Engineering Economics Cheat Sheet

This cheat sheet covers fundamental concepts in Engineering Economics, including economic decision-making, demand and supply analysis, elasticity, estimation models, and investment appraisal techniques like Payback Period, NPV, and IRR.

Core Principles

• Economic decisions involve maximizing utility and minimizing costs.
• Demand is influenced by price, income, tastes, and prices of related goods.
• Supply is influenced by price, cost of production, technology, and producer goals.
• Elasticity measures the responsiveness of demand or supply to changes in influencing factors.
• Estimation models (ROM, Budget, Definitive, Parametric, Analogous, Bottom-Up) provide different levels of accuracy and detail.
• Time value of money recognizes that a rupee today is worth more than a rupee tomorrow.
• Investment appraisal techniques (Payback Period, NPV, IRR) help evaluate project profitability.

Action Steps

• Recognize the problem and define goals/objectives.
• Collect relevant data and identify feasible alternatives.
• Analyze costs and benefits, considering time value of money.
• Apply appropriate estimation models based on available information.
• Calculate investment appraisal metrics (Payback Period, NPV, IRR).
• Compare alternatives and select the best option based on defined criteria.
• Implement the decision and audit the results.

Formulas

• $E_D = \frac{\% \text{ Change in quantity demanded}}{\% \text{ Change in any one of the determinant of demand}}$
• $EP = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}$
• $E_Y = \frac{\% \text{ Change in quantity demanded}}{\% \text{ Change in income of consumer}}$
• $E_c = \frac{\text{Proportionate change in purchase of commodity}}{\text{Proportionate change in price of commodity}}$
• $Q^* = \sqrt{\frac{2SD}{H}}$
• $F = P \times (1 + i \times n)$
• $F = P \times (1 + i)^n$
• $P = \frac{F}{(1 + i)^n}$
• $NPV = \sum_{n=1}^{t} \frac{F_n}{(1 + i)^n} - \text{cash outlay } (F_0 = P)$
• $IRR = i_1 + \frac{i_2 - i_1}{y_2 - y_1} (y_* - y_1)$
• $\text{Payback period} = \frac{\text{Initial Investment}}{\text{Annual Cash Flow}}$

Key Terms

• Scarcity: The fundamental concept that resources are limited, and there are unlimited wants and needs.
• Opportunity Cost: The cost of forgoing the next best alternative when making a decision.
• Marginal Analysis: Evaluating the additional benefits and costs of a small change in the level of an activity.
• Law of Demand: The inverse relationship between the quantity of a commodity and its price.
• Law of Supply: The direct relationship between the price and the quantity supplied of a commodity.
• Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.
• Income Elasticity of Demand: Measures the responsiveness of demand to a change in consumer income.
• Cross Elasticity of Demand: Measures the responsiveness of demand for one good to a change in the price of another good.
• ROM Estimate: Rough Order of Magnitude estimate, a high-level, preliminary estimate.
• Definitive Estimate: The most accurate estimate, produced when detailed information is available.
• Parametric Estimate: Uses statistical relationships between parameters and historical data.
• Analogous Estimate: Uses historical data from similar past projects (top-down approach).
• Bottom-Up Estimate: Estimates each component of a project individually and aggregates them.
• Time Value of Money: Recognizes that money available at the present time is worth more than the same amount in the future.
• Payback Period: The length of time it takes to recover the cost of an initial investment.
• NPV (Net Present Value): The difference between the present value of cash inflows and the present value of cash outflows.
• IRR (Internal Rate of Return): The discount rate that makes the NPV of all cash flows equal to zero.
• EOQ (Economic Order Quantity): The order size that minimizes total inventory costs.

Real World Examples

• Renewable Energy Project: Analyzing financial feasibility, job creation, and carbon emission reduction.
• Transportation Infrastructure Development: Assessing benefits like reduced travel time and improved connectivity, alongside socio-economic impacts.
• Software Development Project Estimation: Using Bottom-Up estimation to break down tasks and estimate effort for a CMS project.
• Car Dealership Inventory: Calculating EOQ to determine the optimal number of cars to order annually.

People

• Dr. Umed Singh: Course Instructor, Assistant Professor, Department of Mechanical Engineering