[2] As a discipline, it is focused on the branch of economics known as microeconomics in that it studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources.
[1] But, it is also a simplified application of microeconomic theory in that it assumes elements such as price determination, competition and demand/supply to be fixed inputs from other sources.
[5] Costs as well as revenues are considered, for each alternative, for an analysis period that is either a fixed number of years or the estimated life of the project.
Critical path economy, as an example, is necessary in most situations as it is the coordination and planning of material, labor, and capital movements in a specific project.
Engineering economics helps provide the Gantt charts and activity-event networks to ascertain the correct use of time and resources.
[7] Considering the prevalence of capital to be lent for a certain period of time, with the understanding that it will be returned to the investor, money-time relationships analyze the costs associated with these types of actions.
Equity capital is money already at the disposal of the business, and mainly derived from profit, and therefore is not of much concern, as it has no owners that demand its return with interest.
Interest and money time relationships come into play when the capital required to complete a project must be either borrowed or derived from reserves.
All one needs to utilize a compound interest table is three things; the time period of the analysis, the minimum attractive rate of return (MARR), and the capital value itself.
Using the compound interest tables mentioned above, an engineer or manager can quickly determine the value of capital over a certain time period.
Thus, an engineer must begin to factor in costs and benefits, then find the worth of the proposed machine, expansion, or facility.
The idea and existence of depreciation becomes especially relevant to engineering and project management is the fact that capital equipment and assets used in operations will slowly decrease in worth, which will also coincide with an increase in the likelihood of machine failure.
Calculation of depreciation also comes in a number of forms; straight line, declining balance, sum-of-the-year's, and service output.
Most situations faced by managers in regards to depreciation can be solved using any of these formulas, however, company policy or preference of individual may affect the choice of model.
[7] The main form of depreciation used inside the U.S. is the Modified Accelerated Capital Recovery System (MACRS), and it is based on a number of tables that give the class of asset, and its life.
It can be fully defined by the statement; "... as the series of decisions by individuals and firms concerning how much and where resources will be obtained and expended to meet future objectives.
"[7] This definition almost perfectly explains capital and its general relation to engineering, though some special cases may not lend themselves to such a concise explanation.
The actual acquisition of that capital has many different routes, from equity to bonds to retained profits, each having unique strengths and weakness, especially when in relation to income taxation.
"In general, the firm should estimate the project opportunities, including investment requirements and prospective rates of return for each, expected to be available for the coming period.
"[8]Being one of the most important and integral operations in the engineering economic field is the minimization of cost in systems and processes.
Time, resources, labor, and capital must all be minimized when placed into any system, so that revenue, product, and profit can be maximized.
There are a great number of cost analysis formulas, each for particular situations and are warranted by the policies of the company in question, or the preferences of the engineer at hand.