Make Profits with Engineering EconomicsOct 20, 2014
Engineers design the world. When they design or create the world they
have to take into account the economic feasibility and profits of the project.
It is not sufficient if an engineer is just creative. He or she must know how
to make money or profits with that creativity. Engineers have to make a lot of
decisions and each decision is arrived after considering a lot of alternatives.
Engineering economics is about listing, estimating, and evaluating the monetary
performance of each alternative.
While accounting is used to evaluate past performance, engineering
economics is used to predict and analyse future events. The time taken for a
project to yield results and the related ambiguity are the two important
factors considered in engineering economics. It is easy to predict
the engineering economics for a small project. But for a large project the
cost, time, and ambiguity will be greater than that of a small project.
For example, let us look at what factors affect engineering economics
for the manufacturing industry. If the services are improved the increased cost
has to be taken into account. Buying new equipment or replacing existing
equipment; creating a new product or bringing variations to an existing product
and general cost reduction leads to economic discussions.
In any engineering economy study, a set of steps as shown below are
- Problem description
- Alternative solutions to reach goal
- Cash flow and other estimates
- Measure of worth criterion
- Engineering Economic analysis
- Best alternative selection
- Implementing and monitoring
In addition to following the prescribed steps, getting money or return
in the near future must be considered more appealing than getting money in the
distant future. When there are a set of alternatives the differences in the
alternatives have to be evaluated. Marginal revenue must be higher than
marginal cost. It is not advisable to take extra risk if there is no extra
return for the project or activity. Taking extra risk may decrease the value of
the invested money over time.
The Time Value of Money (TVM) is a very important
concept. TVM is the concept of the value of any money increasing
over a period of time. People may invest the money to earn greater returns or
the money in the bank may earn some interest. So, it is accepted that the value
of money keeps increasing if properly utilized.
The parameters considered for engineering economics are:
- Fixed Cost
- Sunk Cost
- Variable Cost
- Opportunity Cost
- Marginal Cost
- Marginal Revenue
- Profit-Volume Ratio
- Technical Efficiency
- Economic Efficiency
- Simple Interest
- Compound Interest
- Cash Flow diagram
- Benefit-Cost ratio
- Economic Order of Quantity (EOQ)
- Minimum attracting rate of return
must be cost conscious and use the engineering economic formulas and tools to
test the monetary success of the project. Engineering Economics is an important
subject covered on the PE Exam