Leland T. Blank, P. E.
Department of Industrial Engineering Assistant Dean of Engineering Texas A & M University
Anthony J. Tarquin, P. E.
Department of Civil Engineering Assistant Dean of Engineering The University of Texas at EI Paso
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1.5 Define and recognize in a problem statement the economy symbols P, F, A, n, and i. 1.6 Define cash flow, state what is meant by end-of-period convention, and construct a cash-flow diagram, given a statement describing the amount and times of the cash flows.
1.1 Basic Terminology
Before we begin to develop the terminology and fundamental concepts upon which engineering economy is based, it would be appropriate to define what is meant by engineering economy. In the simplest terms, engineering economy is a collection of mathematical techniques which simplify economic comparisons. With these techniques, a rational, meaningful approach to evaluating the economic aspects of different methods of accomplishing a given objective can be developed. Engineering economy is, therefore, a decision assistance tool by which one method will be chosen as the most economical one. In order for you to be able to apply the techniques, however, it is necessary for you to understand the basic terminology and fundamental concepts that form the foundation for engineering-economy studies. Some of these terms and concepts are described below. An alternative is a stand-alone solution for a give situation. We are faced with alternatives in virtually everything we do, from selecting the method of transportation we use to get to work every day to deciding between buying a house or renting one. Similarly, in engineering practice, there are always seveffl ways of accomplishing a given task, and it is necessary to be able to compare them in a rational manner so that the most economical alternative can be selected. The alternatives in engineering considerations usually involve such items as purchase cost (first cost), the anticipated life of the asset, the yearly costs of maintaining the asset (annual maintenance and operating cost), the anticipated resale value (salvage value), and the interest rate (rate of return). After the facts and all the relevant estimates have been collected, an engineering-economy analysis can be conducted to determine which is best from an economic point of view. However, it should be pointed out that the procedures developed in this book will enable you to make accurate economic decisions only about those alternatives which have been recognized as alternatives; these procedures will not help you identify what the alternatives are. That is, if alternatives ,4, B, C, D, and E have been identified as the only possible methods to solve a Particular problem when method F, which was never recognized as an alternative, is really the most attractive method, the wrong decision is certain to be made because alternative F could never be chosen, no matter what analytical techniques are used. Thus, the importance of alternative identification in the decision-making process cannot be overemphasized, because it is only when this aspect of the process has been thoroughly completed that the analysis techniques presented in this book can be of greatest value. In order to be able to compare different methods for accomplishing a given objective, it is necessary to have an evaluation criterion that can be used as a basis
Terminology and Cash-Flow Diagrams
for judging the alternatives. That is, the evaluation criterion is that which is used to answer the question "How will I know which one is best?" Whether we are aware of it or not, this question is asked of us many times each day....