Introduction to Engineering Economics

Introduction to Engineering Economics

Introduction

Engineering economics is a systematic approach to evaluating the economic aspects of engineering projects and investments. It aids engineers in making informed decisions that optimize cost, efficiency, and performance. Understanding the principles of engineering economics allows for effective allocation of resources in projects.

Fundamental Concepts

Present Worth (PW)

Present Worth refers to the current value of a sum of money that is expected to be received in the future, discounted at a specific interest rate. The formula for Present Worth is given by:

PW=FV(1+r)n PW = \frac{FV}{(1 + r)^n}

Where:

  • PW = Present Worth
  • FV = Future Value
  • r = Interest rate
  • n = Number of periods

Future Worth (FW)

Future Worth is the value of a sum of money at a specific date in the future, taking into account a specific interest rate. The formula for Future Worth is expressed as:

FW=PW×(1+r)n FW = PW \times (1 + r)^n

Where:

  • FW = Future Worth
  • PW = Present Worth
  • r = Interest rate
  • n = Number of periods

Analysis of Alternatives

When comparing different engineering projects or investments, it is essential to conduct an analysis of alternatives. This helps in determining which option provides the best financial outcome based on predefined criteria.

  • Cost-Benefit Analysis: Compares the costs and benefits of each alternative.
  • Break-even Analysis: Determines the point at which total revenues equal total costs.
  • Net Present Value (NPV): Calculates the total value of an investment by discounting future cash flows to present value.

Conclusion

Engineering economics integrates financial principles and technical engineering knowledge, allowing professionals to evaluate costs and returns effectively. Understanding core concepts like Present Worth and Future Worth, and applying analytical techniques equips engineers to make sound financial decisions in their projects.