Chapter 2 Flashcards
Engineering economy?
A subset of economy for application to engineering projects.
Economic viability
We have problems, and we try to find the optimal solution (alternative) with the technical aspects
Engineering economy involves?
Evaluation of the costs and benefits of proposed projects.
Engineering economy symbols?
1- P: present value $ , present worth pw, net present value npv, discounted cash flow dcf, capitalized cost cc.
2- F: future value $, future worth fw.
3- A: annual worth $ per year, $ per month, equal end of period amounts of money, Aw, equivalent uniform annual worth EUAW.
4- n: years, months, days, number of interest periods.
5- i: percent per year, per month, per day. Interest rate or rate of return ROR per time period. Compund interest.
Time value of money?
TVM is based on the concept that the money you hold today is worth more because you can invest it and earn interest.
What is interest?
Interest is what you earn when you let people borrow your money. Price of renting your money
interest is the difference between the ending amount of money and the beginning amount.
Interest paid, interest earned are the same but with different point of view.
Interest paid (borrower, interest rate)
Interest earned (revenue, ROR)
Interest types
Simple interest
Compund interest
Simple interest
Interest period is one year.
Interest only on the original amount
Interest (F)= principal (present, p) x number of periods (n) x interest rate (i)
Linear
Compound interest
More than one interest period.
Interest on all money amounts and periods.
Compound interest (F) = p (1+i)^n
Exponential
Inflation?
Decrease in the value of given currency.
Inflation indicates a loss in the purchasing power of money over time.
Economic equivelance
To compare alternatives that provide the same service over extended periods of time when interest is involved we must reduce them to an equivalent basis.
Economic equivalence means that different sums of money as different times would be equal in economic value.
Cash flows
Flow or movement of money at some specific time over some period of time.
Outflows
Cash that is leaving am account such as a withdrawl. ( expenses or disbursements or losses or costs).
Inflows
Represent cash that is entering an account such as a deposit (revenues or receipts or benefits or incomes).
Cash flow diagram
Used to viually display cash flow movements.
Its a picture of a financial problem that shows all the cash inflows and outflows plotted along a horizontal time line.
Cash flow diagram
Represented by arrows at relevant periods, upward arrows denote positive flows and downward arrows denote negative flows.
Net cash flows
Since two or more values at the same time are summed and shown as single arrow
Net cash flow = receipts - disbursement
= inflows - outflows
MARR
Minimum attractive rate of return is a reasonable rate of return established for evaluation and selection of alternatives, it is the minimum acceptable rate of return to the investor.
If ROR > MARR - accept.
If ROR < MARR - reject.
