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When analyzing certain situations and tasks, it is important for engineers to distinguish what type of method to use. One important factor to consider is the time value of money and when it can be ignored. A basic understanding of this concept can be found in our text book and is quoted here, "The time value of money can be ignored when the alternatives for accomplishing a specific task are being compared over one year or less." (1) (Pg.43, Section 2.4) The assumption is that the analysis of the task does not occur over a prolonged period of time and has more or less of an immediate outcome. An example of when this may occur would be when investment capital is not used, and only out of pocket expenses are involved. Another example would be when an engineer is deciding between two motors and is looking for the most energy efficient option. (1) (Pg.45, Section 2.4) This type of problem, although having a long term impact, can be easily analyzed within a short time frame and will save a considerable amount of analysis effort.

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Answer 1

Time value of money is definesd as the difference between an amount of money in the present and that same amount of money in the future.

Suppose energy efficien t motor is installed.

For example:

Cost of motor =2lac

cost in energy saving=0.5lac

Pay back period will be (200000/50000)=4 years

If same motor installed after 2 years,

possibilities are:

a) Cost in energy saving loss of 1.0 lac

b) Motor cost might increase to 2.5lac due to price inflation

So time value of money should be considered as it has a great benefit in long term.