Engineering Economy Fourth Edition's Problems and Solutions

Based on Engineering Economy Fourth Edition Book.
Written By :
Leland Blank, P.E (Texas A&M University)
Anthony Tarquin, P.E (University of Texas at El Paso)

Problems

1. What is meant by the term time value of money?
2. You meet a friend on a bus to the beach and tell her you are taking a course in engineering economy. She asks what it is. What do you answer?
3. List at least three criteria which might be used besides money for evaluating each of the following:
   a. Quality of the service and food in a neighborhood restaurant
   b. Flight on a commercial aircraft
   c. An apartment where you might sign a 1-year lease.
4. Describe the concept of equivalence in a way that your brother-in-law can understand it. He has a degree in psychology and works as a personal counselor in the human resources department of a large corporation.
5. Write one half to one page on your current understanding of how engineering economy is best used in a decision-making process which usually involves both economic and noneconomic factors.

Solutions

1. Time value of money is the concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity.This core principle of finance holds that, provided money can earn interest, any amount of money can worth more the sooner it is received.
   
         Time value of money is the most important concept in engineering economy. If we elect to invest money today, we inherently expect to have more money in the future and if a person or company finds it necessary to borrow money today, by tomorrow more than the original loan principal will be owed.
2.       Engineering economy is a collection of techniques that simplify comparisons of alternatives on a economic basis. Engineering economy is not a method or a process for determining what the alternatives are. But basically, engineering economy is making sure that your budget dont run out when you are doing engineering business such as construction or plant design.
3.       Three criteria which might be used besides money for evaluating each of the following:

a.       Quality of the service and food in a neighborhood restaurant

-     Food style, including its taste and what the clients want or need to eat, mainly due to current healthy eating trend and new nutritional needs.

-     Ambience in the restaurant. It makes the client feel comfortbale or not. It also includes the concept in the restaurant will make the client enjoy it or not.

-     Opinions from other clients

b.      Flight on a commercial aircraft

-     Punctuality of the aircraft

-     Facility obtained

-     The services that offered in the aircraft

c.       An apartment where you might sign a 1-year lease.

-     Location of the apartment, it must be close to the place where I work, study or make an activity.

-     Facility obtained

-     The security, serenity and the ambience of the apartment and its   neighbourhood.

  4.  The concept of the equivalence used to compare two alternatives that provides the same service over extended periods of time when interest is involved, we must reduce them to an equivalent basis that is dependent on: If two alternatives are economically equivalent, then they are equally desirable. Which means that different sums of money at different times are equal in economic value. For example, if the interest rate is 6% per year, $100 today (present time) would be equivalent to $106 one year from today.

        5. Decisions are made routinely to choose one alternative over another by individuals in everyday life, by engineers on the job, by the managers who supervise the activities of others, by corporate president who operate a business; and by government officials who work for the public good.

Most decisions involve money, or another economic and noneconomic factors, which is usually limited in  amount. The decision of where and how to invest this limited capital is motivated by a primary  goal of   adding value  as future, anticipated results of the selected alternative are realized. Engineers play a vital role in capital investment decisions based upon their ability and experience  to design, analyze, and synthesize. The factors upon which a decision is based are commonly a  combination of economic and noneconomic elements. Engineering economy deals with the  economic factors. By definition, Engineering economy involves formulating, estimating, and evaluating the expected economic outcomes of alternatives designed to accomplish a defined purpose. Mathematical techniques simplify the economic evaluation of alternatives.

Because the formulas and techniques used in engineering economics are applicable to all  types of money matters, they are equally useful in business and government, as well as for  individuals.   Therefore, besides applications to projects in your future jobs, what you learn  from this book and in this course may well offer you an economic analysis tool for making  personal decisions such as car purchases, house purchases, major purchases on credit, e.g.,  furniture, appliances, and electronics.

Other terms that mean the same as   engineering economy  are   engineering economic analysis,  capital allocation study, economic analysis,  and similar descriptors.

People make decisions; computers, mathematics, concepts, and guidelines assist people in  their decision-making process. Since most decisions affect what will be done, the time frame of  engineering economy is primarily the   future . Therefore, the numbers used in engineering econ- omy are   best estimates of what is expected to occur . The estimates and the decision usually  involve four essential elements:

-          Cash flows   

-          Times of occurrence of cash flows  

-          Interest rates for time value of money  

-          Measure of economic worth for selecting an alternative 

Since the estimates of cash flow amounts and timing are about the future, they will be some- what different than what is actually observed, due to changing circumstances and unplanned  events. In short, the variation between an amount or time estimated now and that observed in the future is caused by the stochastic (random) nature of all economic events.   Sensitivity  analysis  is utilized to determine how a decision might change according to varying esti- mates, especially those expected to vary widely.  All these measures of worth account for the fact that money makes money over time. This is the  concept of the   time value of money.

It is a well-known fact that money   makes  money. The time value of money explains the change  in the amount of money   over time  for funds that are owned (invested) or owed (borrowed). This is the most important concept in engineering economy.

The time value of money is very obvious in the world of economics. If we decide to invest  capital (money) in a project today, we inherently expect to have more money in the future than  we invested. If we borrow money today, in one form or another, we expect to return the original  amount plus some additional amount of money.

Engineering economy also begins only after the alternatives have been identified. If the best alternative is actually one that the engineer has not even recognised as an alternative, then all the engineering economic analysis tool will not results in its selection.

Rational Decision Making in Engineering Economy :

-          Recognise a decision problem

-          Define the goals or objectives

-          Collect all the relevant information

-          Identify a set of feasible decision alternatives

-          Select the decision criterion to use

-          Select the best alternative.