Z94.7 ENGINEERING ECONOMY

This section consists of two major elements.  Part A consists of definitions and symbols of the most commonly used parameters as well as a set of functional forms for those compound interest factors frequently encountered in the engineering economy literature.  These can be summarized in two exhibits.  Part B is a glossary of technical terms used in engineering economy.

Exhibit I, definitions and symbols used for parameters, is very similar to Table 1 in the 1982 edition of Industrial Engineering Terminology.  Significant changes incorporated into this new version include:

1. The symbols for the number of compounding periods (N) and the number of compounding subperiods per period (M) are capitalized.  This is consistent with our basic scheme:  all amounts are capitalized and all rates are lower case letters.
2. Four new symbols have been added:  the periodic rate of increase or the geometric gradient (g), the periodic “inflation” rate (f), salvage value (S), and end-of-period cash flow (A.).

Exhibit II is a summary of the functional forms of the compound interest factors, including factor names and appropriate algebraic expressions.  These are classified into four groups:

The continuous compounding cases, Groups B, C and D, are based on the assumption that interest is compounded continuously during the period at nominal interest rate r, where the effective and nominal rates are related by r = 1n(1+i),  More precisely, assuming that the interest period is divided into M subperiods of equal duration, and further assuming that interest is compounded at the end of each subperiod at rate r/M, then the effective rate per period (i) is related to the nominal rate per period ( r )by i= (1+r/M)M-1.  At the limit, as M approaches  ∞, then i approaches exp (r )-1.

Chairman

Gerald A. Fleischer
Professor University of Southern California

Subcommittee

Richard S. Leavenworth
Professor Emeritus
University of Florida

Wolter J. Fabrycky
Professor
Virginia Polytechnic Institute and St. U.

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Bibliography

DEFINITIONS

ACCOUNTING LIFE. The period of time over which the amount of asset cost to be depreciated, or recovered, will be allocated to expenses by accountants.

ACTUAL DOLLARS. Cash flow at the time of the transaction. 

ALTERNATIVE, CONTINGENT. An alternative which is feasible only if some other alternative is accepted.  The opposite of a mutually exclusive alternative.

ALTERNATIVE, ECONOMIC. A plan, project, or course of action intended to accomplish some objective that has or will be valued in monetary terms.

ALTERNATIVE, INDEPENDENT. An alternative such that its acceptance has no influence on the acceptance of other alternatives under consideration.

ALTERNATIVE, MUTUALLY EXCLUSIVE. An alternative such that its selection rules out the selection of any other alternatives under consideration.

AMORTIZATION. (1)  a)  As applied to a capitalized asset, the distribution of the initial cost by periodic charges to expenses as in depreciation. Most amortizable assets have no fixed life;  b)  The reduction of a debt by either periodic or irregular payments.  (2) A plan to pay off a financial obligation according to some prearranged program.

ANNUAL COST. The negative of annual worth. (EQUIVALENT UNIFORM ANNUAL COST.) 

ANNUAL EQUIVALENT. In time value of money, one of a sequence of equal end-of-year payments which would have the same financial effect when interest is considered as another payment or sequence of payments which are not necessarily equal in amount or equally spaced in time.

ANNUAL WORTH. A uniform amount of money at the end of each and every period over the planning horizon, equivalent to all cash flows occurring over the planning horizon when interest is considered.

ANNUITY. (1)  An amount of money payable to a beneficiary at regular intervals for a prescribed period of time out of a fund reserved for that purpose.  (2)  A series of equal payments occurring at equally spaced periods of time. 

ANNUITY FACTOR. The function of interest rate and time that determines the amount of periodic annuity that may be paid out of a given fund.  (See CAPITAL RECOVERY FACTOR.)

ANNUITY FUND. A fund that is reserved for payment of annuities. The present worth of funds required to support future annuity payments.

ANNUITY FUND FACTOR. The function of interest rate and time that determines the present worth of funds required to support a specified schedule of annuity payments. (See PRESENT WORTH FACTOR, UNIFORM GRADIENT SERIES.)

APPORTION. In accounting or budgeting, the process by which a cash receipt or disbursement is divided among and assigned to specific time periods, individuals, organization units, products, projects, services, or orders. 

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