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Economic Optimization

Excerpt

In optimizing something related to economics, the objective function, the statement of what is to be optimized, is often termed a profitability index. A viewpoint of the categories in economic optimization reveals two classes of considerations—the one-time initial capital investment (the purchase cost of an item) and the annual costs and income associated with operating the item. These yield three types of considerations—the one-time initial capital investment, the annual cash flow, and a combination of capital and annual cash flow. A combination of capital and annual cash flow is often preferred, and it should account for the time value of money and the schedule of income and outlay. Although there are several such metrics, and a particular enterprise might prefer one over another, they have similar aspects, and one example is adequate to understand economic optimization. I’ll present a technique termed net present value (NPV). Often it is termed present value (PV) or present worth (PW).

In optimizing something related to economics, the objective function, the statement of what is to be optimized, is often termed a profitability index. A viewpoint of the categories in economic optimization reveals two classes of considerations—the one-time initial capital investment (the purchase cost of an item) and the annual costs and income associated with operating the item. These yield three types of considerations—the one-time initial capital investment, the annual cash flow, and a combination of capital and annual cash flow. A combination of capital and annual cash flow is often preferred, and it should account for the time value of money and the schedule of income and outlay. Although there are several such metrics, and a particular enterprise might prefer one over another, they have similar aspects, and one example is adequate to understand economic optimization. I’ll present a technique termed net present value (NPV). Often it is termed present value (PV) or present worth (PW).

20.1Introduction
20.2Annual Cash Flow
20.3Including Risk as an Annual Expense
20.4Capital
20.5Combining Capital and Nominal Annual Cash Flow
20.6Combining Time Value and Schedule of Capital and Annual Cash Flow
20.7Present Value
20.8Including Uncertainty
20.9Takeaway
20.10Exercises
20.1Introduction
20.2Annual Cash Flow
20.3Including Risk as an Annual Expense
20.4Capital
20.5Combining Capital and Nominal Annual Cash Flow
20.6Combining Time Value and Schedule of Capital and Annual Cash Flow
20.7Present Value
20.8Including Uncertainty
20.9Takeaway
20.10Exercises
Topics: Optimization

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