Dealing With Uncertainty
1
An Example
An apartment priced at HKD 5M
After 30% down payment, mortgage = 3.5M
To be repaid by 20 years or 240 months
Interest rate is HIBOR+0.7%
In April 2011, HIBOR
Alternatives with Different Lives
Example
You can invest $100 in a project
MARR=3%
After one year, you can withdraw from the project and
receive $115
IRR=15%
PW=111.65
You can also choose to st
Sequential Decisions Over Time
Previously in handling uncertainties
We assume a single decision is to be made at the beginning
Sometimes, we need to make several decisions
sequentially over time
T
Payback Period Method
Assumption
A typical project has cash outflows in the beginning
periods, then followed by cash inflows
Definition
The (simple) payback period () is the earliest time
period w
Increasing Speed of Exponential Functions
The story of A Grain of Rice
F(t) = 2t-1
1
Money-Time Relationships
One dollar today is more valuable
than one dollar tomorrow
2
Capital and Interest
You de
Compound Interest
Compound interest is the eighth wonder of the world. He who
understands it, earns it . he who doesn't . pays it
Compound interest is the most powerful force in the universe.
Compound
Exercises
Starting from today (25/2/2016), we make a
monthly investment to a project for $10K per month
The value of the project will increase by 1% per
month
How much is the value of our investmen
Main Methods for Project
Evaluation
Benchmarked against MARR
Present worth (PW)
Future worth (FW)
Annual worth (AW)
Internal rate of return (IRR)
External rate of return (ERR)
Payback period
1
IRR Met
Applications of Money-Time
Relationship
Evaluating An Engineering Project
1
Your friend owes you $10,000.
He can pay you $10,000 today
He also suggests an option of paying you $10,500 after one yea
FAQs
Do I have to use the interest factor notation in
my calculation?
No. You can do calculation in any way you feel
comfortable, as long as the final result is correct.
However, if you make a mista
Concepts of Cost
1
What is cost?
Mr. Li bought a movie ticket on the Internet at the
price of HK$65.
Before going to the theater, he read some movie
surveys and found that the movie was
disappointin
IELM 3230
Engineering Economy
Spring 2016
1
Basic Course Information
Professor Xiangtong Qi
Email: [email protected]
Office: 5543
Office hour: 3:00pm-4:20pm, Tue and Thu
The TAs
Mr. Yifu Li ([email protected]
Cost-Driven Design
Cost reduction is important in profit maximization
Profit = Revenue - Cost
Cost reduction can be achieved in project design
Steps
Identify the design variable that is the primar