Z94.7 ENGINEERING ECONOMY

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CAPACITY FACTOR. (1) The ratio of current output to maximum capacity of the production unit. (2) In electric utility operations, it is the ratio of the average load carried during a period of time divided by the installed rating of the equipment carrying the load.  (See DEMAND FACTOR, LOAD FACTOR.) 

CAPITAL. (1)  The financial resources involved in establishing and sustaining an enterprise or project.  (2)  A term describing wealth which may be utilized to economic advantage.  The form that this wealth takes may be as cash, land, equipment, patents, raw materials, finished products, etc.  (See INVESTMENT, WORKING CAPITAL.)

CAPITAL BUDGETING. The process by which organizations periodically allocate investment funds to proposed plans, programs, or projects.

CAPITALIZED ASSET. Any asset capitalized on the books of account of an enterprise. 

CAPITALIZED COST. (1) The present worth of a uniform series of periodic costs that continue indefinitely (hypothetically infinite). Not to be confused with capitalized expenditure. (2)  The present sum of capital which, if invested in a fund earning a stipulated interest rate, will be sufficient to provide for all payments required to replace and/or maintain an asset in perpetual service.

CAPITAL RECOVERY. (1) Charging periodically to operations amounts that will ultimately equal the amount of capital expended.  (2)  The replacement of the original cost of asset plus interest.  (3)  The process of regaining the new investment in a project by means of setting revenues in excess of the economic investment costs.  (See AMORTIZATION, DEPLETION, AND DEPRECIATION.)

CAPITAL RECOVERY FACTOR. A number, which is a function of time and interest rate, used to convert a present sum to an equivalent uniform annual series of end-of-period cash flows. (See ANNUITY FACTOR.)

CAPITAL RECOVERY WITH RETURN. The recovery of an original investment with interest.  In the public utility industry frequently this is referred to as the revenue requirements approach. 

CASH FLOW. The actual monetary units (e.g., dollars) passing into and out of a financial venture or project being analyzed. 

CASH FLOW DIAGRAM. The illustration of cash flows (usually vertical arrows) on a horizontal line where the scale along the line is divided into time period units.

CASH FLOW TABLE. A listing of cash flows, positive and negative, in a table in order of the time period in which the cash flow occurs.

CHALLENGER. In replacement analysis, a proposed property or equipment which is being considered as a replacement for the presently owned property or equipment (the defender).  In the analysis of multiple alternatives, an alternative under consideration which is to be compared with the last acceptable alternative (the defender).  (See MAPI METHOD.)

COMMON COSTS. In accounting, costs which cannot be identified with a given output of products, operations, or services.  Expenditures which are common to all alternatives. 

COMPOUND AMOUNT. (1)  The equivalent value, including interest, at some stipulated time in the future of a series of cash flows occurring prior to that time. (2) The monetary sum which is equivalent to a single (or a series of) prior sum(s) when interest is compounded at a given rate.

COMPOUND AMOUNT FACTOR(S). Functions of interest and time which, when multiplied by a single cash flow (single payment compound amount factor) or a uniform series of cash flows (uniform series compound amount factor) will give the future worth at compound interest of such single cash flow or series. 

 COMPOUNDING, CONTINUOUS. A compound interest assumption in which the compounding period is of infinitesimal length and the number of periods is infinitely great.  A mathematical concept that is conceptually attractive and mathematically convenient for dealing with frequent (e.g., daily) compounding periods within a year.

COMPOUNDING, DISCRETE. A compound interest assumption in which the compounding period is of specified length such as a day, week, month, quarter year, half year, or year. 

COMPOUNDING PERIOD. The time interval between dates (or discrete times) at which interest is paid and added to the amount of an investment or loan.  Usually designates the frequency of compounding during a year. 

COMPOUND INTEREST. (1) The type of interest that is periodically added to the amount of investment (or loan) so that subsequent interest is based on the cumulative amount. (2) The interest charges under the condition that interest is charged on any previous interest earned in any time period, as well as on the principal.

CONSTANT DOLLARS. An amount of money at some point in time, usually the beginning of the planning horizon, equivalent in purchasing power to the actual dollars necessary to buy the good or service. Actual dollars adjusted for relative price change.

COST-BENEFIT ANALYSIS. (See BENEFIT-COST ANALYSIS.) 

COST EFFECTIVENESS ANALYSIS. An analysis in which the major benefits may not be expressed in monetary terms.  One or more effectiveness measures are substituted for monetary values resulting in a trade off between marginal increases in effectiveness versus marginal increases in costs.

COST OF CAPITAL. A term, usually used in capital budgeting, to express as an interest rate percentage the overall estimated cost of investment capital at a given point in time, including both equity and borrowed funds.

CUTOFF RATE OF RETURN (HURDLE RATE). The rate of return after taxes that will be used as a criterion for approving projects or investments.  It is determined by management based on the supply and demand for funds.  It may or may not be equal to the minimum attractive rate of return (MARR) but is at least equal to the estimated cost of capital. 

CURRENT DOLLARS. (See ACTUAL DOLLARS.) 

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