Engineering Economics Concepts & Methods PDF

\#\# 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.