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BMFG4623 ENGINEERING ECONOMY AND MANAGEMENT - Coggle Diagram

- - - - Engineers must be able to incorporate economic analysis
        into their creative efforts. Often engineers must select and
      - A proper economic analysis for selection and execution is
        a fundamental task of engineering
      - Engineers design and create. This ideas/proposal need to
      - Understanding and applying time value of money, economic equivalence, and cost estimation are vital for engineers.
  - - - ETHICS-DIFFERENT LEVELS
        
        Universal morals or ethics
        
        Personal morals or ethics
        
        Professional or engineering ethics
      - DEFINATION
        
        This is because the money you received today can be invested to earn interest.
        
        TVM explains the change in the amount of money over time for funds owed by or owned by a corporation/individual.
      - INTEREST AND INTEREST RATE
        
        Interest: the manifestation of the time value of
        money
        Interest = amount owed now - principal
        
        Interest rate: Interest paid over a time period
        expressed as a percentage of principal
      - RATE OF RETURN
        
        Interest earned over a period of time is expressed as a
        percentage of the original amount (principal)
    - - DEFINATION
        
        Combination of interest rate (rate of return) and time value of money to determine different amounts of money at different points in time that are economically equivalent
      - HOW IT WORK
        
        Use rate i and time t in upcoming relations to move money (values of P, F and A) between time points t = 0, 1, …, n to make them equivalent (not equal) at the rate i
      - SIMPLE AND COMPOUND INTEREST
        
        Simple Interest
        
        Interest = (principal)(number of periods)(interest rate)
        
        Interest is calculated using principal only
        
        Compound Interest
        
        Interest = (principal + all accrued interest) (interest rate)
        
        Interest is based on principal plus all accrued interest
        That is, interest compounds over time
    - - DEFINATION
        
        MARR is a reasonable rate of return (percent) established for evaluating and selecting alternatives
      - Characteristics
        
        MARR is established by the financial managers of the firm
        
        MARR is fundamentally connected to the cost of capital
        
        Both types of capital financing are used to determine the weighted average cost of capital (WACC) and the MARR
        
        MARR usually considers the risk inherent to a project
    - - Present Value, P: = PV(i%,n,A,F)
        
        Future Value, F: = FV(i%,n,A,P)
        
        Equal, periodic value, A: = PMT(i%,n,P,F)
        
        Number of periods, n: = NPER((i%,A,P,F)
        
        Compound interest rate, i: = RATE(n,A,P,F)
        
        Compound interest rate, i: = IRR(first_cell:last_cell)
        
        Present value, any series, P: = NPV(i%,second_cell:last_cell) + first_cell
    - - TERMS
        
        Cash Inflows Revenues ( R ), receipts, incomes, savings generated by projects and activities that flow in. Plus sign used
        
        Cash Outflows Disbursements ( D ), costs, expenses, taxes caused by projects and activities that flow out. Minus sign used
        
        Net Cash Flow ( NCF ) for each time
        NCF = cash inflows cash outflows = R D
        
        End of period assumption:
        Funds flow at the end of a given interest period
- - - - P = A(P/A,i,n)
      - A = P(A/P,i,n)
      - P is one period Ahead of first A value
  - - - Use spreadsheet function with corresponding P, F, or A value set to 1
      - Linearly interpolate in interest tables
      - Use formula
- - - - General equation for determining P:
        P = present worth of base amount - P(G)
    - - Pg = A {1 --[(1 g)/(1+i)]^n /(i g)}
- - - - Mutually Exclusive (ME) Alternatives: Only one can be selected; Compete against each other
      - Independent Projects: More than one
        can be selected; Compete only against DN
    - - Revenue: Alternatives include estimates of costs (cash outflows) and revenues (cash inflows)
      - Cost: Alternatives include only costs; revenues and savings assumed equal for all alternatives; also called service alternatives
  - - - Select numerically largest PW; alternative A
    - - Select all with PW > 0; projects A, B & D
  - - - LCM (least common multiple) : Compare the PW of alternatives over a period of time equal to the (LCM) of their estimated lives.
      - Study period: Compare the PW of alternatives using a specified study period of n years.
    - - Selected alternative can be repeated over each life cycle of LCM in exactly the same manner
      - Cash flow estimates are the same for each life cycle
        (i.e., change in exact accord with the inflation or deflation rate)
      - Service provided is needed over the LCM or more years
  - - - PW of project with
        infinite life
    - - CC = P = A/i