Chapter 2 - Time Value of Money

Question 1

Engineering decisions frequently involve trade-offs among what?

Answer 1

Costs and benefits occurring at different times

Question 2

What is the interest period?

Answer 2

Period over which interest is calculated

Question 3

What is simple interest?

Answer 3

Interest without compounding (interest is not added to the principal at the end of each period)

Question 4

What is the nominal interest rate (r)?

Answer 4

Interest rate stated for the full period (nominal of 12% is assumed per year. Can also mean 1% per month if compounded monthly)

Question 5

What is the effective interest rate (ie)?

Answer 5

Annual Interest rate that results from the compounding based on the subperiods

Question 6

What is a cash flow diagram?

Answer 6

It’s a graphical summary of the timing and magnitude of a set of cash flows.

Question 7

What are the cash flow diagram assumptions?

Answer 7

1. Cash flows occur at the ends of periods.
2. End of time period 1= beginning of time period 2
3. Time 0 = now

Question 8

Engineering Economics utilizes what to compare certain values at different points in time?

Answer 8

Time Value of Money

Question 9

Name the three concepts of equivalence which distinguish the underlying comparisons of costs/benefits at different times:

Answer 9

1. Mathematical Equivalence
2. Decisional Equivalence
3. Market Equivalence

Question 10

What equivalence assumptions are assumed to be true in this course?

Answer 10

Decisional and Market equivalence therefore Mathematical equivalence is used as an accurate model of how costs and benefits relate to one another over time.