engg econ review

# engg econ review - Engineering Economy Review Main concepts...

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1 John D. Lee Industrial Engineering Engineering Economy Review 2 Main concepts n Models are approximations of reality (THINK) n Time value of money, cash flow diagrams, and equivalence n Comparison of alternatives n Depreciation, inflation, and interest rates 3 Suggestions for solving problems n Lookup unfamiliar terms in the index n Draw cash flow diagrams n Identify P, A, F, i n Be flexible in using equations and tables n Check with alternate methods 4 Cash flows n Cash flows describe income and outflow of money over time n Disbursements =outflows “-” n Receipts =inflows “+” n Beginning of first year is traditionally defined as “Time 0” 5 Equivalence n Translating cashflows over time into common units n Present values of future payments n Future value of present payments n Present value of continuous uniform payments n Continuous payments equivalent to present payment 6 Single Payment Compound Interest n P = (P)resent sum of money n i = (i)nterest per time period (usually years) n MARR=Minimal Acceptable Rate of Return n n = (n)umber of time periods (usually years) n F = (F)uture sum of money that is equivalent to P given an interest rate i for n periods n F=P(1+i) n P=F(1+i) -n n F=P(F/P,i,n) P=F(P/F,i,n)

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7 Bank example n You 1000 deposit n 12% per year n 5 years n How much do you have at end if compounded yearly? n How much do you have at end if compounded monthly? 8 5.47 Income from savings n \$25,000 deposited n Account pays 5% compounded semiannually n Withdrawals in one year and continuing forever n Maximum equal annual withdrawal equals? 9 5.47 Capitalized cost problem n P=25,000 n A=? n r=5% n i=? n A=iP 0 1 2 25,000 3 1 0 Key points to remember n Time value of money • \$1000 today is not the same as \$1000 one hundred years from now • Money in the future is worth less than present sums n Cash flow diagrams • Starts at year zero • Superposition to convert to standard forms n Equivalence • Functional notation, F=P(F/P,i,n) • i and n must match units • Capitalized cost, A=Pi, P=A/i 1 1 Comparison of alternatives n Present/Future worth n Cash flow n Rate of return n Cost benefit n Payback period n Breakeven analysis 1 2 Present/Future worth n Determine time period for analysis, least common multiple n Calculate present value for each alternative • Draw cashflow diagram • Identify/calculate A, i, P, F, n • Use present value equations to determine P n Compare costs
1 3 Tomato peeling machines Machine A Machine B Purchase cost=\$52,000 \$63,000 Annual cost=\$15,000/year \$9,000/year Annual benefit= \$38,000/year \$31,000 /year Salvage value= \$13,000 \$19,000 Useful life= 4 years 6 years 1 4 Present cost of A 0 1 2 3 52,000 15,000 13,000 P 4 = -52000+(38,000 -15,000)(P/A,12%,4)+13,000(P/F,12%,4) P 12 = P 4 + P 4 (P/F,12%,4) + P 4 (P/F,12%,8) P 12 =\$53,255 52,000 52,000 15,000 15,000 5 6 7 15,000 15,000 15,000 38,000 38,000 38,000 38,000 38,000 38,000 13,000 9 10 11 15,000 15,000 15,000 13,000 12 38,000 38,000 38,000 P 4 P 4 P 4 A=38,000-15,000 i= MARR=12% n=4 F=13,000 1 5 Present cost of B 0 1 2 3 63,000 9,000 P 6 = -63000+(31,000 -9,000)(P/A,12%,6)+19,000(P/F,12%,6) P 12 6 6 (P/F,12%,6) P 12 =\$55,846 63,000 9,000 9,000 5 6 7 9,000 9,000 9,000 31,000 31,000 31,000 31,000 9 10 11 9,000 9,000 9,000 13,000 12 9,000 31,000 19,000 31,000 31,000 31,000 31,000 31,000 4 9,000 P 6 P 6 A=31,000-9,000 n=6 F=19,000 1 6 Cash flow analysis n Determine time period for analysis: common multiple OR continuing operation then doesn’t

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## This note was uploaded on 10/04/2010 for the course ENGINEERIN 10028583 taught by Professor Alsoporoti during the Spring '10 term at University of Calgary.

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engg econ review - Engineering Economy Review Main concepts...

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