Engineering Management Exams Study Guide

SAMPLE TEXT on Engineering Economics

Engineering economics refers to the application of economic techniques for evaluating various design and engineering alternatives. Simply put, the primary focus of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint. Engineers must be capable of deciding if the benefits of a proposed project would exceed its costs, and must make this comparison in a unified framework, which is what engineering economics is all about.

Satisfaction of the physical and economic environments is usually linked through production and construction processes. Engineers are therefore in a position to manipulate the relevant systems for achieving a balance in the various attributes in both the physical and economic environments, all within the bounds of limited resources. When conducting engineering economic analyses, it is usually reasonable to assume at first, for the sake of simplicity, that benefits, costs, and physical quantities are known with a high degree of confidence. Such degree of confidence is sometimes being referred to as assumed certainty. Do remember that both risk and uncertainty in decision-making activities are caused by a lack of precise knowledge regarding future conditions - estimation may not always be accurate.

Generally speaking, the engineering process employed from the time a particular need is recognized until it is satisfied may be classified into a number of phases as shown below:

Determination of Objectives, which involves finding out what people need and want that can be supplied by engineering.

Identification of Strategic Factors, which are those factors that stand in the way of attaining objectives (the limiting factors).

Determination of means (in the form of, say, engineering proposals), which involves discovering what means exist to alter strategic factors in order to overcome limiting factors.

Evaluation of Engineering Proposals, with economic analysis employed to determine which among them, if any, is the best means for solving the problem at hand.

Assistance in Decision Making, which means providing assistance to the real decision makers supervising the engineers.

SAMPLE TEXT on TVM and the relevant concepts

Time Value of Money (TVM) is based on the concept that money that you hold today is worth more because you can invest it and earn interest. Simple interest is computed only on the original amount borrowed. It is the return on that principal for one time period, while compound interest is calculated each period on the original amount borrowed plus all unpaid interest accumulated to date. Periods are evenly-spaced intervals of time, not necessarily in years. Payments are a series of equal, evenly-spaced cash flows. Present Value refers to the amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. On the other hand, Future Value refers to the amount of money that an investment with a fixed, compounded interest rate can grow to by some future date.

Cash flow refers to the stream of monetary (dollar) values in terms of costs (inputs) and benefits (outputs) resulting from a project investment. Time value of money refers to the time-dependent value of money stemming both from changes in the purchasing power of money in the form of inflation or deflation and from the real earning potential of alternative investments over time.

Free cash flow refers to the cash that flows through a company in the course of a quarter or a year once all cash expenses have been removed. It represents the actual amount of cash that a company has left from its operations that could be used to pursue other opportunities. Cash flow diagrams provide a means of visualizing and simplifying the flow of receipts and disbursements for the acquisition and operation of engineering items.

Interest refers to the money paid for the use of borrowed money or the return on invested capital. The economic costs of your engineering solutions can be estimated correctly only via the inclusion of a factor for the economic cost of money. Interest formulae often play a central role in the economic evaluation of engineering alternatives.