Engineering Economics and Professional Practice
Economics and practice questions test whether you can discount correctly, compare alternatives on a consistent basis, and recognise the professional and contractual obligations attached to a design.
Project appraisal
- NPV = Σ (Ct − Co)/(1+r)^t, including capital, operating, maintenance and residual value; keep the discount rate consistent with the cash flows (real with real, nominal with nominal, pre- or post-tax throughout).
- IRR is the rate at which NPV = 0; it misleads when comparing projects of different scale or with non-conventional cash flows, where NPV ranking is safer.
- Benefit–cost ratio = PV of benefits / PV of costs; between mutually exclusive options use the incremental BCR, not the ratio of each option alone.
- Life-cycle cost includes maintenance dredging, fender and pavement renewal, and downtime cost - not just capital cost.
Port economics
- Berth provision cost and vessel waiting cost trade off; the optimal number of berths minimises their sum, which is why occupancy targets sit well below 100%.
- Economic analysis uses shadow prices and national benefits; financial analysis uses actual tariffs and cash flow. Do not mix the two.
Professional practice
- Duty of care runs to the client and to third parties; design responsibility does not transfer with construction inspection unless the contract says so.
- Contract forms (FIDIC, NEC) allocate ground-condition and weather risk explicitly; the designer must know who carries the risk created by the specification.
- Confidentiality, conflict-of-interest disclosure, and competence limits: a signed design implies the standard of a competent engineer, not perfection.
Worked example
At 6%, v5 = 1/1.06⁵ = 0.747, and ten five-yearly maintenance payments of 4 M have PV = 4 × 2.80 = 11.2 M. Option A: 80 + 11.2 = 91.2 M. Option B: 60 + 11.2 + 15/1.06²⁵ = 60 + 11.2 + 3.5 = 74.7 M. B is cheaper by 16.5 M, but the year-25 repair is a single large risk, so the defensible conclusion adds a sensitivity test on the repair cost and on the discount rate.
Traps
- Discounting nominal cash flows at a real rate, or comparing options at different rates.
- Ranking mutually exclusive projects by IRR rather than incremental NPV.
- Omitting maintenance and downtime from the comparison.