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Basics of Engineering Economy
by
Leland Blank and Anthony Tarquin
Chapter 1
Foundations of Engineering
Economy
Design: Develop
Solution
Evaluation:
Construction:
O
Operation
ti andd Implement
Maintenance solution
Engineering
Define the Plan: Generate and Economy
Problem compare Alternative
S l ti
Solutions
Design: Develop
Solution
Evaluation:
Construction:
O
Operation
ti andd Implement
Maintenance solution
Fundamental terminology:
Alternative -- stand-alone solution
Cash flows -- estimated inflows (revenues) and outflows (costs) for
an alternative
Evaluation criteria -- Basis used to select ‘best’ alternative;
usually money (currency of the country)
Time value of money -- Change in amount of money over time
(Most important concept in Eng. Econ.)
Take loan of $5,000 for one year; Invest (or lend) $5,000 for one
repay $5,350 year; receive $5,350
$106 one
year from
$94.34 last year $100 now now
Interpretation: $94.34 last year, $100 now, and $106 one year
from now are equivalent only at an interest rate of 6% per year
Cash
C h inflow
i fl – receipt, revenue, income, saving
Cash outflows – cost, expense, disbursement, loss
End-of-period
End of period convention: all cash flows and
NCF occur at the end of an interest period
Year 1 Year 5
Typical time
scale or 5
0 1 2 Time, t 3 4 5
years
+ Cash flow
P=? Find P in
year 0,
0
given 3
0 1 2 3 4 5
cash flows
- Cash flow