Summary Engineering Economy

ISBN-13 9780131486492
339 Flashcards & Notes
2 Students
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This is the summary of the book "Engineering Economy". The author(s) of the book is/are William G Sullivan, Elin M Wicks, and James T Luxhoj. The ISBN of the book is 9780131486492. This summary is written by students who study efficient with the Study Tool of Study Smart With Chris.

Summary - Engineering Economy

  • 1 Introduction to Engineering Economy

  • What are the 7 principles of engineering economy?
    1. Develop the Alternatives;
    2. Focus on the Differences;
    3. Use a Consistent Viewpoint;
    4. Use a Common Unit of Measure;
    5. Consider all Relevant Criteria;
    6. Make Uncertainty Explicit;
    7. Revisit your Descisions;
  • 2.1 Cost Terminology

  • Give the definition of variable cost
    The cost associated with an operation that varies in total with the quantity of output or other measures of activity.
  • Give the definition of fixed cost
    The costs that are unaffected by changes in activity level over a feasible range of operations for the capacity/capability available.
  • Give [6] examples of fixed cost
    • Insurance and taxes on facilities
    • General management
    • Administrative salaries
    • License fees
    • Interest costs
    • Borrowed capital
  • Give the definition of incremental cost
    Incremental cost (or incremental revenue) is the additional cost (or revenue) that results from increasing the output of a system by one (or more) units.

    Often quite difficult to determine since so many factors are involved  
  • Give the definition of recurring costs
    Recurring costs are the costs that are repetitive and occur when an organization produces similar goods or services on a continuing basis.

    Including variable costs because they repeat with each unit of output
  • Give the definition of nonrecurring costs
    Nonrecurring costs are the costs that are not repetitive even though the total expenditure may be cumulative over a relatively short period of time.
  • Give [2] examples of nonrecurring costs
    • Development cost 
    • Establishment cost capability/capacity. 
  • Give the definition of direct costs
    Direct costs are costs that can be reasonably measured and allocated to a specific output or work activity. Such as labour and material cost.
  • Give the definition of indirect costs and a different naming
    Indirect costs are costs that are difficult to attribute or allocate to a specific output or work activity. 

    Overhead cost
  • Explain the term normally considering indirect costs
    When allocating directly to a specific output involves too much effort, the allocation is done through a selected formula. Such as, proportional.

    This is done through established costs per unit since these costs are associated with a certain level of production.
  • Give [4] examples of overhead cost
    • Electricity 
    • General repairs
    • Property taxes
    • Supervision
  • Give the definition of standard cost
    Representative costs per unit of output that are established in advance of actual production or service delivery. Anticipated with direct labor hours, materials and overhead categories (with established cost per unit)
  • Give the definition of cash cost
    A cost that involves payment of cash is called a cash cost and results in a cash flow.
  • Give the definition of noncash cost, include a different naming and a most common example.
    Noncash cost also referred to as book cost do not involve cash payments.

    depreciation charged for the use of assets.
  • Give the definition of sunk costs
    Costs that have occured in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action.
  • Give the definition of opportunity cost
    Opportunity cost is incurred because of the use of limited resources, such that the opportunity to use those resources to monetary advantage in an alternative use is foregone.

    A student could work and earn 20 000 but chooses to go to school and spends 5000. The opportunity cost of going to school for that year is 25 000 : 5000 cash outlay and 20 000 income foregone.
  • Give the definition of life-cycle cost
    Summation of all the costs, recurring and nonrecurring, related to product, structure system or service during its life span.
  • Life-cycle
    • What [2] phases does it exist of? 
    • Where are the most costs made? 
    • Where can the most costs be saved? 
    The greatest potential for achieving life-cycle cost savings is early in the acquisition phase.
  • Give the definition of investment cost
    Capital required for most of the activities in the acquisition phase
  • Give the definition of the term working capital
    Funds required for current assets (other than fixed assets such as equipment, facilities etc.) that are needed for the startup and support of operational activities.
  • Give the definition of operation and maintenance cost 
    Includes many of the recurring annual expense items associated with the operation phase of the life cycle.
  • What has a major part of operation and maintenance cost? [5]
    Five primary resource areas 
    • People 
    • Machines
    • Material
    • Energy
    • Information 
  • What are the disposal cost?
    Nonrecurring costs of shutting down the operation and the retirement and disposal of assets at the end of the life cycle.
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Latest added flashcards

What are the 2 formulas used in monte carlo simulations?- normally distributed - uniform distribution random event
Outcome value = mean + [random normal deviate * standard deviation]
simulation outcome = A + (RN/RNm) (B-A)
When dealing with an assumed normal distribution, statistically independent variables and linear combinations how do you calculate the variance, mean and the probability of the PW
E(PW) = sum Ck * E(Fk ) 
V(PW) = sum (Ck ) 2 * E(Fk )
ck = coefficient
Fk = periodic net cash flow  

Z = (PW - E(PW) / SD(PW) 
then look up in the table. 

Example 12.5
What does a large standard deviation against the mean imply.
Large standard deviation indicates high risk.
When the variance is large what does this mean?
There is large risk involved because of a higher amount of diverse and unknown factors.
Given two independent variablesZ = XYHow do you calculate the mean and the variance of Z
E(Z) = E(X)* E(Y)
V(Z) = V(X 2)V(Y2 )  - (E(X)E(Y)) 2
How to calculate the mean and the variance of the followingE(cX)V(cX)
E(cX) = c * E(X)
V(cX) = c 2 * var(X)
How to calculate the mean and variance?
E(x) = x * p(x)
var(x) =  x 2 * p(x) - [E(X) 2 ]
What does the BC ratio address?
The ratio of benefits against disbenefits (monetary) can be used to select a project.
Give the definition of cost-effectiveness
Cost-effectiveness allows comparison on which alternatives who achieve the most benefit can be assessed. It does not form a basis for justification.
What do you do with taxes on property and insurance and income taxes?
Include taxes on property and insurances in the cashflow and after that calculate the amount of income tax paid.