Engineering Economics Concepts & Methods PDF
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This document covers key concepts and methods in engineering economics, including project evaluation techniques like payback period, discounted payback period, net present value, and future value analysis. It also includes practical examples to illustrate these methods. The document emphasizes the importance of considering both financial and non-financial factors in decision-making for engineering projects.
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\#\# Core Concepts and Assumptions \- Engineering economics operates under the end-of-period convention where cash flows are calculated at period ends \- Sunk costs are not considered; only current and future situations matter \- Two viewpoints exist: investor and borrower perspectives \- Projec...
\#\# Core Concepts and Assumptions \- Engineering economics operates under the end-of-period convention where cash flows are calculated at period ends \- Sunk costs are not considered; only current and future situations matter \- Two viewpoints exist: investor and borrower perspectives \- Projects can be categorized into three types: 1\. Independent projects (evaluated separately) 2\. Mutually exclusive projects (only one can be chosen) 3\. Related but not mutually exclusive projects (decisions affect each other) \#\# Project Evaluation Methods \#\#\# Payback Period Method \- Measures time required to recover initial investment \- Advantages: \- Easy to understand and use \- Focuses on liquidity \- Conservative approach to uncertain future cash flows \- Disadvantages: \- Ignores time value of money \- Arbitrary cutoff points \- Disregards cash flows after payback period \- Biased toward short-term projects \#\#\# Discounted Payback Period (DPBP) \- Considers time value of money by discounting future cash flows \- Requires specified interest/discount rate \- More accurate than simple payback period \- Shorter DPBP is preferred \#\#\# Net Present Value (NPV) \- Calculates difference between initial cost and sum of discounted future cash flows \- Key assumptions: \- Cash flows occur at period ends \- Cash flows and time horizon are known \- Interest rate (MARR) is known \- Decision criteria: \- Higher NPV is preferred \- Positive NPV indicates desirable project \- MARR must exceed WACC (Weighted Average Cost of Capital) \#\#\# Capitalized Equivalent Method \- Used for permanent/infinite period projects (e.g., infrastructure) \- Calculates present sum needed to provide service indefinitely \- Formula: P = A/i (where A is annual payment, i is interest rate) \- Commonly used in government and institutional analysis \#\#\# Future Value Analysis \- Evaluates alternatives at future points in time \- Similar to NPV but focused on future value \- Requires same time period for comparison \- Useful for long-term planning (e.g., retirement savings) \#\# Practical Examples \#\#\# Equipment Selection Example \- Choice between two models: \- Model I: \$15,000 cost, \$5,000 annual profit \- Model II: \$20,000 cost, \$6,500 annual profit \- At 10% MARR, Model II preferred with higher NPV \#\#\# Perpetual Scholarship Example \- \$5,000 annual scholarship forever \- 4% interest rate \- Required endowment: \$125,000 \#\#\# Plant Investment Example \- Comparison between new plant construction and factory remodeling \- Analysis using both future value and NPV methods \- New plant option preferred due to lower costs \#\# Decision Making Considerations \- Economic factors: \- Profitability \- Recovery time \- Cash flow timing \- Non-economic factors: \- Ethics \- Environmental impact \- Societal considerations This comprehensive framework enables informed decision-making for engineering projects while considering both financial and non-financial factors.
