Last Updated on March 21, 2024 by Maged kamel

Introduction to the Engineering Economy.

Definition of the Engineering economy.

We start with the definition of the Engineering economy, I quote, the engineering economy involves formulating estimating, and evaluating the expected economic outcomes of Alternatives designed to accomplish a defined purpose.

Mathematical techniques simplify the economic evaluation of alternates. Formulating means To state as or reduce to a formula.

What are the objectives of our study?

Part-1 The objectives, we will start to understand the following points, 1- definition of engineering economy.

2-Economic study steps, what are the steps to be done? what are the procedures to be followed?
3- What is the interest rate and how to evaluate it concerning the original money?

4-Economic Equivalence, which means the different sums of money at different times would be equal in economic value.

5-The last item is simple interest and compound interest.

Perform Engineering study.

I quote, Engineering economic study involves many elements: problem identifications:

1-Identify and understand the problem; identify the objective of the project.
2-Collect the relevant and available data and define viable solution alternatives.

3-Make realistic cash flow estimates to ensure the flow of money is done smoothly for the cash in and out.

4- Identify economic measures of worth criteria for decision-making. The Decision-maker is to be informed of the alternatives Evaluate each alternative; consider non-economical factors and their effect.
Select the best alternatives and how much they can be helpful.
 Implement the best solution.

What is the interest rate?

The Interest rate and rate of return, simply, can be explained as the final value minus the present value.

Interest is the manifestation of time- the value of money, the action or fact of showing something. Interest is the difference between an ending amount and Money at the beginning amount. Or can be = the ending amount of money-the beginning amount.

If we want to get it as a percentage, then we will divide it by the beginning amount of money, and then multiply by 100.

What is the difference between an investor and a borrower?

We are going to see a diagram, this is a borrower who takes money or the loan(s) from the bank and repays with interest, the left graph shows that case.

While for the second case, it is the case where there is an investor who gives a loan to a corporation and gets back the paid money plus interest as agreed between the investigator and the corporation.

Solved problem 1-1-how to determine the interest value and %?

solved problem -1.1 An employee at laser kinetic.com borrows $10,000 and must repay $10700, exactly one year later. Determine the interest amount and the interest rate paid.

The solution: From the formula amount owed now= borrowed money from one year+Interest.

The original money =$10,000, and the amount is now $10,700. the interest is an increase of the amount of money, the difference between money now-principal, Interest=10700-10000=$700. this is the case of a borrower.

The calculations were performed to get the interest as a%=700/10000=7%.

This is the Textbook from which all the definitions and solved examples are quoted.

This is the pdf file used for the illustration of this post.
This is a link to the next post: Economic equivalence.

The equivalence is a very important aspect, that establishes a relation between the present value and future value of money.
Engineering Economy Applying Theory to Practice is a good reference.