Introduction
An imaginary case will be suitable for this demonstration. It includes most of the engineering economics learned in school. Additionally provides room to adjust all the issues that need to be handled to highlight which an engineer should undertake alternative. Additionally, it can enable one to adjust the figures hence ensuring that the correct decision is made.
Highlights of the Case
The case study is about an engineer who is fronted with alternatives. A project engineer is assigned to provide computer networking and internet access to an office building. After research, various equipment suppliers’ two alternatives are detailed for further economic analysis. Alternative A is a wireless network with lower acquisition costs but higher operational costs. Alternative B is a wired network with low operational costs but higher equipment and installation costs.
Case Alternatives
The individual costs associated with each of the two alternatives are outlined in this section. The figures consider all the components needed to determine a viable product that is cost-effective in both installation and operational costs.
Case Analysis
A good project engineer should recognize that there is time value. This implies that the purchasing power changes over time (Hasugian & Dewi2020). For example, the purchasing power can change because of deflation or inflation in the market (Park, & Sharp, 2021). The time value can also be recognized when the engineer realizes that money invested can also earn money over time. Although time value can be complex to understand, the interest rate can determine the time value. This can be calculated through simple interest or compound interest. Wort criterion analysis can also be used to determine the effectiveness of the project.
Analysis Using Time Value
With the assumption that the project attracts an interest of 10%, and the interest is only charged on the initial amount invested, simple interest can be used to determine the time value of money of alternative A.
F= P+ (iP)N,
Where P= Principal Amount, I= Simple Interest Rate, N= Number Of Interest Periods, Total Amount Accumulated
For alternative A the amount invested (P)= $1000 + $1000+$500 =$2500
Therefore, F= 2500 + (10% X 2500)6
F= 2500+ 1500 =4000
Amount after six years, the total amount accumulated will be $4000.
The same formula of simple interest can determine the time value of alternative B of the same project.
For alternative B the amount invested (P)= $2000 + $2000+$2000 =$6000
So, F= 6000 + (10% x6000)9
6000+ 5400 = $ 11400
The total amount accumulated after nine years is $11400.
Analysis Using Worth Criterion
The worth criterion is also essential in helping in deciding on which alternative to pursue. The project should be undertaken if the worth criterion demonstrates an Annual-Equivalent (AE) greater than 0. However, if the project demonstrated an AE less than 0, it should be investigated further. But in choosing between alternatives, the project with greater Ae should be implemented.
Alternative A
PWA = – 2500 – 1000 (P/A, 10%, 5yrs) + 200 (P/F, 10%, 5yrs)
PWA = – 2500 – 3791 + 124.2
AE = $-6,167
Alternative B
In using the same formula used in Alternative A,
PWB = – 6000 – 100 (P/A, 10%, 5yrs) + 100 (P/F, 10%, 5yrs)
So,
PWB = – 6000 – 379.1 + 62.09
= $ – 6,317
Alternative B has a lesser AE of $– 6,317 compared to that of A, which stands at $ -16167.
Choice of Recommendation
Regardless of the method used to determine which alternative to choose, alternative A is the most outstanding. Therefore, the project engineer should consider implementing the alternative as it will help save the costs of both initial and operational costs.
Conclusion
With all factors considered, the engineer should consider Alternative A.
Although alternative A has a high operational cost, using simple interest to calculate time value reveals that it is less costly.
Use of worth criterion also showcases a higher AE value compared to alternative B
The most cost-effective project is installing a wireless network.
References
Hasugian, I. A., & Dewi, E. (2020, May). Engineering Economics Evaluation For Manufacturing Competitiveness: A case study. In IOP Conference Series: Materials Science and Engineering, 851(1) p. 012027). IOP Publishing. Web.
Park, C. S., & Sharp, G. P. (2021). Advanced engineering economics. John Wiley & Sons.