While reading some questions/answers on this site, I came across this answer from Scott Seidman and I found it interesting.
So, work out your noise budget, figure out how many bits you need, and do what you need to get them. Try to remember that an engineer who consistently exceeds specs instead of meeting them is wasting time and money.
How do you create a noise budget, and when you have one or are given one, how do you use that to determine what components you would need (opamps, adcs etc..) ?
For instance, if you are given a noise budget, how would you determine how many bits you need for an ADC ?
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Original link ratiometric ADC, is it feasible to separate reference voltage and excitation voltage by an amplifier
Best Answer
A noise budget in this context seems to be the minimum resolution you need in order to obtain the information you want.
For the ADC example - if you want to be able to resolve 0.25v out of a 5v signal then your signal-to-noise ratio is 5v/0.25v = 20. To achieve this signal-to-noise ratio you'll need an ADC with at least 5 bits of resolution - 2^5 is 32. 4 bits will not work because 2^4 is 16 which is less than 20.
To summarize - to pick your noise budget, figure out what is the minimum signal you need to resolve. Then calculate the lowest bit rate you'll need in order to resolve that signal.
Of course when working with analog circuits you have to take the non-linearity of the circuits into account. The Wikipedia entry on ADCs has a great summary of things to consider: http://en.wikipedia.org/wiki/Analog-to-digital_converter
Bottom line: You generally should pick an ADC with slightly higher sampling than the minimum you require.
For completeness I'll also mention circuit noise. Circuit noise is the noise generated by the components within a circuit. Examples include thermal noise, shot noise, and 1/f noise. These place a minimum level at which you can resolve a signal and increasing the resolution of the ADC in a circuit will not help with this. More information on the Wikipedia page: http://en.wikipedia.org/wiki/Noise_(electronics)