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Tahun : 2009
Introduction to Engineering
Economy & Basic Concepts
Course Outline 1
1
References
2
Outline
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Role of Engineering Economic
• Engineering Economy is making decision
• Engineering Economy about determining the economic factors
and the economic criteria utilized when one or more
alternatives are considered for selection.
• We can say as mathematical techniques which simplify
economic comparisons.
• Technique and models of engineering economy assist people
in making decision
• Help to decide which one is the best among available
alternatives based on economic factors
• It is based on the systematic evaluation of the costs and
benefits of proposed technical projects
4
Engineering Economic Analysis
Key Questions:
• Which engineering projects are worthwhile?
• Reduction of pollutants
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Decision Making Process
• Procedure for decision making Process
1. Understand the problem and goal
2. Collect relevant information
3. Define the alternative solution
4. Evaluate each alternative
5. Select the best alternative using some criteria
6. Implement the solution and monitor the result
• Engineering economy has a major role in steps 2, 3 and 5. And it is
the primary technique in step 4 to perform the economic-based
analysis of each alternatives
• Steps 2 and 3 set up the alternatives, and engineering economy
helps structure the estimates of each one
• Step 4 utilizes one or more engineering economy models this terms
to complete the economic analysis upon which a decision is made
Go Back 7
Interest Calculation
x 100%
Original amount
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Interest Calculation
• Example 1.3
The Oracle Investment Group Invested $100.000 on
May 1 and withdrew a total of $106.000 exactly 1 year
later. Compute (a) the interest gained and (b) the interest
rate on the investment
Solution
Interest : $106.000 – 100.000 = $6000
Interest rate = $6000 per year
x 100% = 6 % per year
$100.000
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Interest Calculation
• Example 1.4
Stereophonic, Inc. plans to borrow $20,000 from a bank for 1 year at 9% interest for new recording
equipment. Compute (a) the interest and (b) the total amount due after 1 year. (c) construct a graph
which shows the numbers that would be used to compute the loan interest rate of 9% per year
Solution
(a)Total interest = $20,000 (0.09)
= $1800
(a)Total due = $20,000 + $1800
= $21,800
Note :
Total amount due may also be computed
as:
Total = principal (1+interest rate)
= $20,00(1,09)
= $21,800
Go Back
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Equivalence
• Equivalence is an essential factor in engineering
economic analysis.
• Different sum of money at different times are
equally in economic value on certain interest
rate.
• Equivalence concept help us to do comparison
of alternatives option
• Changing the interest rate destroy the
equivalence between two series of
payment/cashflow
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Equivalence
• Example
– If the interest rate (i) 6% per year; $100 to
day (present time) would be equivalent to
$106 one year from to day
Amount accrued = 100 + 100(0,6) =
$106
- If we have $100 now, it is equivalent to
$100/1.06 = 94.34 one year ago at i = 6%
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Simple and Compound Interest
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Simple and Compound Interest
Go Back
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Symbol and Their Meaning
• The relations in engineering economy commonly include
the following symbols and their (sample) units :
– P = value or amount of money at a time denoted as
the present, called the present worth or present
value;
– F = value or amount of money at some future time,
called future worth or future value
– A = series of consecutive, equal, end-of-period
amount of money, called the equivalent value per
period or annual worth;
– n = number of interest periods ; years, month, days
– i = interest rate per interest period; percent per
year, percent per month
– t = time stated in periods; years, months, days
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Example 1.10
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Example 1.11 & 1.12
• Assume you borrow $2000 now at 12% per year for 5 years and
must repay the loan in equal yearly payments. Determine the
symbols involved and their values
Solution
Time t in in years
P = $2000 ; A = ? Per year for 5 years
i = 12% per year ; n = 5 years
There is no future value F involved
• On May 1, 1988 you deposited$500 into an account which paid
interest at 10% per year and withdrew an equal annual amount for
the following 10 years. List the symbols and their values
Solution
Time t is in years; the P(deposit) and A amounts (ten withdrawals)
are
P = $500; A= ? Per year
i = 10% per year; n = 10 years. Go Back 17
Cash flow Diagram
Samples of Cash flow inflows Samples of Cash Outflows
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Cash Flow Diagram
Example of positive and negative cashflow diagram
+
Cash flow
1 2 3 4 5 6 time
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Example 1.15
Reconsider Example 1.10, where P = $2000 is borrowed and F is
sought after 5 years. Construct the cash-flow diagram for this case
assuming an interest rate of 10% per year
+ $2000 i= 10%
Cash flow
1 2 3 4 5 6 year
F?
-
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Cash flow Diagram
• Example 1.16
Assume that Mr. Ramos stars now and make five equal
deposits of A = = $1000 per year into a 17% per year
investment and withdraws the accumulated total
immediately after the last deposit. Construct the cash
flow diagram
F?
+ i= 17%
Cash flow
0 1 2 3 4 5 6 year
-
A = $1000
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Cash flow Diagram
• Example 1.16
Assume that you want to deposit an unknown
amount into an investment opportunity 2 years
from now that is large enough to withdraw $400
per year for 5 years starting 3 years from now. If
the rate of return is 15% per year, construct the
cash flow diagram
F?
+ i= 17%
Cash flow
0 1 2 3 4 5 6 year
-
A = $1000
Go Back 21