Engineering Economic
SECTION FIVE
CHAPTER 7
Engineering Economics
John M. Watts, Jr., and Robert E. Chapman
Introduction
Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives.1 The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint. This chapter discusses the time value of money and other cash-flow concepts, such as compound and continuous interest. It continues with economic practices and techniques used to evaluate and optimize decisions on selection of fire safety strategies. The final section expands on the principles of benefit-cost analysis. An in-depth treatment of the practices and techniques covered in this compilation is available in the ASTM compilation of standards on building economics.2 The ASTM compilation also includes case illustrations showing how to apply the practices and techniques to investment decisions. A broader perspective on the application of engineering economics to fire protection engineering can be found in The Economics of Fire Protection by Ramachandran.3 This work is intended as a textbook for fire protection engineers and includes material and references that expand on several other chapters of this section of the SFPE handbook.
Time Value of Money
The following are reasons why $1000 today is “worth” more than $1000 one year from today: 1. Inflation 2. Risk 3. Cost of money Of these, the cost of money is the most predictable, and, hence, it is the essential component of economic analysis. Cost of money is represented by (1) money paid for the use of borrowed money, or (2) return on investment. Cost of money is determined by an interest rate. Time value of money is defined as the time-dependent value of money stemming both from changes in the purchasing power of money (inflation or deflation) and from the real earning potential of alternative investments over time.
Cash-Flow
CHAPTER 7
Engineering Economics
John M. Watts, Jr., and Robert E. Chapman
Introduction
Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives.1 The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint. This chapter discusses the time value of money and other cash-flow concepts, such as compound and continuous interest. It continues with economic practices and techniques used to evaluate and optimize decisions on selection of fire safety strategies. The final section expands on the principles of benefit-cost analysis. An in-depth treatment of the practices and techniques covered in this compilation is available in the ASTM compilation of standards on building economics.2 The ASTM compilation also includes case illustrations showing how to apply the practices and techniques to investment decisions. A broader perspective on the application of engineering economics to fire protection engineering can be found in The Economics of Fire Protection by Ramachandran.3 This work is intended as a textbook for fire protection engineers and includes material and references that expand on several other chapters of this section of the SFPE handbook.
Time Value of Money
The following are reasons why $1000 today is “worth” more than $1000 one year from today: 1. Inflation 2. Risk 3. Cost of money Of these, the cost of money is the most predictable, and, hence, it is the essential component of economic analysis. Cost of money is represented by (1) money paid for the use of borrowed money, or (2) return on investment. Cost of money is determined by an interest rate. Time value of money is defined as the time-dependent value of money stemming both from changes in the purchasing power of money (inflation or deflation) and from the real earning potential of alternative investments over time.
Cash-Flow