Engineering Economics

Reference data and engineering information about engineering economics for automotive and transport applications.

engineeringeconomics

Overview

Engineering reference data for Engineering Economics in automotive transport.

Key Formulas

Braking Distance

$d = \frac{v^2}{2\mu g}$

Distance to stop from velocity v.

Fuel Consumption

$FC = \frac{\text{distance}}{\text{fuel volume}}$

Distance per unit fuel.

Horsepower

$HP = \frac{\tau \cdot n}{5252}$

Torque × RPM / 5252.

Drag Force

$F_d = \frac{1}{2} \rho v^2 C_d A$

Aerodynamic drag on vehicle.

Variables

Symbol	Description	Unit
$d$	Braking distance	m
$v$	Velocity	m/s
$\mu$	Friction coefficient	—
$\tau$	Torque	N·m
$C_d$	Drag coefficient	—

Core Economic Indicators

This section expands on key metrics and concepts used in engineering economics to evaluate projects and investments.

Comparison of Key Financial Metrics

Understanding the differences between common financial metrics is crucial for project evaluation.

Metric	Description	Primary Use
Net Present Value (NPV)	The difference between the present value of cash inflows and outflows over a project's life.	Determines the absolute dollar value added by a project. A positive NPV indicates a potentially viable project.
Internal Rate of Return (IRR)	The discount rate that makes the NPV of all cash flows equal to zero.	Represents the expected rate of return of a project. It is compared against a minimum acceptable rate of return (MARR).
Payback Period	The time required to recover the initial investment from the net cash flows.	Measures project liquidity and risk. Shorter payback periods are generally preferred.
Accounting Rate of Return (ARR)	Calculated as the average annual accounting profit divided by the average investment.	A simple profitability metric using accounting income rather than cash flows.

Discounting and Present Value

The core principle of the time value of money states that a dollar today is worth more than a dollar in the future. This is addressed through discounting.

The present value ( $PV$ ) of a single future cash flow ( $FV$ ) received after $n$ periods at a discount rate $i$ is:

PV = \frac{FV}{(1 + i)^n}

For a series of discrete, regular cash flows (an annuity $A$ ), the present value is:

PV = A \left[ \frac{(1 + i)^n - 1}{i(1 + i)^n} \right]

These formulas are foundational for calculating the Net Present Worth (NPW) of a cash stream mentioned in the overview.

Inflation and Real vs. Nominal Rates

Inflation erodes the purchasing power of money over time. To perform a consistent economic analysis, it's essential to distinguish between nominal and real rates.

Nominal Interest Rate ( $i$ ): The rate of interest before taking inflation into account.
Inflation Rate ( $f$ ): The general rate at which prices for goods and services are rising.
Real Interest Rate ( $i_r$ ): The rate of interest adjusted for inflation, representing the true cost of money or increase in purchasing power.

The approximate relationship is:

i_r \approx i - f

For precise calculations, the exact Fisher equation is used:

1 + i = (1 + i_r)(1 + f)

Cash flows should be discounted using a rate consistent with the type of cash flow: nominal cash flows with a nominal rate, and real (constant-dollar) cash flows with a real rate.

References

Original Source

Source: engineeringtoolbox.com