Engineering%20Economics_CH4_PartI

Engineering%20Economics_CH4_PartI - = Engineering Economics...

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Engineering Economics Ch. 4 Money-Time Relationship and Equivalence - Part I - =
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Review • Chapter 1. Introduction – Engineering economics – 7 Principles of engineering economy • Develop the alternatives • Focus on the differences • Use a consistent viewpoint • Use a common unit of measure • Consider all relevant criteria • Make uncertainty explicit • Revisit your decisions – Engineering economic analysis procedure – Overview of the textbook
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Review • Chapter 2-Evaluating alternatives not in consideration of time value – Cost terminology • Fixed, variable, incremental cost • Direct, indirect, standard cost • Cash, book cost • Sunk, opportunity, life-cycle cost
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Review • Chapter. 2 – Price-demand relationship • Assumptions: p = a – bD, p = constant etc. • Total Revenue (TR) = p x D • Find D1 maximizing TR • Find D2 maximizing Profit (= TR – TC) • Find D3 making breakeven (Profit = 0) – Cost-driven design optimization
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Review • Present Economy Studies – Decision rules among alternatives (when time value of money is ignored) • Rule1: Maximize overall profitability • Rule2: Minimize total cost
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Engineering Projects (EE, ME, CE, IE, BE,…) Alternatives (Profit/Revenue) -Single alternative: Ch.5 evaluating a single project - Multiple alternatives Ch.6 comparing multiple projects Cost: Time considerations -Interest: Ch.4 time value of money (Economic equivalence) -Depreciation: Ch.7 Depreciation Ch.1: Introduction Ch.2: cost/profit concept Ch 3: cost estimation Ch.8 price changes and exchange rates Ch.9 replacement Ch.10 – 14 others Economic environments Ch.7 taxes Ch.8 price changes and exchange rates Overview of engineering economics The time value of money is not a factor.
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Chapter 4. The Time value of Money
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Time Value of Money – Earning Power • A dollar today is worth more than a dollar a year from now because of interest . • Given a cash flow, interest rates can be used to determine the time value of money.
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Simple vs. Compound Interests Simple Interest P : Principal amount. N : Number of interest periods (e.g., years). i : Interest rate per period Simple interest I earned or paid is given by: I = P N i. $1000 x 3 years x 10%/year = $300
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Simple vs. Compound Interests • Therefore if you invest an amount of P for N years at a rate of i % a year, after N years you will have: P + I = P + P N i = P ( 1 + N i ) • Simple interest is not used frequently in modern commercial practice.
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Simple vs. Compound Interests Exercise 1 : A friend borrowed $500 from you at a simple interest rate of 9% per year for three years. What is the total amount of money your
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Engineering%20Economics_CH4_PartI - = Engineering Economics...

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