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Matakuliah : D0762 /Ekonomi Teknik

Tahun : 2009

Introduction to Engineering
Economy & Basic Concepts
Course Outline 1

1
References

• Engineering Economy – Leland T. Blank, Anthoy


J. Tarquin, Fourth Edition, McGraw-Hill
International Edition, 1998
• Engineering Economic Analysis, Donald G.
Newman, Third Edition, Engineering Press. Inc,
1988
• Engineering Economy, William G. Sulivan, Elin
M. Wicks, C. Patrick Koelling, 14th edition,
Pearson Prentice Hall, 2009

2
Outline

– Role of Engineering Economy in decision making


next
– Interest Calculation
Equivalence
next

– Simple and Compoundnext
Interest
– Symbols and Their Meaning next
– Cash Flow Diagram
next
next
References :
- Engineering Economy – Leland T. Blank, Anthoy J. Tarquin p.2-37
- Engineering Economic Analysis, Donald G. Newman, p. 1-51
- Engineering Economy, William G. Sulivan, p.21-35, p. 135-140

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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

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Engineering Economic Analysis

Key Questions:
• Which engineering projects are worthwhile?

• Which projects should have higher priority?

• How the project should be designed?

• How to achieve long-term financial goals?

• How to compare different ways to finance purchases?

• How to make short and long-term financial decisions?


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Engineering Economic Analysis
Examples of Non-Monetary Factors:

• Meeting customer expectations consistently

• Maximization of employee satisfaction

• Maintaining flexibility to meet changing demand

• Maintenance of a desired public image

• Leveling cyclic fluctuations in production

• Improvement of safety in operations

• 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

• The manifestation of the time value of money is


termed interest, which is the increase between an
original sum of money borrowed and the final
amount owed

Interest = total amount now- original principal


Interest rate = Interest accrued per time unit

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

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10
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

• Simple interest is calculated using the principal only,


ignoring any interest accrued in preceding interest
periods. The total simple interest over several periods is
computed as
Interest = (principal) (number of periods) (interest rate)
• For compound interest the interest accrued for each
interest period is calculated on the principal plus the total
amount of interest accumulated in all previous periods.
interest = (principal + all accrued interest) (interest rate)

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Simple and Compound Interest

Go Back
14
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

• A College student about to graduate plans to borow $200


now and repay the entire loan principal plus accrued interet
at 10% per year in 5 years. List the engineering economy
symbols involved and their values if the student wants to
know the total amount owed after 5 years
Solution
In this case P and F, but not A, are involved, since all
transactions are single payments. Time t is expressed in
years
P = $2000; i = 10% per year; n = 5 years; F = ?
The future amount F is the unknown amount

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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

 Revenue  First cost of assets


 Operating cost reduction  Engineering design costs
 Asset salvage value  Operating costs (annual and
 Receipt of loan principal incremental)
 Income tax savings  Periodic Maintenance and rebuild
 Receipts from stock and bond
sales costs
 Construction and facility cost  Loan Interest and principal
savings payments
 Saving or return of corporate  Major expected / unexpected
capital funds upgrade costs
 Income taxes
 Expenditure of corporate capital
funds.

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Cash Flow Diagram
Example of positive and negative cashflow diagram

+
Cash flow

1 2 3 4 5 6 time

-
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

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