Reference

Blank, L. and Tarquin, A. “Engineering

Economy”, 8th edition, 2018.

Dr. Ghada Shedeed

GhadaShedid.Lecturer@gmail.com
Engineering Economy

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 Course Specifications
• HUM 111_Course_Specification

1-3

Learning Outcomes
• Decision making
• Terminologies:
– Time value of money.
– Interest
– Interest period
– Interest rate and rate of return
– Principle (Original amount)
– Economic equivalence

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 Terminologies and Definitions
Decision Making

It is an important procedure used to

address the development and selection
of alternatives. Commonly referred to as
the problem-solving approach or the
decision-making process.

Decision Making
The steps in the approach:
1. Understand the problem and define the
objective.
2. Collect relevant information.
3. Define the feasible alternative solutions and
make realistic estimates.
4. Identify the criteria for decision making using
one or more attributes. “measure of worth”
5. Evaluate each alternative, using sensitivity
analysis to enhance the evaluation.
6. Select the best alternative.
7. Implement the solution and monitor the results.

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 Terminologies and Definitions

Time value of money

• When determining a measure of worth, the

fact that money today is worth a different
amount in the future is considered; that is,
the time value of money is accounted for.
• Is the change in the amount of money over a
given time period. It is the most important
concept in the engineering economy.

Terminologies and Definitions

Interest, interest period, and interest rate
Interest is the materialization of the time
value of money.
• Interest (per time unit) = total amount now
– original amount (principal)
• Interest over a specific time unit is
expressed as percentage of the original
amount (principal), the result is called the
interest rate
• The time unit of the rate is called interest
period, if not mentioned, it will be one year
by default.

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 Terminologies and Definitions
Interest Rate and Rate of Return
•Interest earned (investor and
ROR bank, investment rate of return). IR
• Interest paid (borrower and
bank, loan interest rate)

Money Invested

Person Bank

Money Borrowed

IR ROR

Terminologies and Definitions

Equivalence

When considered together, the time value of

money and the interest rate; help in
developing the concept of economic
equivalence. It means that different sums of
money at different times are equal in
economic value, and their values at a
common point in time are numerically equal.

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 Example of Equivalence
Different sums of money at different
times may be equal in economic value
$110
at a given rate
Year

0 1
Rate of return = 10% per year

$100 now

$100 now is economically equivalent to $110 one year

from now, if the $100 is invested at a rate of 10% per
year.
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