EMT320: Foundations of Engineering Economy

WEEKLY OVERVIEW: Week 1

Welcome to Basics of Engineering Economy!

The course is problem driven. Each week you will be given 10 problems for homework. The book
gives many examples on how to solve these problems This is an eight week course dealing with
decisions in in engineering and how economics drives these decisions. I had this course many years
ago and found it one of the most important I ever had once I moved to management. The course is
broken down into eight weeks. Each week will deal with a different approach to the way we evaluate a
project. If you get behind you will be in trouble as each weeks session is related to the next weeks
work. Therefore a word of advice, Do Not Get Behind. The eight sessions are titled:

1. The Foundations of Engineering Economy

2. How Time and Interest Affect Money
3. Nominal and Effective Interest Rates
4. Present Worth Analysis
5. Annual Worth Analysis
6. Rate of return Analysis
7. Benefit /Cost Analysis and Public Sector Projects
8. Breakeven, Sensitivity and Payback Analysis

Dont let the simplicity of the titles fool you. This is an in depth study of these terms and requires a fair
amount of mathematical computations.

1. Chapter 1: Foundations of Engineering Economy.

This chapter will introduce you to determining the role of Engineering Economy in the decision
making process. This is a collection of techniques that simplify comparisons of alternatives on
an economic basis. You will be required to identify what is needed to successfully perform an
engineering study.You will have to Identify the alternatives, develop the cash flow, evaluate the
criteria, take into account Intangible factors and understand what we mean about the time
value of money. In this chapter we will define these terms. We will begin with interest rate,
Rate of return, and Minimal Attractive Rate of Return. (MARR).
You will be introduced to other terms, Rate of Return (ROR), Return on investment (ROI).
Engineering Alternatives are evaluated on the prognosis that a reasonable Rate of Return

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 (ROR) can be realized. This reasonable rate is the MARR and is the lowest interest rate that
will induce companies to invest their money. ROR MARR >Cost of Capital.
Equivalence in engineering economy, when considered together, the time value of money and
the interest rate help develop the concept of equivalence. Problems will be presented in your
book on how to find these terms. You will learn the difference between simple inters and
compound interest. Simple Interest is calculated using the principal only ignoring any interest
accrued in preceding interest periods.
Interest = (principal)(number of periods)(interest rate)
The following terms are also introduced.
P = Value or the amount of money designated at the present time 0
F = Value of money at some future time
A = series of consecutive, equal, end of period amounts of money
n = number of interest periods, (can be years, months or days)
i = Interest rate of return per time period
t = time
These terms are defined in greater detail on page 14 of your book.
You will be exposed to Cash Flows: Their estimation and how to diagram them. Finally you will
get the first introduction to Spreadsheet and Calculator functions.
The last thing that the chapter covers is Ethics and economic decisions. If you have had ET
100 this code of ethics for engineers.

2. How Time and Interest affect Money

We will look at single and uniform series. You will work with many formulas in this section
such as single payment F/P and P/F for single payment. Take a look at page 37, you can see
the formulas are starting to get complicated. This is why you have to keep up. You will deal
with Uniform series formulas P/A. A/P, A/F. and F/A. These will all be explained in the second
chapter. You will also deal with gradient formulas and calculations for cash flows that are
shifted.

3. Nominal and Effective Interest Rates.

Since many real-world situations involve cash flow frequencies and compounding periods, other
than 1 year, it is necessary to use nominal and effective interest rates. This chapter will take
you through the rigors of making these adjustments.

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 4. Present Worth Analysis
This chapter explains the difference between mutally exclusive and independent alternatives. It
discusses the use of Present Worth Analysis to select the economically best alternative.

5. Annual Worth Analysis

The Annual Worth method of comparing alternatives preferred to the Present Worth method,
because the AW comparison is performed for only one life cycle. This is a distinct advantage
when comparing different life alternatives.

6. Rate of Return Analysis

Just as Present Worth, Annual Worth, and Future Worth methods find the best alternative from
several, the ROR calculation serves the same purpose.

7. Benefit/Cost Analysis and Public Sector Projects

The Benefit/Cost Method is used primarily to evaluate Alternatives in the public sector. When
one is comparing mutually exclusive alternatives, the incremental B/C ratio must be greater
than or equal to 1.0 for the incremental equivalent
total cost to be economically justified.

8. Breakeven, Sensitivity, and Payback Analysis

This chapter treats sensitivity analysis and the related topics of breakeven and payback.
Sensitivity is changing estimates for a parameter or for competing alternatives, and is
determined via changes in the net worth,

Assigned Reading:
1. Chapter 1 in your textbook
2. View W1 Lecture
3. View W1 Video Lecture
Activities
1. Participate in the W1 discussion: Foundations of Engineering Economy
2. Complete the W1 Assignment