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Engineering economics is the application of economic principles and calculations to engineering projects. It is important to all fields of engineering because no matter how technically sound an engineering project is, it will fail if it is not economically feasible. Engineering economic analysis is often applied to various possible designs for an engineering project in order to choose the optimum design, thereby taking into account both technical and economic feasibility.
Many basic economic principles may be applied in an engineering economic analysis, depending on their applicability. Time value of money is one such principle with wide applicability. This principle is used to calculate the future value of something given the present value, or the present value given the future value, at a given interest rate. For example, time value of money may be used to calculate how much a project will cost once it is actually completed; annual investments or withdrawals may also be calculated. A cash-flow diagram is often used to aid in the calculation of the time value of money.
When comparing costs among two or more possible alternatives, engineering economics may use either present or future worth analysis or annual cost. Present or future worth analysis converts all the costs of a project into equivalent present or future worth. The time period of analysis must be the same for all options for this method to be valid.
Annual cost analysis computes the annual rate of return for a project or projects. A value called the minimum active rate of return is also computed. Generally, a project must meet or exceed the minimum active rate of return to be considered feasible. If two or more projects meet this rate, other criteria are also considered.
For government engineering projects, a method called benefit/cost analysis is often used. This method converts the all benefits and costs of a project into monetary values, and then divides the total benefits by the total costs. As a general rule, the project is considered acceptable if this ratio is greater than one.
In manufacturing engineering, a method called break-even analysis is often used. This is used to determine the percent capacity for the manufacturing operation at which cost is equal to income. A company could use this method to determine the minimum amount it must produce in a month to turn a profit.
Engineers may also use economics to calculate depreciation of value. For example, they could calculate the value of a tool that a company is considering purchasing. Methods for calculating depreciation include book value, straight-line depreciation, and accelerated cost recovery system.
All disciplines of engineering employ engineering economics. Most university and college engineering departments require a course in engineering economics, or include economic analysis in other engineering coursework. Engineering economics is a required section of the Fundamentals of Engineering exam, which is required for engineers who desire to attain professional licensure.
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