Engineering economics applies economic principles to engineering projects, ensuring technical and economic feasibility. Time value of money, present/future value analysis, and annual cost analysis are used to compare costs and determine viability. Cost benefit analysis and breakeven analysis are used in government and manufacturing engineering, respectively. Depreciation can also be calculated. Engineering economics is a mandatory section of the Engineering Fundamentals exam.
Engineering economics is the application of economic principles and calculations to engineering projects. It is important for all fields of engineering because no matter how technically sound an engineering project is, it will fail if it is not economically feasible. Engineering economic analysis is often applied to various possible designs for an engineering project in order to choose the optimal design, thus taking into account both technical and economic feasibility.
Many basic economic principles can be applied in an engineering economic analysis, depending on their applicability. The time value of money is one such principle with broad applicability. This principle is used to calculate the future value of something given the present value, or the present value given the future value, at a given interest rate. For example, the time value of money can be used to calculate how much a project will cost when completed; investments or annual withdrawals can also be calculated. A cash flow diagram is often used to help calculate the time value of money.
When comparing costs between two or more possible alternatives, engineering economics may use present or future value analysis or annual cost. Present or future value analysis converts all costs of a project into equivalent present or future value. The analysis period must be the same for all options for this method to be valid.
Annual cost analysis calculates the annual rate of return for one or more projects. A value called the active minimum rate of return is also calculated. In general, a project must meet or exceed the minimum active rate of return to be considered viable. If two or more projects meet this rate, other criteria are also taken into consideration.
For government engineering projects, a method called cost benefit analysis is often used. This method converts all benefits and costs of a project into monetary values, then divides the total benefits by the total costs. As a general rule, the design is considered acceptable if this ratio is greater than one.
In manufacturing engineering, a method called breakeven analysis is often used. This is used to determine the percentage capacity for the manufacturing operation at which cost equals income. A company could use this method to determine the minimum amount it must produce in a month to make a profit.
Engineers can also use economics to calculate value depreciation. For example, they might calculate the value of an instrument that a company is considering buying. Methods for calculating depreciation include book value, straight line depreciation, and accelerated cost recovery system.
All engineering disciplines employ engineering economics. Most engineering departments at universities and colleges require an engineering business course or include business analysis in other engineering courses. Engineering Economics is a mandatory section of the Engineering Fundamentals exam, required for engineers who wish to obtain a professional license.
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