In most cases, engineering processes have often been regarded as designing, structuring, and machines. However, engineering economics has proved to be a critical aspect of engineering that plays an important role in effectively using limited resources. Engineering economics entails evaluating the past performance of a project and analyzing future predictions. If followed as stipulated by the engineering process, numerous methods can highlight the future and account for the past procedures. Additionally, it helps in choosing an alternative that will provide an end product with minimum costs. Therefore, time and uncertainty are critical in every step of engineering and should often be considered.
In engineering economics, the time value of money is critical in every action taken by the project managers. Money has time value because it has to earn power and can generate more money over time. The purchasing power of money also changes, and it can be determined in terms of interest rates. The interest rates can be determined through simple interest and compound interest. In simple interest, the interest rate is only charged on the initial amount. However, in compound interest, the interest rate is charged on the initial amount and any other interest rates that and not withdrawn. Purchasing is, however, determined by inflation and deflation. Inflation is a general rise in the prices of goods and services, while in deflation, the prices of goods decrease.
Economic equivalence is the core of engineering economics as it allows an engineer to evaluate the viability of two or more projects. It is always determined when cash flows have the same economic effect and can therefore be traded. Although there can be differences in the time and amount, an appropriate interest rate equalizes the projects. Economic equivalence can be determined through interest rates and profitability. Compound interest can be calculated annually or monthly based on the project’s life cycle and cash flows. Equivalence can also be determined in cases where there is deflation or inflation. However, interest rates are carefully considered as they help determine the market value and account for all the changes witnessed.
Analyzing interest rates, payment period, interest period, and effective interest rate are critical for effective evaluation. The payment period is the time frame between the completion of the project and the period it makes its first profit (Chowdhury et al., 2018). It is calculated in weeks, months, quarterly, semiannually, and annually. In cases it is estimated that the payback period will be short, such a project is always deemed viable, and it is chosen over a project with a long payback period. The interest period is when an interest rate commences; it ends excluding the first day of interest payment. Effective interest rate, however, is the gains obtained from the deposited amount for a particular period.
Profitability is, however, determined by measuring investment worth. This method can also be effective in determining if a project is worth pursuing or should be abandoned. Investment worth can be calculated through present net worth, annual worth analysis, rate of return, internal rate of return, and cost-benefit analysis. Regardless of the method used, a project with high profits is deemed suitable for pursuit. Additionally, the project’s rate of return should also be higher.
In conclusion, engineering economics is key in undertaking any engineering project. It helps in analyzing past projects while also helping in predicting the future of a project. The highlighted process can help a project manager choose between alternatives and ensure that only worthy projects are accomplished. Additionally, it provides insight into when the project will begin to make profits and at which rate. Moreover, it helps consider uncertainties such as inflation and deflation affecting the project’s resources. To summarize, it is important to determine more than one aspect of the project to determine its viability.
Reference
Chowdhury, A. Y., Alam, M. Z., Sultana, S., & Hamid, M. K. (2018). Impact of working capital management on profitability: A case study on pharmaceutical companies of Bangladesh. Journal of Economics, Business, and Management, 6(1), 27-35. Web.