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Engineering Economics - Coggle Diagram

- - - - Calculate costs, & then set a price for a desired profit
    - - Set price according to market and use the allowed profit to see how much costs are accepted
  - - - Time should decrease at a decreasing rate
      - Reduction in time will have a predictable pattern
      - Time will be less each time is undertaken
  - - - Ct=C0(It/Io)
      - Capital replacement value: money to replace something
    - - Cost-capacity equations
        
        C2=C1*(Q2/Q1)^x
      - Factor method
        
        Ct=h*Ce
- - - - Least common multiple
      - Common study period
  - - - should be i* >= MARR
    - - Multiple ROR (i*)
        
        Return on Invested Capital approach (ROIC)
        
        Make F for each year
        
        if i''> MARR it is justified
        
        Modified RoR approach (MIRR)
        
        PW@ yr 0 (-@ib), FW@ yr n (+@ii), FW=PW(F/P,i',n)
        
        if i'>MARR project is justified
      - Single ROR (i*)
        
        PW or AW = 0
    - - Two alternatives
        
        Break even
        
        IRR at which both alternatives are equivalent
        
        Find i at which PW of incremental cash flow = 0
        
        Incremental analysis
        
        Cash flow 2 - Cash flow 1
        
        If i* < MARR, select A
        
        Annual worth
        
        AW= - Capital Recovery - Annual Operating Costs
        
        AW= - CR - AOC = - [P-S] - AOC
        
        Two actual cash fow series (one life cycle)
        
        Incremental cash flow series (LCM)
        
        Present worth
      - Multiple alternatives
        
        Compare alternatives 2 by 2, with an incremental analysis
        
        Until i* > MARR, otherwise select the previous one
    - - EROR=i'
        
        i_b= borrowing rate (usually WACC)
        
        i_i = reinvestment rate -> usually MARR
  - - - Geometric
        
        Same rate of increase each year (a constant rate, but the amount will increase)
      - Aritmetic
        
        Same amount increasing each year
- - - - BVt=B(1-d)^t
      - Dt=dB(1-d)^(t-1)
      - d
        
        DB: d=1-(S/B)^(1/n)
        
        DDB: d=2/n
    - - BVt=B-t*Dt
      - Dt=(B-S)*d=(B-S)/n
- - - - Decision, visualize decision
      - Information, obtain more insights
        
        Value of control
        
        What you're willing to pay to have control over nature
        
        VOPI: Value of perfect information
        
        What you're willing to pay to have perfect info
        
        VOII: Value of imperfect information
        
        What you're willing to pay to have imperfect info
- - - - Usually (-) cash flows
      - Longer period of time
      - Larger investments
      - Benefits & disbenefits
      - Multicriteria
      - Politics also other than economic
  - - - Environmental
      - Safety
      - Competitiveness
    - - Formula
        
        Modified: B/C = (ben-disben-O&M)/Initial investment
        
        Conventional: B/C = (ben-disben)/costs
      - Result
        
        PW = -CO + Cf -> >0
        
        PI = (Cf/-CO) -> >1
      - For several alternatives
        
        2 alternatives
        
        Incremental B/C analysis
        
        If B/C < 1, select the lower cost one (the 1st one used in the analysis)
        
        If B/C >/ 1, select the higher cost one (the 2nd one used in the analysis)
        
        Multiple alternatives
        
        Similar incremental B/C analysis
        
        One by one discarding until getting the best one
  - - - CER = Cost/effectivenes
    - - delta C/E = (delta C) / (delta E)
      - delta C/E must be the lower than defender, otherwise no clear dominance
- - - - Maxmin method
      - Maxmax method
    - - Outranking methods
      - Reference point methods
      - Value based methods
  - - - Criteria
      - Weights, Scores
        
        Steps
        
        Assign score for each
        
        Combine 1 & 2
        
        Determine relative importance by setting weights
        
        Methods (subjective)
        
        Direct method
        
        Normal, use a budget of 100 and distribute them
        
        Ranking
        
        Rank criteria & apply formula
        
        Rank sum
        
        Rank exponential
        
        Rank sum ^ p
        
        Rank reciprocal
        
        Pairwise comparison
        
        Compare in pairs the criteria (table), set values (matrix), normalize per column (matrix) bring together (sum each row & divide / number of criteria) until getting a weight for each
        
        Swing weighting (didn't really see it)
        
        NGT (structured way of doing brainstorming)
        
        Writing brainstorming, round, discussion, voting
      - Alternatives
    - - Aggregation of information
      - Selection/Evaluation
        
        Methods
        
        AHP, ANP (hierarchy)
        
        Making layers
        
        Consensus method (reference point method)
        
        Matrix, choosing the alternative closest to the best.
        
        You put the decision maker's attitude
        
        LAM: Linear additive method (value-based method)
        
        Criterion * weight
- - - - Weighted average COC
        
        Debt-to-equity mix identifies %s of debt & equity financing for a corporation
    - - Weighted average interest rate paid based on debt and equity sources
        
        Debt capital
        
        Equity capital
        
        It's recommended to have a good balance between debt and equity funding
    - - Factors affecting it
        
        Tax structure
        
        Investment opportunity
        
        Limited capital
        
        Project risk
        
        Rates ar other corporations
        
        Government internvention
  - - - Decrese power of purchase
        
        2-8% per yr
    - - Market rate or inflation-adjusted rate (i_f)
      - Pure interest rate or inflation rate (f)
      - Inflation free-interest rate (i)
    - - if = i + f + if
  - - - Selected entirely (not half a project), budget limit, different life, positive cash flows reinvested at MARR untill longest EoL
        
        Equal-life projects
        
        PW=PW of bundle net cash flows - initial investment = =sum(NCF_allYrs)-NCF_Yr0
        
        Get all NCF (initial investment and annuallities after that), get salvage value, then get the PW of all of that
        
        Unequal-life projects
    - - Maximize sum(PW)
      - Sum of investments should be less than b
    - - IROR
      - PWI -> best one,
        
        (PW of NCF)/(PW of Initial investment)
      - PW
- - - - What the mkt is willing to pay
    - - As an outsider, keeping the defender is costing money
    - - yr-by-yr estimate of costs to own & operate an asset for 1 yr
        
        AW of marginal costs = total AW of costs
        
        Cost of ownership (Loss in MV compared to previous yr) + Foregone interest of MV (loss interest on MV by not selling the yr before) + AOC
      - Increase in the total production cost when producing one more unit
        
        MC = change in total cost / change in quantity
  - - - of years at which the lowest AW of cost occurrs
        
        Min Cost /yr (numerically largest AW) -> Total AW = - CR - AWo&m (year by year) = -P(A/P)+S(A/F)-AW
    - - Defender vs challenger
        
        Study period specified
        
        AW over study period, select lowest cost or highest income
        
        No study period specified
        
        AW of costs based on ESL, then select best option
- - - - TI= GI-OE-D+DR- net CG - net CL -> (New TI w/dep recapture and cap. gain, when sold)
      - TI= GI-OE-D (gross income-operationg expenses-depreciation)
  - - - Same as ROR or IRR but using CFAT each year -> then use P=F(P/F, i%,yr)
    - - After-tax ROR = before-tax ROR * (1-Te)
- - - - Several projects
      - Single projects
    - - ROR: at which interest rate 2 projects come together.
      - Replacement analysis: what min mkt value of the defender will make the challenger econ attractive.
      - Comparing costs and revenue
      - PBP (payback period)
    - - Breakeven analysis
        
        Single
        
        Cost-revenue model approach
        
        Breakeven point (Q_BE)=FC/(Revenue-VC)
        
        Profit=Rev-FC-VC
        
        2 alternatives
        
        Make or buy analysis
        
        Present worth
        
        More than 2 alternatives
        
        3 alternative analysis
        
        AW & find unit for Be point (Q_BE)