IOE+201+Notes+1

IOE+201+Notes+1 - IOE 201 Lecture Notes 1 Course IOE 201...

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1 Course IOE 201 Economic Decision Making Instructor: Prof. Blumenfeld Wednesday 09/09/09 IOE 201 Lecture Notes 1

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2 IOE 201 : Economic Decision Making Course Subject Area: Engineering Economics Scientific and engineering principles to address basic economic questions: - How much is this really going to cost ? - Do the benefits outweigh costs ? Mathematical techniques that simplify economic comparison of engineering alternatives. Course Objective: Understand and apply principles of Engineering Economics, to make informed economic decisions.
Importance of Engineering Economics in IOE Impact on investment and loan decisions - Current cash flow considerations - Future economic planning Impact on many industries - Banking industry - Housing industry - Automotive industry - Other manufacturing industries - Health care industry - Entertainment industry - Transportation industry 3

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4 Importance of Engineering Economics in IOE Impact on decisions at many levels - Individuals - Small business - Large corporation - Local, state, and federal government Impact on professional and personal decisions - Need for quantitative approach to evaluate alternatives - Need for fundamental principles in decision-making
5 Key Factors in Engineering Economics Time: Value of money at different points in time Uncertainty: Impact of random variability in finance

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6 Time Value of Money Money can earn more money over time ( earning power ) Interest is an amount charged for the use of money Increase in money earned per unit time is the interest rate . Purchasing power of money changes over time ( inflation ).
7 Methods of Calculating Interest Simple Interest: Interest earned only on initial amount (principal). Compound Interest: Interest earned on initial amount (principal) plus Interest earned on interest

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Simple Interest Year Beginning Balance Interest Earned Ending Balance 1 \$1000 \$50 \$1050 2 \$1050 \$50 \$1100 3 \$1100 \$50 \$1150 Interest earned each year = \$1000 × 0.05 = \$50 Example: Principal: \$1000 Interest rate: 5% per year (0.05 per year) Total amount at end of 3 rd year = \$ 1000 + (3 × 50) = \$1150 8
9 Simple Interest Year Beginning Balance Interest Earned Ending Balance 1 P iP P + iP 2 P + iP iP P + 2 iP 3 P + 2 iP iP P + 3 iP N P + ( iP )( N - 1) iP P + ( iP ) N General case: P = Principal (\$) i = Interest rate per year Interest earned each year = iP Total interest earned at end of N th year = ( iP ) N Total amount at end of N th year = P + ( iP ) N = P (1 + iN )

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10 Compound Interest Year Beginning Balance Interest Earned Ending Balance
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IOE+201+Notes+1 - IOE 201 Lecture Notes 1 Course IOE 201...

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