Economics of Software Engineering

--Originally published at Project Evaluation and Management

Economic Engineering

Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.

Engineering Economy involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available.

Engineering economics quantifies the benefits and costs associating with engineering projects to determine if they save enough money to warrant their capital investments.

General concepts

Efficiency: Efficiency of a system is generally defined as the ratio of its output to input. The efficiency can be classified into technical efficiency and economic efficiency.

Technical efficiency: It is the ratio of the output to input of a physical system. The physical system may be a diesel engine, a machine working in a shop floor, a furnace, etc. (Technical efficiency (%) =  Output/ Input × 100)

Economic efficiency: Economic efficiency is the ratio of output to input of a business system. (Economic efficiency (%) = Output/Input  × 100 = Worth/Cost × 100)

Interest: Money paid for the use of money

Investment: Is an asset or item acquired with the goal of generating income or appreciation. (Interest = Current Value – Original Amount)

Loan: Is money, property, or other material goods given to another party in exchange for future repayment of the loan value or principal amount, along with interest or finance charges. (Interest = Current Total Owed – Original Amount)

Interest Rate: Interest paid per unit time. (Interest Rate = Interest paid per unit time / Original Amount)

Rate of Return (ROR): Interest accumulated per unit time. (ROR = Interest accumulated per unit time / Original Amount)

Time Value of Money (TVM): Is the money available

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