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Engineering Economic Overview

1 Renewable Energy
COST CONCEPT
A number of cost classifications have come into use to
serve as a basis for economic analysis.

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 First cost: is the initial cost of capitalized property,
including transportation, installation, and other related
initial expenditures

 Operation and Maintenance Cost: Whereas first cost

occurs only once in getting an activity started,
Operation and maintenance cost is that group of costs
experienced continually over the useful life of the
activity.
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COST CONCEPT
 Fixed costs: is that group of costs involved in a going
activity whose total will remain relatively constant

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throughout the range of operational activity.
Fixed costs are made up of such cost items as
depreciation, maintenance, taxes, insurance, lease
rentals, interest on invested capital, license fee, sales
programs, certain administrative expense, and research.

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COST CONCEPT
 Variable Cost is that group of costs that vary in some
relationship to the level of operational activity.

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 In general, all costs such as direct labor, direct material,
direct power, and the like, which can readily be allocated
to each unit produced, are considered to constitute
variable costs

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COST CONCEPT
It is often convenient to analyze costs on a per unit basis,
since this approach corresponds more closely to that of

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demand analysis which focuses on the price per unit of a
commodity. Two different unit cost measures are widely
used:

 Average Unit cost: is the cost per unit of output. This is

expressed as:
AC=Total cost/output
 Marginal Cost: is the cost of producing one more unit
of output.
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COST CONCEPT
Example
COST CONCEPT
 Differential cost: is a difference in cost between any
two alternatives.

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 Opportunity cost of a resource is the value of the
resource in its best alternative use foregone. In other
words, Opportunity Cost may be defined as the potential
benefit that is given up as you seek an alternative course
of action.

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COST CONCEPT
 Sunk cost: is a past cost that cannot be altered by future
action and is therefore irrelevant.

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A sunk cost is one that has already been incurred by past
actions. Such costs are irrelevant for to decisions
because they cannot be changed regardless of what
decision is made now or in future. The only costs
relevant to a decision are those costs that vary among the
alternative courses of action being considered.

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TIME VALUE OF MONEY
 Investment for a period of time, a dollar received at
some future date is not worth as much as a dollar in hand

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at present. This relationship between interest and time
leads to the concept of the time value of money.
 Interest is a rental amount charged by financial
institutions for the use of money.
 Interest rate, or the rate of capital growth, is the rate
of gain received from an investment. Usually this rate of
gain is stated on a per-year basis, and it represents the
percentage gain realized on the money committed to the
undertaking.
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PURCHASING POWER OF MONEY
Inflation and deflation are terms that describe changes in
price levels in an economy.

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 Simple interest

Under simple interest, the interest owed upon repayment

of a loan is proportional to the length of time the
principal sum has been borrowed. The interest earned
may be found in the following manner. Let I represent
the interest earned, P the principal amount, N the
interest period, and i the interest rate. Then,
I = PNi.

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PURCHASING POWER OF MONEY
 Compound Interest
When loan is made for several interest periods, interest is

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calculated and payable at the end of each interest period.
There are number of loan repayment plans.

These range from paying the interest when it is due to

accumulating the interest until the loan is due. If the borrower
does not pay the interest earned at the end of each period and
is charged interest on the total amount owed (principal plus
interest), the interest is said to be compounded. The interest
owed in the previous year becomes part of the total amount
owed for this year. This year’s interest charge includes
interest that has been earned on previous interest charges. 11
INTEREST FORMULA
Let,
i = the annual interest rate

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 N = the number of annual interest periods;
 P= a present principal amount;
 A = a single payment, in a series of n equal payments, made
at the end of each annual payments.
 F = a future amount in N annual interest periods.

We get
F=P(1+i)N

A = F [i/((1+i)N-1)] = F (A/F, i, N)
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TYPE OF CASH FLOW
 There are 5 type differences of cash flow

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 Single cash flow
 Equal (uniform) payment series at regular intervals
 Linear gradient series, where each cash flow in a series
increases or decreases by a fixed amount (G).
 Geometric gradient series where each cash flow in a series
increases or decreases by a fixed rate (percentage) (g)
 Irregular payment series, which exhibits no regular overall
pattern.

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TYPE OF CASH FLOW
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TYPE OF CASH FLOW
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TYPE OF CASH FLOW
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TYPE OF CASH FLOW
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TYPE OF CASH FLOW
LOAN VS INVESTMENT

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Loan
Bank Customer
Repayment

Investment
Company Project
Return

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PAYBACK PERIODS
 Payback Period is the length of time required to recover
the cost of an investment

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 Conventional payback method
 Discounted payback method

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CONVENTIONAL PAYBACK METHOD
Conventional payback period is the ratio between Initial
cost by Uniform annual benefit

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