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 alternatives. Formulating means to state as or reduce to a formula.
What are the objectives of our study?
Part 1: The objectives are 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 do you evaluate it about the original amount?
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 an Engineering study.
I quote, Engineering economic study involves many elements: problem identification:
1. Identify and understand the problem; define the project’s objective.
2-Collect the relevant and available data and define viable solution alternatives.
3. Make realistic cash flow estimates to ensure the smooth flow of money 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, considering both economic and non-economic factors and their effects.
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 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 the ending amount and the initial amount.
Or can be = the ending amount of money minus the beginning amount.
If we want to express it as a percentage, we will divide it by the initial 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 loans from the bank and repays with interest. The left graph shows that case.
In the second case, it is a scenario where an investor lends money to a corporation and receives the original amount plus interest, as agreed upon between the investor and the corporation.
Solved problem 1-1: How to determine the interest value and interest%?
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, the amount owed is now the borrowed money from one year plus interest. This is not the case with the Investor.
The following slide shows the Author’s solution.
The original amount was $10,000, and it has now increased to $10,700. The interest is the increase in the amount of money; after one year, the difference between the money now and the principal. Interest = $10700- $10000 = $700. This is the case of a borrower.
The calculations were performed to determine the interest as a percentage, which is 7% = 700*100/10’000.
This is the Textbook from which all the definitions and solved examples are quoted.
The following post will include a solved problem for investing in a bank.
There is a link on Amazon for the best-selling Engineering Economy books.
This is a link to the next post: Economic equivalence.
The equivalence is an essential aspect that establishes a relation between the present value and the future value of money.
Engineering Economy: Applying Theory to Practice is A good reference.