Engineering Economy Terminology

Amortization
As applied to a capital asset, the distribution of the initial cost by periodic charges to operations as
in depreciation. Most property applies with indefinite life
The reduction of a debt by either periodic or irregular payments
A plan to pay off a financial obligation according to some prearranged program.
Annual Equivalent
In time value of money, a uniform annual amount for a prescribed number of years that is
equivalent in value to the present worth of any sequence of financial events for a given interest
rate.
One of a sequence of equal end-of-year payment which would have the same financial effect when
interest is considered as another payment or sequence of payments which are not necessarily equal
in amount or equally spaced in time.
Annuity
An amount of money payable to a beneficiary at regular intervals for a prescribed period of time
out of a fund reserved for that purpose.
A series of equal payments occurring at equal period of time.
Annuity Fund
A fund that is reserved for payment of annuities. The present worth of funds required to support
future annuity payments.
Asset
An accounting term for capital owned by a company.
Book Value
The recorded current value of an asset. First cost less accumulated depreciation, amortization, or
depletion.
Original cost of an asset less the accumulated depreciation
The worth of a property as shown on the accounting records of a company. It is ordinarily taken to
mean the original cost of operations less the amounts that have been charged as depreciation
expense.
Breakeven Chart
A graphical representation of the relation between total income and total costs for various levels of
production and sales indicating areas of profit and loss.
Breakeven point
In business operations, the rate of operations, output, or sales at which income is sufficient to
equal operating cost, or operating cost plus additional obligations that may be specified.
The operating condition, such as output, at which two alternatives are equal in economy.
The percentage of capacity operation of a manufacturing plant at which income will just cover
expenses.
Capacity Factor
The ratio of average load to maximum capacity
The ratio between average load and the total capacity of the apparatus, which is the optimum load.
The ratio of the average actual use to the available capacity.
Capital
The financial resources involved in establishing and sustaining an enterprise or project.
A term describing wealth that may be utilized to economic advantage. The form of this wealth
takes may be as cash, land, equipment, patents, raw materials, finished products, etc.
Capital Recovery
Charging periodically to operations amounts that will ultimately equal the amount of capital
expenditures.
The replacement of the original cost of an asset plus interest.
The process of regaining the net investment in a project by means of revenue in excess of the cost
from the project. (Usually implies amortization of principal plus interest on the diminishing un-
recovered balance.)
Capital Recovery Factor
A factor used to calculate the sum of money required at the end of each of a series of periods to
regain the net investment of a project plus the compounded interest on the unrecovered balance.
Capitalized Cost
The present worth of a uniform series of periodic costs that continue for an indefinitely long time
(hypothetically infinite). Not to be confused with a capitalized expenditure.
The value of the purchase date of the first life of the asset of all expenditures to be made in
reference to this asset over an infinite period of time. This cost can also be regarded as the sum of
capital which, if investment in a fund earning a stipulated interest rate, will be sufficient to provide
for all payments required to maintain the asset in perpetual service.
Cash Flow
The flow back pf profit plus depreciation from a given project.
The actual dollars passing into and out of the treasury of a financial venture.
Common Costs
Costs that cannot be identified with a given output of products, operations, or services.
Compound Amount
The future worth of a sum invested (or loaned) at compound interest.
Combined Interest Rate
The cost of capital, expressed as an effective rate (percent) per interest period, including, a market
adjustment for the anticipated general price inflation rate in the economy. Thus, it represents the
time value change in future cash flows and takes into account both the potential real earning power
of money and the estimated general price inflation in the economy.
Compound Amount Factor
The function of interest rate and time that determines the compound amount from a stated initial
sum.
A factor which when multiplied by the single sum or uniform series of payments will give the
future worth at compound interest of such single sum or series.
Compound Interest
The type of interest that is periodically added to the amount of investment (or loan) so that
subsequent interest is based on the cumulative amount.
The interest charges under the condition that interest is charged on any previous interest earned in
any time period, as well as on the principal.
Compounding, Continuous
A compound interest situation in which the compounding period is zero and the number of periods
infinitely great. A mathematical concept that is practical for dealing with frequent compounding
and small interest rates.
A mathematic procedure for evaluating compound interest factors based on a continuous interest
function rather than discrete interest period.
Compound Period
The time interval between dates at which interest is paid and added to the amount of an investment
or loan. Designates frequency of compounding.
Decision Period
A program of action undertaken as a result of established policy to influence the final decision.
Decisions Under Certainty
Simple decisions that assume complete information and no uncertainty connected with the
analysis of the decisions.
Decisions Under Risk
A decision problem in which the analyst elects to consider several possible futures, the
probabilities of which can be estimated.
Decisions Under Uncertainty
A decision for which the analyst elects to consider several possible futures, the probabilities of
which cannot be estimated.
Declining Balance Depreciation, also known as percent on diminishing value
A method of computing depreciation in which that annual charge is fixed percentage of the
depreciated book value at the beginning of the year to which the depreciation applies.
Demand Factor
The ratio of the maximum instantaneous production rate to the production rate for which the
equipment was designed.
The ratio between the maximum power demand and the total connected load of the system.
Depletion
A form of capital recovery applicable to extractive property (example, mines). Can be a unit-of-
output basis the same as straight-line depreciation related to original or current appraisal of extent
and value of deposit (known as cost depletion). Can also be a percentage of income received from
extractions (known as percentage depletion).
A lessening of the value of an asset due to a decrease in the quantity available. It is similar to
depreciation except that it refers to such natural resources as coal, oil, and timber in forests.
Depreciated Book Value
The first cost of the capitalized asset minus the accumulation of annual depreciation cost charges.
Depreciation
Decline in value of a capitalized asset
A form of capital recovery applicable to a property with two or more years life span, in which an
appropriate portion of the assets value is periodically charged to current operations.
The loss of value of obsolescence or due to attrition. In accounting, depreciation is the allocation
of this loss of value according to some plan.
Differential Price Inflation Rate
The percentage increment of price change (in the unit price, or cost for fixed amount), above or
below the general price inflation rate, during a time period for goods or services.
Discounted Cash flow
The present worth of a sequence in time of sums of money when the sequence is considered as a
flow of cash into and/or out of an economic unit.
An investment analysis that compares the present worth of projected receipts and disbursements
occurring at designated future times in order to estimate the rate of return from the investment or
project.
Earning Value
The present worth of an income producers probable future net earnings, as prognosticated on the
basis of recent and present expense and earnings and the business outlook.
Economic good
Anything that is useful, transferable, and not abundant.
Economic Model
A mathematical expression or tabular relation that expresses the interaction of technical and
economic variables applying to a specific problem.
Economic Return
The profit derived from a project or business enterprise without consideration of obligations to
financial contributors and claims of other based on profit.
Economy
The cost or profit situation regarding a practical enterprise or project, as in economy study,
engineering economy, engineering economic analysis.
Effective Interest
The true value of interest rate computed by equations for compound interest for 1-year period.
Endowment
A fund established for the support of some project or succession of donations or financial
obligations.
Engineering economy
The application of engineering or mathematical analysis and synthesis to economic decisions
A body of knowledge and techniques concerned with the evaluation of the worth of commodities
and services relative to their cost
The economic analysis or engineering alternatives.
Estimate
The true magnitude as closely as it can be determined by the exercise of sound judgment based on
approximate computations; not to be confused with offhand approximations that are little better
than outright guesses.
Expected return
The profit participated from a venture.
Expected Yield
The ratio expected return/investment, usually expressed as a percentage on an annual basis.
Expense
Synonymous with cost for purposes of these terminologies.
First Cost
The initial cost of a capitalized property, including transportation, installation, preparation for
service, and other related initial expenditures.
Future Worth
The equivalent value at a designated future date based on time value of money
The monetary sum, at a given future time, which is equivalent to one or more sums at given earlier
times when interest is compounded at a given rate.
General Price Inflation Rate
A general measure of the change in the purchasing power of dollar or peso during a specified
period of time. The general price inflation rate is defined by selected , and broadly based, index of
market price changes.
Going Concern Value
The difference between the value of a property as it stands possessed of its going elements and the
value of the property alone as it would stand at completion of construction as a bare or inert
assembly or physical parts.
Incremental Cost
The additional cost that will be incurred as the result of increasing the output one more unit.
Conversely, it can be defined as the cost that will not be incurred if the output is reduced one unit.
More technically, it is the variation in the output resulting from a unit change in input. It is known
as the marginal cost.
Incremental Revenue
The additional revenue resulting from the sale of one more item.
In-Place Value
A value of physical property market value plus costs of transportation to site and installation.
Intangibles
In engineering economy studies, conditions or economy factors that cannot be readily evaluated in
quantitative terms as in money.
In accounting, the assets that cannot be reliably evaluated.
Interest
Financial share in a project or enterprise
Periodic compensation for the lending of money
In economy study, synonymous with required return, expected profit, or charge for the use of
capital.
The cost for the use of capital. Sometimes referred to as the time value of money.
Interest Rate
The ratio of the interest payment to the principal for a given unit of time; usually expressed as a
percentage of the principal.
Interest Rate, Effective.
An interest rate for a stated period (per year unless otherwise specified) that is the equivalent of a
smaller rate of interest that is more frequently compounded.
Interest Rate, Nominal.
The customary type of interest rate designation on an annual basis without consideration of
compounding periodic interest payments.
Investment
As applied to an enterprise as a whole, the cost (or present value) of all the properties and funds
necessary to establish and maintain the enterprise as a going concern. The capital tied up in the
enterprise or project.
Any expenditure that has substantial and enduring value (at least years anticipated life) and is
therefore capitalized.
Investors Method
See discounted cash flow
Irreducible
A term that may used for the class of intangible conditions or economy factors that can only be
qualitatively appraised
Matter that cannot readily be reduced to estimated money receipts and expenses
Life
Economic: that period of time after which a machine or facility should be discarded or replaced
because of its excessive costs or reduced profitability. The economic impairment may be absolute
or relative.
Physical: that period of time after which a machine or facility can no longer be repaired in order to
perform its design function properly.
Service: the period of time that a machine or facility will satisfactorily perform its function
without major overhaul.
Life Cycle
The time span that begins with the identification of the economic need or want (the requirement)
for a product, structure, system, or service, and ends with retirement and disposal activities.
Life Cycle Cost
A summation of all the costs, both recurring and nonrecurring, related to a product, structure,
system, or service during its life span.
Load Factor
A ratio that applies to physical plant or equipment: average load/maximum demand, usually
expressed as a percentage. Equivalent to percent of capacity operation of facilities just
accommodate the maximum demand.
The ration of average load to maximum load.
Marginal analysis
An economic concept concerned with those elements of costs and revenue associated directly with
a specific course of action, normally using available current costs and revenue as a base, and
usually independent of traditional accounting allocation procedures.
Marginal Cost
The cost of one additional unit of production, activity, or service
The rate of change of cost with production or output.
Matheson Formula
A little for the formula used for declining balance depreciation.
Nominal Interest
The number employed to describe the annual percentage rate on a loan.
Obsolescence
The condition of being out of date. A loss of value occasioned by new development that places the
older property at a competitive disadvantage. A factor in depreciation
A decrease in the value of an asset brought about by the development of new and more
economical methods, processes, and or machinery
The loss of usefulness or worth of a product or facility as a result of the appearance of better and
or more economical products, methods, or facilities.
Pay off Period
Regarding an investment, the number of years (or months) required for the related profit or
savings in operating cost to equal the amount of said investment
The period of time at which a machine, facility, or other investment has produced sufficient net
revenue to recover its investment costs.
Perpetual Endowment
An endowment with hypothetically infinite life.
Present Worth
The equivalent value at the present, based on time value of money
The monetary sum equivalent to a future sum(s) when interest is compounded at a given rate
The discounted value of future sum
Present Worth Factor
A mathematical expression also known as the present value of annuity of one.
One of a set of mathematical formulas used to facilitate calculation of present worth in economic
analyses involving compound interest.
Profitability Index
The rate of return in an economy study or investment decision when calculated by discounted cash
flow method or an investors method.
Rate of Return
The interest rate at which the present worth of the cash flows on a project is zero
The interest rate earned by an investment.
Real Interest Rate
The cost of capital, expressed as an effective rate (percent) per interest period, not including a
market adjustment for the anticipated general price inflation rate in the economy. It represents the
time value change in future cash flows based only on the potential real earning power of money.
Replacement Policy
A set of decision rules (usually optimal) for the replacement of facilities that wear out, deteriorate,
or fail over period of time. Replacement models are generally concerned with weighting the
increasing operating costs (and possibly decreasing revenues) associated with aging equipment
against the net proceeds from alternatives equipment.
Replacement Study
An economic analysis involving the comparison of an existing facility and a facility proposed to
supplant the existing facility.
Required Return
The minimum return or profit necessary to justify an investment. Often termed interest, expected
return or profit, or charge for the use of capital. It is the minimum acceptable percentage, no more
and no less.
Required Yield.
The ratio of required return over amount of investment, usually expressed as a percentage on
annual basis.
Retirement of Debt
The termination of a debt obligation by appropriate settlement with lender understood to be in
full amount unless partial settlement is specified
Salvage Value
The cost recovered or which could be recovered from a used property when removed, sold, or
scrapped. A factor in appraisal of property value and in computing depreciation.
The market value of a machine or facility at any point in time. Normally, an estimate of an assets
net market value at the end of its estimated life.
Sensitivity
The relative magnitude of the change in one or more elements of an engineering economy problem
that will reverse a decision among alternative.
Simple Interest
Interest that is not compounded is not added to the income-producing investment or loan
The interest charges under the condition that interest at any time is charged only on the principal.
Sinking Fund
A fund accumulated by periodic deposits and reserved exclusively for a specific purpose, such as
retirement of a debt or replacement of a property
A fund created by making periodic deposits (usually equal) at compound interest in order to
accumulate a given sum at a given future time for some specific purpose.
Sinking Fund Depreciation
A method of computing depreciation in which the periodic amount is presumed to be deposited in
a sinking fund that earns interest at a specified rate. Sinking fund may be real but is usually
hypothetical.
A method of depreciation where a fixed sum of money is regularly deposited at compound interest
in a real or imaginary fund in order to accumulate an amount equal to the depreciation in any year
equals the sinking fund deposit plus interest in the sinking fund balance.
Sinking Fund Factor
The function of interest rate and time that determines the cumulative amount of a sinking fund
resulting from specified periodic deposits. Future worth per unit of uniform amounts
The mathematical formulas used to facilitate sinking fund calculations.
Straight-line Depreciation
Method of depreciation whereby the amount to be recovered (written off) is spread uniformly over
the estimated life of asset in terms of time periods or units of output.
Study Period
In economy study, the length of time that is presumed to be covered in the study of events and
appraisal of results. Often the anticipated life of the project under consideration, but a shorter time
may be more appropriate for decision making.
Sum-of-Digits Method, also known as sum-of-the years-digits method
A method of computing depreciation in which the amount for any year is based on the ratio of
(years of remaining life) to (1 + 2 + 3 +.+ N), the total anticipated life.
Sunk Cost
The un-recovered balance of an investment. It is a cost, already paid, that is not relevant to the
decision concerning the future that is being made. Capital already invested that for some reason
cannot be retrieved.
A past cost that has no relevance with respect to future receipts and disbursements of a facility
undergoing an engineering economy study. This concept implies that since a past outlay is the
same regardless of the alternative selected, it should not influence the choice between alternatives.
Tangibles
Things that can be quantitatively measured or valued, such as items of cost and physical assets.
Time Value of Money
The cumulative effect of elapsed time on the money value of an event, based on the earning power
equivalent invested funds.
The expected interest rate that capital should or will earn.
Total Price Escalation Rate
The total rate (%) of price change (in unit price, or cost for a fixed amount) during a time period
for good or service.
The total price escalation rate for a good or service includes the effects of both the general price
inflation rate and the differential price inflation on price changes. The rate is projected for a future
time interval and usually expressed as an effective annual rate.
Traceable Costs
Costs which ca be identified with a given product, operation, or service.
Unrecovered Investment Balance
The investment amount outstanding in a venture, allowing for profits generated and including the
time value of money.
Valuation or Appraisal
The art of estimating the fair-exchange value of specific properties.
Working Capital
That portion of investment represented by current assets (assets that are not capitalized) less the
current liabilities. The capital necessary to sustain operations.
Those funds that are required to make the enterprise or project a going concern.
The ratio of return or profit over the associated investment, expressed as a percentage of decimal,
usually on annual basis.