CIEG210 - Quiz 4 Economic Sustainability

Interest Rate (‘i’)

The cost of borrowing money or the rate earned on invested capital, expressed as a percentage per year.

Discount Rate

A factor applied to convert future monetary values into present ones. While conceptually similar to interest, it is used to asses financial viability and is set by broader financial markets/Federal Reserve Policy.

Inflation Rate (‘f’)

The rate at which the general prices of goods and services increase over time (measured via the Consumer Price Index), reducing purchasing power.

How do we track how the general price of goods and services rise or drop?

Consumer Price Index

Real Discount Rate (‘i*’) - Definition

The discount rate adjusted for expected inflation.

Real Discount Rate (‘i*’) - Formula

i* = [ (1+i) / (1+f) ] -1

What are the two single payment equations?

1. Future Value from Present Value

F = (P)(1+i)^n

2. Present Value from Future Value

P = (F)(1+i)^(-n) »»» P = (F) [1 / (1+i)^n ]

What is “earning potential”?

Interest

Does money have greater value today or in the future? Why?

Is has greater value today then in the future because of earning potential (interest).

What are the two formulas for multiple payment equations?

(These require looking in the FE reference Factor Table)

1. Future Value given the Present Value

F = (P) { ([P/F], i%, n) factor}

^^ This factor is found in the FE reference table

2. Present Value given by the Future Value

P = (F) { ([P/F], i%, n) factor}

^^ This factor is found in the FE reference table

Fixed Cots Definition

Costs that do not change regardless of production volume or output within the project scope.

Example: Cost of building a factory or facility)

Variable Costs Definition

Costs that change in direct proportion to output or productivity levels.

Examples: Raw materials, energy per unit produced

Incremental Costs Definition

Additional costs incurred when output or activity levels change outside optimized capacity.

Labor Costs Deinitition

Direct costs associated with worker time, including hourly wages, salaries, and benifits.

Indirect Costs Definition

Overhead Expenses not tied directly to a single project or product.

Examples: Administrative staff, utilities, legal fees, advertising

Sunk Costs Definition

Costs that have already occurred in the past and cannot be recovered.

Rule: Sunk costs must be incurred in future economic decision making.

Examples: past feasibility studies and past equipment purchases.

Owner Costs Definition

Capital expenses, design fees, construction, maintenance, and facility operations.

User Costs Definition

Expenses borne by the public/users.

Examples: vehicle operation costs, traffic detour delays, and/or accident costs.

Annual Worth/ Cost (‘A’) Definition

Uniform annual cash flow that normalizes non-uniform costs across time to evaluate long-term financial commitments.

Breakeven Analysis Definition

Calculates the point in time when cumulative saving equal initial investment.

Breakeven Analysis Formula

Breakeven Point = (Investment Cost) / (Annual Savings or per-unit net benefit)

Breakeven Point Key Applications and Decision Criteria

Used for straightforward asset upgrades. Short payback periods indicate high viability for this analysis method.

Examples: Solar panels, LED retrofits

Benefit-Cost Analysis (B/C) Definition

Ratio of equivalent benefits to equivalent costs.

Benefit-Cost Analysis Formula

B/C = (Present Value of Benefits) / (Present Value of Costs)

Benefit-Cost Analysis Key Applications

Used primarily for public projects.

Benefit-Cost Analysis Decision Criteria

Viable if B/C > 1.0

^^ If this is true than the benefits exceed costs and the project is financially viable.

Life-Cycle Cost Analysis (LCCA) Definition and Formula

Sum of all costs over the entire useful life of an asset.

Formula: Total Cost = ∑ALL Costs of Project

Life-Cycle Cost Analysis Key Applications

Used to compare competing design alternatives.

Examples: Conventional vs. Green Infrastructure.

Life-Cycle Cost Analysis Decision Criteria

Select the option with the lowest total life-cycle cost.

Rate on Return (RoR) Definition

The effective interest rate (i) at which the present value of benefits equals the present value of costs.

Rate on Return Formula

costs (P)(Vbenifits) = (P)(Vcosts)

Rate on Return Key Applications

Used to compare project returns against alternative investments.

Example: high-yield savings accounts vs. benchmark bond rates

What are the big 3 market based incentives?

1. Carbon Tax

2. Carbon Offset

3. Carbon Cap-and-Trade

Carbon Tax Definition

A direct fee charged per metric ton of CO2-eq emitted by industries or fuel supplier. Rates vary significantly worldwide (ranging from $0.10/ton in Poland to $164/ton in Norway).

Carbon Offset Definition

Compensating for emissions by funding equivalent CO2 capture or reduction projects elsewhere.

Examples: Reforestation, renewable energy installations, and agricultural soil carbon storage.

Carbon Cap-and-Trade

A system setting a strict regional limit (“cap”) on total emissions while issuing allowances that participating companies can trade in a market.

• Companies Under their limit can sell unused credits to higher-polluting firms.

Example: Delaware’s regional CO2 cap-and-trade system)

What is the Green Economy?

An economy designed to fulfill environmental objectives (reducing emissions, conserving resources) while fostering economic growth (green hobs, technological innovation) and achieving social equity (public health, fair labor).

How does the Green Economy apply to Civil Engineering?

Green building design, eco-friendly concrete/materials, low-carbon transport infrastructure, rainwater harvesting, nature-based flood protection, and renewable energy integration.

What are the three ways we are evaluating economics in our final project?

1. Categorize Costs

2. Apply Economic Tools

3. Incorporate Qualitative Metrics