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Daily Dose 011 | Engineering Economics
How do you find the Cash Flow of an Engineering Investment?
I bet I can guess your first thoughts when you read “Find the cash flow of an engineering investment”.
Look, I get it, there is a reason we became engineers and not CPAs…we design – they crunch numbers.
But the reality is, to provide the most value to the communities we represent, we must know enough to get dirty in the world of economics.
In this lesson, we jump in to a problem type that is covered within the subject of ENGINEERING ECONOMICS, specifically, diving in to determining the CASH FLOW of an engineering investment from the business owner’s perspective visually using a CASH FLOW DIAGRAM.
Key Definition
What is CASH FLOW DIAGRAM?
CASH FLOW DIAGRAMS help us visually represent CASH FLOW (income and expenses) over a desired time interval.
The diagram is simple, consisting of a horizontal line with markers at a series of time intervals.
At the point of a CASH FLOW the EXPENSE or COST are shown.
It is customary to take cash flows during a year at the end of the year, or EOY (end-of-year).
CASH FLOW DIAGRAMS can also be represented differently for the same situation depending on the view in which it is being developed.
The Process
How can you find the Cash Flow of an Engineering Investment?
I wasn’t a big fan of Engineering Economics while in college, and I know many of you aren’t either.
But engineering isn’t just about designing and building cool stuff, it also requires that we understand how economically feasible it is to implement those designs on a larger scale.
Determining the cash flow of an engineering investment will be a problem type you will see on the exam. So whether or not you want to embrace it, I suggest that you do.
Don’t worry, as with any of the other complex problem type that will be on the FE Exam, we will break it down into a simple, streamlined, repeatable process.
- Step 1: What’s the Investment?
- Step 2: Money In and Money Out
- Step 3: When Does Money Move?
- Step 4: Value of Money Over Time
- Step 5: Look at the Big Picture
Carefully read through the problem statement and figure out what your project is. Are you looking at buying new equipment, developing a new tech, or maybe starting a big project?
Not only will you spend money on your project, but it’ll also bring money in. Think of costs like buying equipment, running it, and fixing it. Then, think of the money you’ll make or save from the project.
Your project will have different costs and earnings over time. It helps to map out when you’ll spend money and when you’ll get some back.
Remember, money today is worth more than the same amount in the future. This is called the “time value of money”, and it’s a big deal in understanding investments.
After laying out your money in and out, take a moment to see the whole picture. Does everything make sense? Are there ways to make it even better?
This is the general blueprint that will help you tackle a range of problems involving cash flow of engineering investments. Adapt and expand upon these steps as needed based on specific nuances found within the problem statement.
Understanding cash flows in engineering is all about seeing the money side of your projects. It might seem a bit tricky now, but with these steps and some practice, you’ll get the hang of it in no time. And by getting this right, you’re setting your projects (and yourself!) up for success.
And with all of that being stated, check out the video and see how we can go about solving this type of problem in the most efficient manner.
As always, we are here to help, Prepineer
