1. Foundations of Engineering Economy

Question 1

Why is engineering economy important to engineers?

Answer 1

Engineering economy important to engineers for the following reasons:

• Engineers design and create
  
  • Designing involves economic decisions
  • Engineers must be able to incorporate economic analysis into their creative efforts
• Understanding and applying time value of money, economic equivalence, and cost estimation are vital for engineers
• Project decisions are made more on the return on investment (or payback) than on technology.
• You must communicate the basics of economy for your proposals to get funding.

Question 2

Describe Time Value of Money (TVM).

Answer 2

Time Value of Money (TVM) explains the change in the amount of money over time for funds owed by or owned by a corporation or individual.

Question 3

What are some principles of TVM (Time Value of Money)?

Answer 3

Principles of TVM (Time Value of Money) include the following:

• Corporate investments are expected to earn a return
• Investment always involves money
• Money has a ‘time value’

Question 4

What is the MOST important concept in engineering economy?

Answer 4

The time value of money (TVM) is the most important concept in engineering economy.

Question 5

What are three main components of engineering economy?

Answer 5

Three main components of engineering economy include the following:

• Formulating
• Estimating
• Evaluating expected economic outcomes of alternatives designed to accomplish a defined purpose

Question 6

Explain the evaluating aspect of engineering economy?

Answer 6

Evaluating in the context of engineering economy refers to the evaluation of expected economic outcomes of alternatives designed to accomplish a defined purpose. Easy-to-use math techniques simplify the evaluation.

Question 7

What are two categories of estimates of economic outcomes?

Answer 7

Estimates of economic outcomes can be deterministic or stochastic in nature.

Question 8

List the general steps for decision-making processes in engineering economy?

Answer 8

The general steps for decision-making processes in engineering economy are as follows:

1. Understand the problem – define objectives.
2. Collect relevant information – e.g. cash flows, interest rate, estimated life.
3. Define the set of feasible alternatives.
4. Define the criteria for decision making.
5. Evaluate the alternatives and explore sensitivity analysis.
6. Select the “best” alternative (typically measured by dollars).
7. Implement the alternative and monitor results.

Question 9

Map out the general steps for decision-making processes in engineering economy?

Answer 9

Flow chart of the general steps for decision-making processes in engineering economy.

Question 10

What are the different levels of ethics?

Answer 10

The levels of ethics are as follows:

• Universal morals or ethics – Fundamental beliefs: stealing, lying, harming or murdering others are wrong.
• Personal morals or ethics – Beliefs that an individual has and maintains over time; how a universal moral is interpreted and used by each person.
• Professional or engineering ethics – Formal standard or code that guides a person in work activities and decision making.

Question 11

Recite the preamble to the Code of Ethics for Engineers held by the National Society of Professional Engineers.

Answer 11

Preamble
Engineering is an important and learned profession. As members of this profession, engineers are expected to exhibit the highest standards of honesty and integrity. Engineering has a direct and vital impact on the quality of life for all people. Accordingly, the services provided by engineers require honesty, impartiality, fairness, and equity, and must be dedicated to the protection of the public health, safety, and welfare. Engineers must perform under a standard of professional behavior that requires adherence to the highest principles of ethical conduct.

Question 12

List the fundamental canons of the Code of Ethics for Engineers held by the National Society of Professional Engineers.

Answer 12

I. Fundamental Canons
Engineers, in the fulfillment of their professional duties, shall:

1. Hold paramount the safety, health, and welfare of the public.
2. Perform services only in areas of their competence.
3. Issue public statements only in an objective and truthful manner.
4. Act for each employer or client as faithful agents or trustees.
5. Avoid deceptive acts.
6. Conduct themselves honorably, responsibly, ethically, and lawfully so as to enhance the honor, reputation, and usefulness of the profession.

Question 13

List the rules of practice of the Code of Ethics for Engineers held by the National Society of Professional Engineers.

Answer 13

II. Rules of Practice

1. Engineers shall hold paramount the safety, health, and welfare of the public.
2. Engineers shall perform services only in the areas of their competence.
3. Engineers shall issue public statements only in an objective and truthful manner.
4. Engineers shall act for each employer or client as faithful agents or trustees.
5. Engineers shall avoid deceptive acts.

Question 14

List the professional obligations of the Code of Ethics for Engineers held by the National Society of Professional Engineers.

Answer 14

III. Professional Obligations

1. Engineers shall be guided in all their relations by the highest standards of honesty and integrity.
2. Engineers shall at all times strive to serve the public interest.
3. Engineers shall avoid all conduct or practice that deceives the public.
4. Engineers shall not disclose, without consent, confidential information concerning the business affairs or technical processes of any present or former client or employer, or public body on which they serve.
5. Engineers shall not be influenced in their professional duties by conflicting interests.
6. Engineers shall not attempt to obtain employment or advancement or professional engagements by untruthfully criticizing other engineers, or by other improper or questionable methods.
7. Engineers shall not attempt to injure, maliciously or falsely, directly or indirectly, the professional reputation, prospects, practice, or employment of other engineers. Engineers who believe others are guilty of unethical or illegal practice shall present such information to the proper authority for action.
8. Engineers shall accept personal responsibility for their professional activities, provided, however, that engineers may seek indemnification for services arising out of their practice for other than gross negligence, where the engineer’s interests cannot otherwise be protected.
9. Engineers shall give credit for engineering work to those to whom credit is due, and will recognize the proprietary interests of others.

Question 15

Define interest in an engineering economy context.

Answer 15

Interest is the:

• Manifestation of the time value of money
• Fee that one pays to use someone else’s money

𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 = 𝐚𝐦𝐨𝐮𝐧𝐭 𝐨𝐰𝐞𝐝 (𝐧𝐨𝐰) − 𝐩𝐫𝐢𝐧𝐜𝐢𝐩𝐚𝐥

Question 16

Define interest rate in an engineering economy context.

Answer 16

Interest rate is interest paid over a time period expressed as a percentage of principal__.

Question 17

Define rate of return in an engineering economy context.

Answer 17

Rate of return is:

• Interest earned over a period of time.
• Expressed as a percentage of the original amount (principal).

Question 18

What are the borrower’s and the lender’s/investor’s perspectives on interest rate and rate of return?

Answer 18

Borrower’s perspective – interest rate paid
Lender’s or investor’s perspective – rate of return earned

Question 19

Solve the example problem 1.15:

Which of the following 1-year investments has the highest rate of return?

(a) $12,500 that yields $1125 in interest,
(b) $56,000 that yields $6160 in interest, or

(c) $95,000 that yields $7600 in interest .

Answer 19

Solution

i = (1125/12,500)*100 = 9%

i = (6160/56,000)*100 = 11%

i = (7600/95,000)*100 = 8%

(b), the $56,000 investment has the highest rate of return

Question 20

What are some commonly used symbols in engineering economy?

Answer 20

Commonly used symbols in engineering economy include the following:

• t = time, usually in periods such as years or months
• P = value or amount of money at a time t = 0
  
  • Designated as present or time 0
• F = value or amount of money at some future time
  
  • Such as at 𝒕 = n periods in the future
• A = series of consecutive, equal, end-of-period amounts of money
• n = number of interest periods; years, months
• i = interest rate or rate of return per time period; percent per year or month

Question 21

Solve example problem 1.17:

For the following problem, write down the given values and the unknown values using engineering economy symbols

“Determine the amount of money Frost Bank might loan a housing developer who will repay the loan 2 years from now by selling eight water-view lots at $240,000 each. Assume the bank’s interest rate is 10% per year.”

Answer 21

Solution

P = ?; n = 2; i = 0.10

F = 8*240,000 = $1,920,000

Question 22

Explain cash inflows in an engineering economy context.

Answer 22

Cash Inflows – Revenues (R), receipts, incomes, savings generated by projects and activities that flow in. Plus sign used (convention).

Question 23

Explain cash outflows in an engineering economy context.

Answer 23

Disbursements (D), costs, expenses, taxes caused by projects and activities that flow out. Minus sign used (convention).

Question 24

What is the equation the describes net cash flow (NCF) for each time period?

Answer 24

Net Cash Flow (NCF) for each time period:

NCF = cash inflows − cash outflows = R − D

R=Revenues

D=Disbursements

Question 25

What is the end-of-period assumption?

Answer 25

The end-of-period assumption is that funds flow at the end of a given interest period.