What is Economic Engineering?

Economic Engineering is a specialty that integrates engineering knowledge with the basic
elements of microeconomics. Its main objective is decision making based on economic
comparisons of different technological investment alternatives. The techniques used range
from the use of standardized spreadsheets for cash flow evaluations to more elaborate
procedures, such as risk and uncertainty analysis, and can be applied to both personal
investments and industrial ventures.

Most decisions involve money, called capital or capital funds, which usually exists in
limited quantities. The decision of where and how to invest this limited capital is motivated
by the primary objective of adding value when the expected future results are achieved.

Fundamentally, economic engineering involves formulating, estimating and evaluating

economic results when there are alternatives available to carry out a defined purpose.

Other terms that mean the same thing as engineering economics are engineering economic
analysis, capital allocation studies, economic analysis, and other similar terms.

So the numbers used in economic engineering are the best estimates of what is expected to
happen. Such estimates and the corresponding decision generally involve four essential
elements:

1. Cash Flow
2. Time in which cash flows occur
3. Interest rates related to the time value of money
4. Measuring the economic benefit to select an alternative

A sensitivity analysis determines how a decision would change based on the variation in
estimates, especially those that can change over a wide range of values.

The criterion for choosing an alternative in engineering economics for a specific set of
estimates is called a measure of value. The measures developed and used in this document
are the following:

Economic engineering is capable of analyzing both future and past cash flows, in order to
determine if a certain specific criterion was achieved.
An Engineering study involves many elements: problem identification, objective definition,
cash flow estimation, financial analysis and decision making.

The steps of an economic engineering study are as follows:

Identification and understanding of the problem; Definition of the project objective.

Compilation of relevant information, available data and definition of viable
solutions.
Make realistic estimates of cash flows.
Identification of an economic measure of the value criterion for decision making.
Evaluation of each option; consider non-economic factors; apply a sensitivity
analysis.
Choosing the best option.
Implement the solution and monitor the results

The terms moral and ethics are often used synonymously, but they have slightly different
interpretations. Morality generally relates to the fundamental principles that constitute a
person's character and behavior when determining what is right and what is not.

Moral practices are evaluated with a code of morals or code of ethics that integrates the
standards that guide the decisions and actions of individuals and organizations in a
profession, for example, electrical, chemical, mechanical, industrial or civil engineering.
There are various types and levels of morality and ethics

Universal or common morality These are fundamental moral beliefs that virtually all
people have. Most people agree that you should not steal, murder, lie, or physically harm
anyone.

Individual or personal morality These are fundamental moral beliefs that a person has
and maintains over time; They generally agree with common morality as to what to steal,
lie, murder, etc. They are immoral acts

Engineering or professional ethics Professionals in a discipline guide their decisions and

work performance by a formal standard code. The code establishes generally accepted
standards of honesty and integrity expected of each individual in his or her professional
practice. They are codes of ethics for doctors, lawyers and, of course, engineers.
Interest is the manifestation of the time value of money. From a calculation perspective,
interest is the difference between a final amount of money and the original amount. If the
difference is zero or negative, there is no interest.

There are two variants of interest: Interest paid and interest earned.

Interest is paid when a person or organization borrows money (gets a loan) and pays a
larger amount. Interest is earned when a person or organization saves, invests, or lends
money and receives a larger amount.

From the perspective of a saver, lender or investor, the interest earned is the final amount
minus the initial amount, or principal.

The interest generated during a specific period is expressed as a percentage of the original
amount and is called the rate of return (TR).

The unit of time for the rate of return is called the interest period, and the same name as
when viewed from the borrower's perspective. Again, the most common period is one year.

Financial Mathematics or Economic Engineering has as its fundamental objective the

study and analysis of all those operations and approaches in which the magnitudes of:
Capital, Interest, Time and Rate intervene.

Financial variables:

1. Capital c 4. Interest Yo
2. Time t 5. Share R
3. Rate Yo 6. Amount M

Interest: It is what is paid or received for a certain amount of money borrowed or

borrowed.

Cash inflows are the receipts, profits, income and savings generated by business projects
and activities. A positive or plus sign indicates a cash inflow.

Cash outflows are the costs, disbursements, expenses and taxes incurred by business
projects and activities. A negative or minus sign indicates a cash outflow. When a project
only involves costs, the negative sign can be omitted for certain techniques, such as
benefit/cost analysis.

The cash flow diagram is a very important tool in economic analysis, particularly when
the cash flow series is complex. This is a graphical representation of cash flows plotted on a
time scale. The diagram includes known data, estimated data, and information that is
needed.

The direction of the arrows on the diagram is important to differentiate inputs from outputs.
An arrow pointing upward indicates positive cash flow; conversely, if it points
downwards, it denotes a negative flow.

The fundamental factor in economic engineering is the one that determines the amount of
money F that accumulates after n years (or periods) from a single present value P with
interest compounded once per year (or per period).

The need for economic engineering is motivated mainly by the work that engineers carry
out when analyzing, synthesizing and obtaining conclusions in projects of any size. In other
words, economic engineering is a core point in decision making. Such decisions involve the
basic elements of cash flows, time, and interest rates.

Definition:

Mathematical concepts and techniques applied in the analysis, comparison and financial
evaluation of alternatives related to engineering projects generated by systems, products,
resources, investments and equipment.
It is a decision tool through which an alternative can be chosen as the most economical
possible.

Inflation

Elevation of the general level of prices, which implies loss of purchasing power.
Therefore, money becomes devalued due to inflation.

Inflation rate: average percentage of price increases in a period.

The financial rationality of the agents

People and economic agents will always seek to maximize benefits and reduce costs for a
given level of risk.

If a quantity of money is available, an interest rate greater than inflation (positive real rate)
will always be found in the market.

Devaluation

Decrease by law or by market forces the value of the national currency compared to a
foreign currency (currency).

Devaluation stimulates exports and discourages imports. Why?

As the peso devalues, it loses purchasing power in the international market.

 In constant Quetzales we abstract from inflation and devaluation.

 In current Quetzales we work with market prices.

Liquidity: availability of money, ability to pay short-term debts.

Profitability: degree of appreciation of money or an investment over time.

Risk: possibility that a payment will be made or not at the time and in the stipulated
amount.

Financial evaluation: it is a relationship between income and cash expenses for the project
owner or entrepreneur.
Economic evaluation: it is the effect of the project on the country or region. For example:
spending or saving foreign currency, employment, environmental impact.

Social evaluation: Impact on social groups or classes. Effect of the project on the
distribution of wealth and income.

Interest: Amount of money that exceeds what is borrowed.

It is the cost of a loan.

Interest = amount paid - amount borrowed

Interest rate:

Percentage charged for an amount of money borrowed during a specific period.

If we refer to a period we will have the following formula:

P: loan or present value at the beginning of the period.

F: payment or future value at the end of the period.

F - P: interest for the period.

i: effective interest rate per period (due)