Engineering Economics Flashcards

A comprehensive set of vocabulary flashcards covering the fundamental definitions, roles of engineers, types of strategic decisions, principles, and cost concepts in engineering economics based on the lecture notes.

Engineering Economics

The application of economic principles and methods to evaluate engineering alternatives and make cost-effective decisions.

Cost

The amount of money spent to acquire, produce, operate, or maintain a product, service, or project.

Benefit

The gain or advantage received from a project, such as increased revenue, savings, or improved performance.

Value

The worth of a product or service based on its usefulness compared to its cost.

Alternative

One of two or more possible solutions or courses of action that can be compared.

Investment

Money spent today with the expectation of earning future returns or benefits.

Interest

The cost of borrowing money or the return earned from investing money.

Time Value of Money (TVM)

The principle that money available today is worth more than the same amount in the future because it can earn interest.

Present Value (PV)

The current worth of a future amount of money, discounted at a specific interest rate.

Future Value (FV)

The value of an amount of money at a future date after earning interest.

Cash Flow

The movement of money into (inflows) and out of (outflows) a project or business over time.

Depreciation

The decrease in the value of an asset over its useful life due to wear, age, or obsolescence.

Life-Cycle Cost

The total cost of owning an asset, including purchase, operation, maintenance, and disposal costs.

Opportunity Cost

The value of the next best alternative that is given up when a decision is made.

Economic Efficiency

Achieving the greatest possible benefit while using the least amount of resources and minimizing costs.

Break-Even Point

The point at which total revenue equals total cost, resulting in neither profit nor loss.

Profit

The amount remaining after all costs and expenses have been deducted from total revenue.

Rate of Return (ROR)

The percentage gain or loss earned on an investment over a specified period.

Inflation

A sustained increase in the general prices of goods and services, reducing the purchasing power of money.

Feasibility Study

An evaluation conducted to determine whether a proposed engineering project is technically, economically, and financially practical.

Equipment or Process Selection

A class of engineering decision problems involving selecting the best course of action out of several that meet a project’s requirements.

Equipment Replacement

Investment decisions involving considering the expenditure necessary to replace worn-out or obsolete equipment.

New Product or Product Expansion

Investments that increase company revenues by increasing the output of existing production/distribution facilities or expanding into new products/geographic areas.

Cost Reduction Project

A project that attempts to lower a firm’s operating costs, such as buying equipment to perform an operation currently done manually.

Principle 1: A nearby penny is worth a distant dollar

A fundamental concept stating that money has a time value associated with it, making it better to receive money earlier than later.

Principle 2: All that counts are the differences among alternatives

The rule that an economic decision should be based only on the differences between alternatives; all that is common is irrelevant.

Principle 3: Marginal revenue must exceed marginal cost

The requirement that any increased economic activity must be justified by the additional revenue generated being greater than the additional cost incurred.

Marginal Cost (MC)

The additional cost of producing one more unit of a product or service. Formula: $MC = \frac{\text{Change in Total Cost}}{\text{Change in Quantity}}$

Marginal Revenue (MR)

The additional revenue earned from selling one or more unit of a product or service. Formula: $MR = \frac{\text{Change in Total Revenue}}{\text{Change in Quantity}}$

Optimal Production Level

The point where $MR = MC$, resulting in maximized profit.

Principle 4: Additional risk is not taken without the expected additional return

The principle that investors demand a minimum return greater than inflation or perceived risk to compensate for delaying consumption.

Fixed Cost

A cost that remains constant regardless of the level of production or activity, such as building rent or insurance.

Variable Cost

A cost that changes directly with the level of production or usage, such as raw materials and energy consumption.

Total Cost

The sum of all costs: $\text{Total Cost} = \text{Fixed Cost} + \text{Variable Cost}$

Average Cost

The total cost divided by the number of units produced: $\text{Average Cost} = \frac{\text{Total Cost}}{\text{Number of Units}}$.

Sunk Cost

A cost that has already been incurred and cannot be recovered; it should not influence future decisions.

Incremental Cost

The additional cost resulting from selecting one alternative over another.

Direct Cost

A cost that can be directly traced to a specific product, service, or project, such as materials and labor used for a specific project.