Economic Engineering
Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.
Engineering Economy involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available.
Engineering economics quantifies the benefits and costs associating with engineering projects to determine if they save enough money to warrant their capital investments.
General concepts
Efficiency: Efficiency of a system is generally defined as the ratio of its output to input. The efficiency can be classified into technical efficiency and economic efficiency.
Technical efficiency: It is the ratio of the output to input of a physical system. The physical system may be a diesel engine, a machine working in a shop floor, a furnace, etc. (Technical efficiency (%) = Output/ Input × 100)
Economic efficiency: Economic efficiency is the ratio of output to input of a business system. (Economic efficiency (%) = Output/Input × 100 = Worth/Cost × 100)
Interest: Money paid for the use of money
Investment: Is an asset or item acquired with the goal of generating income or appreciation. (Interest = Current Value – Original Amount)
Loan: Is money, property, or other material goods given to another party in exchange for future repayment of the loan value or principal amount, along with interest or finance charges. (Interest = Current Total Owed – Original Amount)
Interest Rate: Interest paid per unit time. (Interest Rate = Interest paid per unit time / Original Amount)
Rate of Return (ROR): Interest accumulated per unit time. (ROR = Interest accumulated per unit time / Original Amount)
Time Value of Money (TVM): Is the money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.
Present Value (PV): Is the current value of a future sum of money or stream of cash flows given a specified rate of return.
Future Value (FV): Is the value of a current asset at a future date based on an assumed rate of growth.
Cash Flow: Is the net amount of cash and cash-equivalents being transferred into and out of a business.
Money value throughout time
The time value of money draws from the idea that rational investors prefer to receive money today rather than the same amount of money in the future because of money’s potential to grow in value over a given period of time. For example, money deposited into a savings account earns a certain interest rate and is therefore said to be compounding in value.
Simple and compound interest
Interest is defined as the cost of borrowing money as in the case of interest charged on a loan balance. Interest can be calculated in two ways, simple interest or compound interest.
Simple interest is calculated on the principal, or original, amount of a loan. Formula: Simple interest = P x i x n; P = principle, i = interest rate and n = term of the load
Compound interest is calculated on the principal amount and also on the accumulated interest of previous periods, and can thus be regarded as “interest on interest.” Formula: Compound interes t= [P(1+i)^n]−P & Compound interest = P[(1+i)^n−1]; P = principle, i = interest rate in percentage terms and n = number of compounding periots of year
Nominal and effective interest rate.
Interest rate is one of the most commonly used phrases in fixed-income investment lexicon. The different types of interest rates, including real, nominal, effective and annual, are distinguished by key economic factors, that can help individuals become smarter consumers and shrewder investors.
Nominal Interest Rate: Is the stated interest rate of a bond or loan, which signifies the actual monetary price borrowers pay lenders to use their money.
Effective Interest Rate: Investors and borrowers should also be aware of the effective interest rate, which takes the concept of compounding into account. «Compounding is the process in which an asset’s earnings.»
Project Evaluation and Management 