Introduction
Engineering economics, also known as engineering economy, combines economic theory with engineering techniques. Its main purpose is to evaluate the economic impact of alternative courses of action on any given project. It deals with the economic appraisal of project investments and their return on investment, and includes cost-benefit analysis, risk and decision-making processes centered on economic principles.
The fundamentals of engineering economics abide by the principle of time value for money, or TVM. TVM is the concept that a specific unit of money will have different values over time depending on interest rates and inflation. For example, one dollar today is worth more than one dollar in a year’s time due to inflation and interest, and vice versa.
In engineering economics, the philosophy is that money keeps its worth, but its value changes over time. Therefore, the goal is to compare a project’s value now to its value in the future, taking into account the fluctuating value of money.
Engineers use different approaches to engineering economics. In cost estimation methods, they analyze the cost of resources and materials as well as the cost of labor and associated expenses. This typically involves making estimations based on construction and installation costs, raw materials, and the scope of the project.
In economic analyses, engineers use a variety of methods to evaluate economic decision-making. This includes evaluating risk, cost-benefit analysis, net present value (NPV), and internal rate of return (IRR). By evaluating the inherent risks and rewards, engineers are able to make more informed decisions.
In decision-making methods, engineers use quantitative methods such as decision trees and payback periods to compare potential options. They also use qualitative methods such as sensitivity analysis to explore ideas from different angles. Through these methods, engineers are able to determine the best solution for any given project to yield the highest return on investment.
Conclusion
Engineering economics is an important branch of engineering that provides engineers with the tools to analyze the economic impact of their decisions. It combines economic theory with engineering techniques, and uses methods such as cost-benefit analysis, risk assessment, and decision-making, to identify the most beneficial project options. By looking at the changing value of money over time and making informed decisions relative to those economic variables, engineers can maximize the return on investment of any given project.
