APSC 221 - Engineering Economics Practice Flashcards

Comprehensive vocabulary flashcards covering cost terminology, estimation techniques, time value of money, rate of return methods, depreciation, inflation, and feasibility analysis from APSC 221 lecture notes.

Fixed Costs

Costs unaffected by activity level over a feasible operating range, such as insurance, license fees, and administrative salaries.

Variable Costs

Costs that change with the quantity of output or activity level, such as material and labour.

Incremental Costs/Revenue

Additional costs or revenue resulting from increasing system output, such as the equipment cost for adding a production line.

Direct Costs

Costs that can be measured and allocated to a specific output or activity, such as labour and material used in production.

Indirect Costs

Costs difficult to allocate to one specific output or activity, also known as overhead or burden, such as office supplies and electricity.

Sunk Cost

A past cost that should not affect future decisions, such as $50,000 already spent on equipment.

Opportunity Cost

The value of the best forgone alternative use of limited resources.

Life-Cycle Cost

The total cost related to a product, structure, or service over its entire life, including design, construction, operation, and disposal.

Order-of-Magnitude Estimates

Cost estimates used in planning and initial project evaluation.

Definitive/Detailed Estimates

Estimates used during detailed design and project implementation for control purposes.

Index numbers

Dimensionless numbers used to estimate future or past costs relative to a reference year, such as the Consumer Price Index.

Parametric Cost Estimating

A technique based on historical cost data that uses historical methods to fit a model to key independent variables or cost drivers.

Power-Sizing

A cost estimating technique that accounts for economies of scale where doubling capacity usually does not double total project cost, often using an exponent between $0.6$ and $0.9$.

The Learning Curve Model

A model assuming a constant percentage reduction in input resources each time cumulative production doubles as a team becomes faster through repetition.

Decisional Equivalence

Exists between two options if the individual making the decision is indifferent with respect to the options with no personal gain.

Mathematical Equivalence

Relates a cash flow $P$ at time $t$ to a cash flow $F$ at time $t + \text{delta } t$ using the formula $F = P(1+i)^N$.

Annuity ($A$)

A uniform cash flow series starting at the end of the first period and continuing over $N$ periods.

Sinking Fund Factor ($A/F, i, N$)

The factor used to convert a future amount $F$ to a periodic annuity $A$.

Capital Recovery Factor ($A/P, i, N$)

The factor used to convert a present amount $P$ to an annuity $A$ to find the uniform amount needed to recover an initial investment.

Arithmetic Gradient ($G$)

A cash flow series that starts at zero at the end of the first period and increases by a constant dollar amount each subsequent period.

Capitalized Value

The present amount equivalent to an infinitely long series of cash flows, calculated as $P = \frac{A}{i}$ when $N \rightarrow \text{∞}$.

Minimal Acceptable Rate of Return (MARR)

The minimum interest rate required to accept a job, accounting for risk, opportunity cost, and the cost of capital.

Independent Projects

Projects where the selection of one has no influence over the selection of another and can be accepted if $PW \text{≥} 0$.

Mutually Exclusive Projects

Projects where the selection of one prevents the selection of another, competing for the same resources.

Repeated Lives Approach

A method for comparing projects with unequal lives by repeating them over the least common multiple of their service lives.

Payback Period

The years required to recover the first cost of an investment; calculated as $\text{First Cost}/\text{Annual Benefits}$ if benefits are constant.

Internal Rate of Return (IRR)

The interest rate, $i^*$, that makes the present worth of all project cash flows equal to zero.

External Rate of Return (ERR)

A return calculation that introduces an explicit external reinvestment rate, usually the MARR, used when IRR is ambiguous or unrealistic.

Book Value

The value of an asset calculated based on a depreciation model for accounting or tax purposes.

Straight Line Depreciation

A model assuming a constant linear loss of value from the purchase price to the salvage value over the asset's useful life.

Capital Cost Allowance (CCA)

The maximum depreciation a firm can claim for tax purposes in Canada, typically using declining-balance depreciation.

Undepreciated Capital Cost (UCC)

The basis for calculating CCA, tracking the undepreciated portion of the original capital cost within a specific class pool.

Half-Year Rule

A tax rule where only half of the capital cost of acquiring an asset can be claimed for CCA in the first year of ownership.

Consumer Price Index (CPI)

A measure that tracks changes in the price experienced by consumers to monitor inflation, which the Bank of Canada aims to keep around 2\text{%}.

Actual (Current) Dollars

Dollars at the time the cash flow occurs; the physical money paid or received at a point in time.

Real (Constant) Dollars

Dollars with constant purchasing power relative to a base year, removing the effect of inflation.

Sensitivity Analysis

A method to determine which input matters most by varying one uncertain parameter while holding others fixed and plotting the performance measure.

Break-Even Analysis

A calculation to find the threshold value of a parameter (e.g., where $PW = 0$) where a project becomes economically justified or indifference is reached between alternatives.

Risk

The product of probability and impact, representing any event that can negatively affect project success.

Minimum Viable Product (MVP)

The smallest test created to expose key assumptions to real users and generate customer feedback or usage data.

TAM / SAM / SOM

Market sizing terms representing Total Market (TAM), Reachable Market (SAM), and Realistic Early Share (SOM).