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Daily Dose 025 | Engineering Economics
How do you find the Present Worth?
You are going to be asked to find the Present Worth of some engineering investment on your FE Exam.
It’s a legitimate question.
As engineers, we are making contributions to the economy on the daily.
Whether we realize it or not.
From direct contribution of economic output for the companies we work for to the return from the economy of improvements in physical infrastructure, in which we play a role in.
You see, every dollar that goes out the door needs to produce some economical advantage to the company that is producing it.
If not, then it’s only a matter of time before that company, and you, are out of business.
We at Prepineer are going to make sure you are ready for these Present Worth problems.
In this lesson, we dive in to a FE Exam Practice Problem in the subject of ENGINEERING ECONOMICS, specifically dealing with how to define the PRESENT WORTH of a potential investment.
Key Definition
What is PRESENT WORTH?
PRESENT WORTH is an equivalence method of engineer economic analysis in which a project’s cash flows are discounted to a single present value.
We deemed with the responsibility to determine whether or not a project is acceptable on a economic basis, it is perhaps the most efficient analysis method we can use.
Other analysis methods used in ENGINEERING ECONOMICS are built on a solid understanding of PRESENT WORTH.
The Process
What is the process to find the Present Worth?
In Engineering Economics, we often have to make decisions about investments or costs that will occur in the future.
Present Worth helps us understand the value of future money in today’s terms. It’s like a financial time machine, allowing us to compare costs and benefits that happen at different times on a common ground.
This concept is crucial for making smart and informed decisions as engineers.
Whether you are asked to choose between competing projects, evaluate long-term benefits of a new technology, or understand the real cost of a loan, you will see a Present Worth problem in some form on the FE Exam – this is the general process to solving it:
- Identify the Future Value
- Determine the Interest Rate
- Establish the Number of Periods
- Use the Present Worth Formula
- PV = FV / (1 + i)^n
- Perform the Calculation
- Interpret the Result
- Adjust for Inflation if Necessary
Determine the future value (FV) that will be received or paid at a future date.
Identify the interest rate (i) per period, which could be annual, monthly, or quarterly.
Calculate the number of periods (n) until the future value is realized, such as the number of years, months, or quarters.
Calculate the present worth using the formula:
Where PV is the present worth, FV is the future value, i is the interest rate per period, and n is the number of periods.
Plug the values of FV, i, and n into the formula to calculate the present worth.
The result, PV, represents the current value of a sum of money to be received or paid in the future.
In some cases, adjust the calculation for inflation, especially for long-term investments or costs.
These problems can certainly present themselves more difficult than they are because of all the data and variables that you may be presented. However, following the step by step process will ensure that you are able to find the Present Value fast, no matter how hard they initially appear.
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
