CHAPTER 1: Introduction to Engineering
Economy
Engineering economy
Engineering Economy fundamentals
Easy to use math techniques simplify the evaluation
involves formulating, estimating and evaluating
important to engineer
Engineering economy is the application of economic principles and calculations to engineering problems. Many basic economic principles may be applied in an engineering economic analysis, depending on their applicability.
- Engineers must be able to incorporate economic analysis
into their creative efforts. Often engineers must select and
- Understanding and applying time value of money, economic equivalence, and cost estimation are vital for engineers.
- Engineers design and create.
- A proper economic analysis for selection and execution is
a fundamental task of engineering
Time value of money (TVM)
ETHICS-DIFFERENT LEVELS
INTEREST AND INTEREST RATE
DEFINATION
RATE OF RETURN
TVM explains the change in the amount of money over time for funds owed by or owned by a corporation/individual.
This is because the money you received today can be invested to earn interest.
Universal morals or ethics
Personal morals or ethics
Professional or engineering ethics
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
Interest earned over a period of time is expressed as a
percentage of the original amount (principal)
Introduction to MINIMUM ATTRACTIVE RATE OF RETURN (MARR)
Economic equivalence
Spreadsheet functions
CASH FLOWS
TERMS
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
Cash Inflows Revenues ( R ), receipts, incomes, savings generated by projects and activities that flow in. Plus sign used
End of period assumption:
Funds flow at the end of a given interest period
SIMPLE AND COMPOUND INTEREST
HOW IT WORK
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
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 Interest
Compound Interest
Interest is calculated using principal only
Interest = (principal)(number of periods)(interest rate)
Interest is based on principal plus all accrued interest
That is, interest compounds over time
Interest = (principal + all accrued interest) (interest rate)
DEFINATION
Characteristics
MARR is a reasonable rate of return (percent) established for evaluating and selecting alternatives
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 is established by the financial managers of the firm
MARR usually considers the risk inherent to a project
Number of periods, n: = NPER((i%,A,P,F)
Compound interest rate, i: = RATE(n,A,P,F)
Equal, periodic value, A: = PMT(i%,n,P,F)
Compound interest rate, i: = IRR(first_cell:last_cell)
Future Value, F: = FV(i%,n,A,P)
Present value, any series, P: = NPV(i%,second_cell:last_cell) + first_cell
Present Value, P: = PV(i%,n,A,F)