Flashcards for the Fundamentals of Engineering Exam topic of Engineering Economics
Terms in this set (8)
present worth method
used when two or more alternatives are capable of performing the same functions. Restricted to evaluating alternatives that are mutually exclusive and that have the same lives.
annual cost analysis
used for alternatives that accomplish the same purpose but that have unequal lives. It assumes that each alterative will be replaced by an identical twin at the end of its useful life. alternatives must be mutually exclusive and repeately renewed up to the duration of the longest-lived alternative.
rate of return analysis
effective annual interest rate that makes the cost and benefits equal.
minimum attractive rate of return (MARR)
criterion of the minimum level of economic performance that a company would like to realize on all investments. Once the rate of return is known it can be compared to the MARR. If it is equal to or exceeds the MARR, the investment is qualified
the altneratives are ordered in increasing initial investment. The cash flows from the lowest cost are subtracted from the higher priced alternative. The new "alternative" must have a rate of return that exceeds the MARR. The alternative with the high initial investment is superior if the incremental rate of return exceeds the MARR.
Benefit-cost ratio method
all benenfits over all costs must be greater than 1. If ranking is to be done by this method. Incremental analysis is accomplished by calculating the ratio of differences in benefits to differences in costs for each possible pair of alternatives. If the ratio exceeds 1, alternative 2 is superior to alternative 1.
(b2-b1)/(c2-c1) >= 1
method of determining when the value of one alternative becomes equal to the value of another. It is commonly used to determine when costs exactly equal revenue.
the length of time N for the cumulative net annual profit to equal the initial investment in break-even analysis