Engineering Economic

05-07.QXD

11/14/2001 11:53 AM

Page 93

SECTION FIVE

CHAPTER 7

Engineering Economics

John M. Watts, Jr., and Robert E. Chapman

Introduction

Engineering economics is the application of economic

techniques to the evaluation of design and engineering alternatives.1 The role of engineering economics is to assess

the appropriateness of a given project, estimate its value,

and justify it from an engineering standpoint.

This chapter discusses the time value of money and

other cash-flow concepts, such as compound and continuous interest. It continues with economic practices and

techniques used to evaluate and optimize decisions on selection of fire safety strategies. The final section expands

on the principles of benefit-cost analysis.

An in-depth treatment of the practices and techniques

covered in this compilation is available in the ASTM

compilation of standards on building economics.2 The

ASTM compilation also includes case illustrations showing how to apply the practices and techniques to investment decisions.

A broader perspective on the application of engineering economics to fire protection engineering can be

found in The Economics of Fire Protection by Ramachandran.3 This work is intended as a textbook for fire protection engineers and includes material and references that

expand on several other chapters of this section of the

SFPE handbook.

Cash-Flow Concepts

Cash flow is the stream of monetary (dollar) values—

costs (inputs) and benefits (outputs)—resulting from a

project investment.

Dr. John M. Watts, Jr., holds degrees in fire protection engineering,

industrial engineering, and operations research. He is director of the

Fire Safety Institute, a not-for-profit information, research, and educational corporation located in Middlebury, Vermont. Dr. Watts also

serves as editor of NFPA’s Fire Technology.

Dr. Robert E. Chapman is an economist in the Office of Applied Economics, Building and Fire Research Laboratory, National...