Engineering Economics Flashcards
A
Annuity or annual
BV
Book value
EUAC
Equivalent uniform annualized cost
EV
Expected value
F
Future value
f
Inflation rate
G
Uniform gradient amount per interest period
i
Interest rate per period
M
Compound period
MACRS
Modified accelerated cost recovery system
MARR
Modified attractive rate of return
n
Number of compounding periods
P
Present value
ROI
Return on investment
Economics
A social science concerned chiefly with description and analysis of the production, distribution and consumption of goods and services
Finance
The science or study of the management of funds
Depreciate
To deduct from taxable income a portion of the original cost of (a business asset) over several years as the value of the asset decreases
Inflation
A continuing rise in the general price level usually attributed to an increase in in the volume of money and credit relative to available goods and services
Fixed cost
A cost that remains constant and does not vary with short term changes in production
Variable cost
Cost that fluctuates directly with changes in output
Direct labor
Labor (as machine operators) applied directly to a product in the manufacturing process so that the cost is computable, identifiable, and chargeable directly to the specific product
Indirect labor
Labor (as clerks, repair men, maintenance men) applied indirectly to a product in the manufacturing process so that the cost is not computable in, identifiable with, or chargeable directly to the specific product
Sustainability
Of, relating to, or being a method of harvesting or using a resource so the resource is not depleted or permanently damaged
Cash flow diagrams
A method to visualize cash flows over time
P
Given F, i, n
P=F(1+i)^-n
Note that I should be a decimal
Non annual compounding
i’ = (1+(r/m))^m-1
Inflation
d=i+f+(ixf)
Uniform gradient
Another type of cash flow that may be tested - the uniform gradient amount per interest period (G)
P
Given G, i, and n
P’ = G(FIND IN FERH SUPPLIED FACTOR TABLE)
Net present value
Comparing alternative costs
Same i
Lower payback is better
P’ = -P + (P/F, i, n)
OR
P’ = -P + (P/A, i, n)
Capitalized costs
The present value of an infinite series of payments, given an interest rate
CONCEPT
Would an infinite series of payments produce an infinite value?
NO
and infinite series of payments will have a FINITE value
Capitalized cost Eq
P = A/i
Equivalent Uniform Annualized Cost
EUAC
When alternatives do the same job but have different life expectancies, they may be compared based on the cost per year of each alternative
EUAC
EUAC = P(A/P, i, n) + (per year cost)
Cost benefit analysis
B - C >= 0
Fixed cost
Fixed costs do not vary with production, such as plant and equipment (overhead) costs
Incremental cost
Or marginal costs - vary with production such as material and labor
Sunk cost
BAD
Throwing good money after bad
Feeling committed to something because money was already put in
Minimum attractive rate or return (MARR)
Should represent the minimum ROI known
Break even analysis
Exactly as it sounds
Set Eq(1) = Eq(2) and solve for variable
Probabilistic analysis
Given uncertain outcomes but given the probability of possible costs/revenues
EV
EV = (C1)(P1) + (C2)(P2) + …
Probabilistic analysis ex
- remember to find EV THEN apply
P’ = P(P/A, i, n)
Straight line depreciation
D_j (j = year of depreciation)
D_j = (C-S_n)/n
Book value
BV = P - ΣD_j
Book value
Definition
Represents the portion of assets initial cost that has not yet been used to offset income
Given annual rate, compounded monthly
Divide by 12
When given an initial amount (A) and an annual increase, or gradient (G), use what to find P
P = A(P/A) + G(P/G)
Max investment =
Present worth of benefits
(P/A) for difference in cost (ie cost savings)
Profit can be found from what two totals
Revenue - cost
When inflation is mentioned use
Combined interest rate
Can be used for rate of return
For the total amount paid on a loan
Convert each payment with (P/F) with inflation rate then take those values and put through (P/F) with interest rate.
OR
Use inflation Eq for d and use in (P/A) and find closest
READ CAREFULLY
Dumbass
When asking for depreciation value give the
Amount of decrease NOT total amount after decrease
Present value of a bond
P = A(P/A) + F(P/F)
Where F is the value of the bond
Cost of bonds
= A(P/A) + F(P/F)
Annual interest payments for bonds
Interest rate * bond worth
Rate of return investment for bonds?
Guess and check until cost = what bond was bought for
When given a table for schedule of funds use this
F = ΣP(1+i)^n
Add every iteration for n
Tax savings from depreciation
Depreciation value * tax rate
Annual net cash flow
Cash flow from ops - income taxes - income taxes
Income taxes
(cash inflow - ops cost)*tax rate - tax savings from depreciation
