Engineering Accounting
and Economics
Engineering Economics
• Whether or not an engineering project is cost
effective
• Which project option is most cost effective?
Financial Terms
Present Value (PV) is the current value of a future sum of money
or stream of cash flows given a specified rate of return.
It takes the future value and applies a discount rate or the
Future value (FV) is the value of a current asset at some point
in the future based on an assumed growth rate. Investors are
able to reasonably assume an investment’s profit using the FV
calculation.
Financial Terms
Interest Rate refers to the amount charged by a lender,
expressed as a % of principal
Annual Cash Flow (A) is also called Annuity. It is defined as a
series of equal cash flows that occur evenly spaced over time
Annual Value (AV) is the difference between the annual savings
of a project and its annuitized initial investment (i.e. the cost).
Minimum Acceptable Rate of Return (MARR) refers to the
lowest rate of return that the project must earn in order to
offset the costs of the investment.
Financial Terms
The simple payback period (SPB) refers to the amount of time it
takes to recover the cost of an investment (i.e the payback period
is the length of time an investment reaches a break-even point. The
desirability of an investment is directly related to its payback period)
Shorter paybacks mean more attractive investments.
Example1: If 1,000 T8 fixtures (60 Watts/fixture) are to
replace with 36W LED fixtures. Lights are on 8,760
hours a year, and electricity costs $0.17/kWh. What will
be the simple payback period if the LEDs are
$100/fixture to install?
kWh/yr = (1,000 Fixtures)(0.060 kW - 0.036 kW) (8,760 hr/yr)
= 210,240 kWh/year
$/yr = (210,240 kWh/yr) ($0.17/kWh) = $35,741/yr
New lamps cost = (1,000)($100) = $100,000
$100,000
SPB=
= 2.8 years
$35,741/yr
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Financial Terms
• Net Present Value (NPV) refers to the difference between the present value of
cash inflows and the present value of cash outflows over a period of time.
• NPV is used in capital budgeting and investment planning to analyze the
profitability of a projected investment or project.
• If the NPV of an investment is positive, it means the investment is profitable
• If the NPV of an investment is negative, it means the investment has a net
loss.
compound interest factor table
“what we want to determine” / What we do know” (i.e. / is not a division operator)
Example “P/A, I, N” means we want to find P ….. If we know A,I and N
Example: You are considering purchasing insulation
jackets to be placed on all the steam traps throughout
the university campus. You are evaluating at two(2)
different types of insulation. Both insulation measures
last 20 years long. The university’s MARR is 15%.
Insulation Measure #1 costs $570,000 and saves
$140,000 per year. Insulation Measure #2 costs $680,000
and saves $170,000 per year. Which insulation measure
would you recommend?
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In-Class Assignment
1.
If 850 T5 fixtures (80 Watts/fixture) are to replace
with 36W LED fixtures. Lights are on 5000 hours a
year, and electricity costs $0.18/kWh. What will be
the SPB if the LEDs are $80/fixture to install?
2.
You are considering purchasing insulation jackets to
be placed on all the steam traps throughout the
university campus. You are evaluating at three(3)
different types of insulation. All insulation measures
will last 15 years long. The university’s MARR is
15%. Insulation Measure #1 costs $470,000 and
saves $180,000 per year. Insulation Measure #2
costs $700,000 and saves $250,000 per year.
Insulation Measure #3 costs $900,000 and saves
$290,000 per year. Which insulation measure would
you recommend?
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