Last time we introduced engineering economics and the different kinds of costs. Today we begin analyzing the time value of money.

Which do you want: $100 today or $100 one year from now?

Money (Commons)

Obviously $100 now. Why? Because you can use the money for an extra year! Money is only a resource if you have time to use it!

The time you have to use money is so important that people will pay extra to have more time to spend it. This is analogous to a rental fee and is known as interest.

The value of money changes at all points in time. $100 today is not necessarily worth $100 at any other time. The core and essence of estimating engineering costs comes down to estimating the value of something at different points in time. When viewed like this, engineering economics is analogous to a unit conversion problem — you know the quantity of $ units of something at a point in time and need to convert the units to another point in time. This is where we begin applying the definitions, equations, and conversion tables from the Econ section of the FE Reference Handbook. Let’s apply this to a handful of examples on the board: Econ Lesson 2 Lecture Notes.

Applying this to your current project, we need to know if there is a business case here to produce this product. There are a couple of scenarios you need to consider:

  1. What is the anticipated annual cost for operating the machines, replacing tooling, and general machine maintenance? How much money should you set aside now to cover these expenses for the next 3 or 5 years at 6 % interest?
  2. What is the equivalent uniform annual salary cost to pay a worker/machinist if the interest rate is 4% over the next 3 or 5 years?
  3. How many units will you have to sell per year, and at what price to cover these costs?