shows the variation of costs for different processes to achieve the same objective. The analysis can be employed in the selection among the alternatives.
Time based studies
A) Cash flow forecasting
Cash flow is the movement of money into or out the company. Purposes of cash flow are:
- It ensures the availability of cash to meet the demand
- It provides an indicator to the lending institutions that the company is capable of the repaying the advances made
- It ensures that cash resources are fully utilized for the benefit of the owner and the investors
B) Investment Appraisal
This may be classified according to the managerial problems.
- New construction
- Replacement and modernization
- Economic choice
- Financing problems
The actual decision is made based on economic comparison of the various alternatives. But sometimes expenditure may override an optimum solution.
The expenditure can be evaluated by different approaches:
- Return on capital employed
- Discounted cash flow method
1. Pay back: In this method, the number of years it takes to payback the original investments from profits arising out of the investments is considered.
2. Return on capital employed: This method is based on annual profit which is a percentage of the capital required to produce that profit.
3. Discounted cash flow method: The basic principle of this method is that a sum of money received today is worth more than the same sum received at some future date.