Engineering Economics

Engineering Economy

cost or profit situation regarding a practical enterprise or project, as in economy studies, engineering economy, project economy; system of production, distribution, and consumption of goods and services.

Economics

Study or science of the production, distribution and consumption of goods and services; Science that deals with attainment of the maximum fulfilment of society’s unlimited demands for goods and service.

Engineering Economics

The discipline concerned with economic aspects of engineering; it involves the systematic evaluation of the costs and benefits of proposed technical projects.

Goods

items for sale, or possessions that can be moved; tangible (can be seen and touched)

Services

doing things for customers; intangible (cannot be physically touched)

Necessity

goods and services that are required to support human life, needs and activities

Luxury

goods and services desired by human and will be acquired only after all necessities have been satisfied

Consumer Goods and Services

Products/services that are directly used by people to satisfy their wants.

Producer Goods and Services

those that are used to produce consumer goods and services

Costs

the amount of money needed to buy, do, or make something

Direct Cost

price that can be directly tied to the production of specific goods or services

Indirect Cost

difficult to attribute or allocate to a specific output or work activity.

Overhead Cost

consists of plant operating costs that are not direct labor or direct material costs.

Fixed Costs

those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available.

Variable Costs

those associated with an operation that varies in total with the quantity of output or other measures of level.

Recurring Costs

those that are repetitive and occur when an organization produces similar goods or services continuously.

Non-Recurring Costs

not repetitive, even though the total expenditure may be cumulative over a relatively short period of time.

Cash Cost

cost that involves payment of cash (and results in a cash flow)

Noncash Cost

one that does not involve a cash transaction and is reflected in the accounting system as a noncash cost.

Sunk Cost

one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action; those which have already been incurred and which are unrecoverable.

Opportunity Cost

forgone benefit that would have been derived by an option not chosen.

Incremental Cost

additional cost, or revenue, that results from increasing the output of a system by one (or more) units.

Standard Cost

costs established in advance of actual production or service delivery.

Investment Cost

capital required for most of the activities in the acquisition phase.

Operation and Maintenance Cost

includes many of the recurring annual expense items associated with the operation phase of the life cycle.

Disposal Cost

includes those nonrecurring costs of shutting down the operation and the retirement and disposal of assets at the end of the life cycle.

Life-Cycle Cost

summation of all costs, recurring and nonrecurring, related to a product, structure, system, or service during its life span.

Capital

Wealth in the form of money or property that can be used to produce more wealth.

Equity Capital

a capital (as stock or surplus earnings) that is free of debt; especially received for an interest in the ownership of a business.

Debt Capital

often called borrowed capital, is obtained from lenders (e.g., through the sale of bonds) for investment.

Working Capital

money used for daily operations.

Interest

payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum.

Demand

need, want or desire for a product backed by the money to purchase it.

Supply

the amount of a product made available for sale.

Law of Demand

If all other factors remain equal, the higher the price of a good, the less people will demand that good.

Law of Supply

If all other factors remain equal, the higher the price, the higher the quantity supplied.

Law of Supply and Demand

Under conditions of perfect competition, the price at which any given product will be supplied and purchased is the price that will result in the supply and the demand being equal.

Market

place where the vendors and buyers come together.

Buyer/Consumer

Basic consuming or demanding unit of a commodity.

Seller

Entity which makes product, good or service available to a buyer in exchange of monetary consideration.

Competition

form of market structure where the number of suppliers is used to determine the type of market.

Surplus

QUANTITY SUPPLIED EXCEED DEMAND AT A CERTAIN PRICE

Shortage

QUANTITY SUPPLIED DOES NOT MEET DEMAND AT A CERTAIN PRICE

Market Equilibrium

AT A CERTAIN PRICE, IF SUPPLY MEETS DEMAND

Perfect Competition

any given product supplied by a large number of vendors and there is no restriction on additional vendors entering the market.

Monopoly

market structure characterized by a single seller, selling a unique product in the market.

Oligopoly

number of sellers is so few that the market share of each is large enough for even a modest change in price or output by one seller to have a perceptible effect on the market shares or incomes of rival sellers.

Current Assets

Cash in Bank, Accounts Receivable, Accrued Interest Receivable, Short Term Securities, Inventory, Government Bonds, Interest Earned, Cash in hand, Notes and accounts Receivable.

Fixed Assets

Furniture and fixtures, Buildings and factories less depreciation, Machineries (less depreciation), Trucks (less depreciation), Land, Equipment.

Current Liabilities

Accounts payable, Notes payable, Dividends declared on preferred stock, Taxes accrued, Declared and unpaid dividends.

Fixed Liabilities

Mortgage payable, Reserve for expansion.

Accounting Equation

ASSETS = LIABILITIES + OWNERSHIP

Acid Test Ratio

Quick Ratio

Simple Interest Formula

I = P * i * n

Future Worth (Simple Interest)

F = P + I = P(1 + i * n)

Ordinary Simple Interest (Days)

I = P * i * (d / 360)

Exact Simple Interest (Normal Year)

I = P * i * (d / 365)

Exact Simple Interest (Leap Year)

I = P * i * (d / 366)

Compound Interest Formula (Future Worth)

F = P(1 + i)^n

Compound Interest Formula (Present Worth)

P = F(1 + i)^-n

Single Payment Compound Amount Factor

(1 + i)^n

Single Payment Present Worth Factor

(1 + i)^-n

Effective Rate of Interest (ER)

ER = (1 + i/m)^m - 1

Continuous Compound Interest (Future Worth)

F = P * e^(NR * n)

Continuous Compound Interest (Present Worth)

P = F * e^-(NR * n)

Discount

Difference between the future worth of a negotiable paper and its present worth.

Rate of Discount (d)

d = 1 - (1 + i)^-1

Annuity

Equal payments made at equal intervals of time.

Ordinary Annuity

Payments are made at the end of each period.

Annuity Due

Payments are made at the beginning of each period.

Annuity Certain

Payments with a fixed and definite duration.

Deferred Annuity

The first payment is made several periods after the beginning of the annuity.

Perpetuity

An annuity in which the payments continue indefinitely.

Capitalized Cost

The sum of its first cost and the present worth of all costs for replacement, operation, and maintenance for a long time or forever.

Annual Cost

The equivalent uniform yearly cost of owning, operating, and maintaining an asset or project.

Bonds

A fixed-income investment representing a loan made by an investor to a borrower.

Face Value/Par Value

The money amount the bond will be at maturity.

Coupon Rate

Rate of interest the bond issuer will pay on the face value of the bond.

Depreciation

Reduction or fall in the value of an asset during its working life due to usage, wear and tear, obsolescence, or passage of time.

Market Value

The amount a willing buyer will pay to a willing seller.

Book Value

Worth of property reflected in the book of record of a company.

Salvage Value

The estimated value that an owner is paid when the item is sold at the end of its useful life.

Straight Line Method (Annual Depreciation)

d = (FC - SV) / n

Straight Line Method (Book Value after m years)

BVm = FC - (d * m)

Declining Balance Method (Depreciation Rate k)

k = 1 - (SV / FC)^(1/n)

Declining Balance Method (Book Value after m years)

BVm = FC(1 - k)^m

Sum of Years Digit (SYD)

SYD = n(n + 1) / 2

Sum of Years Digit (Depreciation at year m)

dm = (FC - SV) * (n - m + 1) / SYD

Break-Even Point

Total income equals total expenses.

Return on Investment (ROI)

A ratio that compares the gain or loss from an investment relative to its cost.

Revenue Passenger Kilometer (RPK)

Number of revenue passengers multiplied by the total distance traveled.

Available Seat Kilometer (ASK)

Available seats multiplied by the number of kilometers flown.

Passenger Load Factor (PLF)

(RPK / ASK) * 100%

Cost per Available Seat Kilometer (CASK)

Operating costs / ASK

Passenger Yield

Passenger revenue / RPK

Management

The process of planning, organizing, leading, and controlling resources to achieve organizational goals efficiently and effectively.

Planning

Choosing tasks, outlining how they must be performed, and indicating when they should be performed.

Organizing

Assigning tasks to various individuals or groups within the organization.

Leading/Influencing

Guiding the activities of members in a direction that helps the organization move towards its goals.

Controlling

The process of assessing organizational performance and taking necessary corrective action.