Engineering Economics Concept 2

Question 1

Cost estimating relationships

Answer 1

C2 or CT - Relations that use design variables and changing costs over time to estimate current and future costs (15.3–4).

Question 2

Cost of capital

Answer 2

i or WACC - Interest rate paid for the use of capital funds; includes both debt and equity funds. For debt and equity considered, it is weighted average cost of capital (10.2–3).

Question 3

Debt-equity mix

Answer 3

D-E - Percentages of debt and equity investment capital used by a corporation (1.9, 10.3).

Question 4

Depreciation

Answer 4

D - Reduction in the value of assets using specific models and rules; there are book and tax depreciation methods (16.1).

Question 5

Depreciation rate

Answer 5

dt - Annual rate for reducing the value of assets using depreciation models (16.1).

Question 6

Discount rate

Answer 6

The rate used to “move” cash flows to other time periods to account for the time value of money.

Question 7

Discounting

Answer 7

The process of “moving” cash flows to other time periods while retaining economic equivalence.

Question 8

Economic service life

Answer 8

ESL or n - Number of years at which the AW of costs is a minimum (11.2).

Question 9

End-of-period convention

Answer 9

all cash flows that occur within an interest period are added together and treated as if they occurred on the last day of the interest period. This simplifies calculations, but may introduce some error.

Question 10

Expected value (average)

Answer 10

x‾, μ or E(X) - Long-run expected average if a random variable is sampled many times (18.3, 19.4).

Question 11

Expenses

Answer 11

E - All corporate costs incurred in transacting business (17.1).

Question 12

First cost

Answer 12

P - Total initial cost—purchase, construction, setup, etc. (1.3, 16.1).