Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Techno economic assessment > Engineering Economics (Uge 40) > Flashcards

Engineering Economics (Uge 40) Flashcards

1
Q

What is the main thing that separates accounting and engineering economy?

A

Uncertainty. In engineering economy you have to make a lot of assumptions on the market/prices/interests etc.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are the 5 main methods in techno-economic analyses?

A 
o	Static cost benefit assessment
o	Annuity method
o	Net cash flow table
o	Net present value
o	Internal rate of return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the definition on Simple Payback Period (SPP)?

A

The time required for savings to offset first (capital) costs.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the definition on Simple Return on Investment (ROI)?

How does the formula for ROI looks?

A

The simple percent return the project pays over its life.

ROI = Annual savings - ((First Cost/Lifetime of project) / First Cost)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why are the methods “Simple Payback Period” and “Simple Return on Investment” called “simple”?

A

They do not consider the time value of money.

Simple methods can be used for preliminary checks only and are not suitable for precise calculations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is done in the “Net cash flow table method”?

A

All cost paid (in cash) and benefits received (in cash) are calculated and the annual cash flow is calculated as benefit minus cost.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What does the Net cash flow table show?

A
  • It gives an excellent overview on the timeline of incomes and payments over project period.
  • It shows how many years it will take before the first positive cash flow can be expected
  • Gives an indication on questions of financing and shows in a very simple way the overall situation of a project.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is “Net Present Value”?

A

NPV is a way to assess whether the cash flow of a project is positive while taking into account the time value of money. In its simplest form it means that a dollar today, is worth more than a dollar tomorrow.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Which three factors are accounted for in the NPV?

A
  • Opportunity Cost - what you couldn’t do with that money, like invest it.
  • Inflation - that dollar will have less purchasing power tomorrow.
  • Risk - are you really going to get that dollar tomorrow
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why is it important to include “time value of money” when considering a project?

A
  • A project with a life of several years has cash flows at various times
  • To consider dollar amounts at different times, we need to put all amounts on an equal basis taking the time value of money into account.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is “Present Value”?

A

The value now of an amount of money F received n years in the future.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is “Future Value”?

A

The value n years in the future of an amount of money P received now.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

If we can earn interest rate i on investments, the relationship between P (Present Value) and F (Future Value) is:

A

F = P(1+i)^n

P = F / (1+i)^n

Where n is number of years.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is inflation?

A

Prices tend to increase over time due to inflation in money’s value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

The average rate of inflation is reflected by which kind of index?

A

Consumer Price Index (CPI)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Accounting for inflation includes 4 steps. Which?

A
  1. Inflate all costs and savings using the available information, so that net cash flow before taxes is accurate for the year in question. Lacking better information, use the average inflation rate.
  2. Calculate the present value discount factor, using discount rate r.
    PV discount = 1 /(1+r)^n
  3. Calculate an inflation discount factor using inflation rate I:
    Inflation discount = 1 /(1+I)^n
  4. Calculate an overall discount factor:
    Overall discount factor = Inflation discount + PV discount
17
Q

What does the “Discounted cash flow method” do?

A

Convert each NCF from all years n to present value by multiplying NCF*1/(1+r)^n.
This process is called discounting the NCF to account for present value.
Then add up discounted cash flows for all years. This is the present value of the investment.

18
Q

What is a discount rate?

A

A discount rate is the rate of return used to discount future cash flows back to their present value.

This rate is often a company’s required rate of return, or the hurdle rate that investors expect to earn relative to the risk of the investment.

19
Q

What is the “Discounted cash flow method” utilized to account for?

A
  • The time value of money
  • The riskiness of an investment
  • Represent opportunity cost
  • Act as a hurdle rate for investment decisions
  • Make different investments more comparable
20
Q

What is the nominal discount rate?

A

The discount rate which incorporates the expected inflation rate:

Nominal Discount Rate = (1+Real Discount Rate)(1+Inflation Rate)-1 ≈ Real Discount Rate + Inflation Rate

21
Q

Mention the steps to do a present worth analysis (NPV) for a single alternative (investment).

A

o Select a desired value of the discount rate (r)
o Using the compound interest formulas bring all benefits and costs to present worth
o Select the alternative if its net present worth (Present worth of benefits – Present worth of costs ≥0
o For multiple alternative: Select the alternative with the largest net present worth

22
Q

What is a socioeconomic discount rate and by who is it set?

A

Represents cost of opportunity for the society
o Society is getting wealthier – dollar earned now has more value than in a rich future
o Pure time preferences –impatience in our nature
o Market interest rates and public borrowing

It is set by the Ministry of finance.

23
Q

What is the “Internal Rate of Return”?

A

The rate of return at which the NPV is equal to zero.
(tells at what rate you are earning your money back).

Helps to determine the yield on an investment.

24
Q

When looking at the relationship between IRR and discount rate. When are the project a GOOD investment?

A

If IRR is greater than the discount rate.

25
Q

When looking at the relationship between IRR and discount rate. When are the project a BAD investment?

A

If IRR is less than the discount rate

26
Q

What do you do if the IRR and discount rate i equal?

A

Then you should use another method to evaluate the project.

27
Q

When multiple projects are being considered, is IRR then a good investment tool to use to evaluate which projects to choose?

A

No.

The IRR is useful when considering only a single project.

28
Q

In which cases may multiple IRRs occur?

A

When projects have non-normal cash flows.

When you have multiple IRRs there is no way to know which IRR is correct.

29
Q

What is “Required Rate of Return (RRR)?

A

Minimum acceptable rate of return (MARR) shareholders demand for an investment

30
Q

What is “Cost of Capital (CC)?

A

Rate of return to meet capital expenses including interest paid on loans plus opportunity costs or hurdle rate

31
Q

What is “Hurdle rate”?

A

Rate of return to breakeven opportunity costs, risk premium and inflation

Techno economic assessment (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions