Chapter 1
Fall 2018
1. Alternatives:
Different solutions (approaches) >>> best economical one
2. Cash Flows:
The estimated inflows (revenues) and outflows (costs ) of money
3. Alternative Selection:
Inaction, do-nothing (DO), as-is, status quo >>> several solutions
4. Evaluation Criteria:
Choosing the best alternative = the lowest cost (highest income)
5. Intangible (untouchable )Factors:
unreal (noneconomic) = goodwill, friendship, morale
6. Time Value of Money: time is (makes) money!
The change in the amount of money over a given time period
The most important concept in engineering economy
Engineering Economy
Chap 1: Foundation of Engineering Economy
8. Interest Rate:
interest rate or rate of return (ROR) = interest over a specific time unit in %
𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑝𝑝𝑝 𝑡𝑡𝑡𝑡 𝑢𝑢𝑢𝑢
𝑅𝑅𝑅 = × 100% [1.2]
𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑎𝑎𝑎𝑎𝑎𝑎 (𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝)
Example 1:
Engineering Economy
Chap 1: Foundation of Engineering Economy
Basic Terminology and Fundamental Concepts
Example 2:
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 3:
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 3:
Engineering Economy
Chap 1: Foundation of Engineering Economy
10. Equivalence:
different sums of money at different times would be equal
in economic value!
e.g. If the interest rate is 6% per year, $100 today (present time) is
equivalent to $106 one year from today:
Amount in one year = $100 + $100 (0.06) = $100 (1 + 0.06) = $106
A total of $100 now is equivalent to $100/1.06 = $94.34 one year ago
$94.34 last year = $100 now = $106 next year (interest rate of 6% / year)
$6 $5.66
6% 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑝𝑝𝑝 𝑦𝑦𝑦𝑦 = × 100% = × 100%
$100 $94.34
Engineering Economy
Chap 1: Foundation of Engineering Economy
10. Equivalence:
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 4
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 4
Example 5
Example 6
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 7
Engineering Economy
Chap 1: Foundation of Engineering Economy
Inflows: “ + ” Outflows: “— ”
cash receipts cash disbursements
revenues expenses
incomes costs
take give
win loss
year 1 year 4
0 1 2 3 4 5 Time [year]
Example 8
Engineering Economy
Chap 1: Foundation of Engineering Economy
Example 9
Engineering Economy
Chap 1: Foundation of Engineering Economy
Excel Examples