Engineering Optimization

20Economic Optimization

20.1 Introduction

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).

As one confounding effect, annual expenses can include a probable penalty cost associated with an undesired event. This attribute of an investment is termed risk. As a second confounding effect, any profitability index is predicated on the value of the “givens” (the cost of electricity, the tax rate, the anticipated sales volume, etc.), which all have uncertainty over a typical future forecast of 20 years or so. We might know the cost of electricity ...