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Engineering Economy Study Notes, Study notes of Engineering Economy

Liceo de Cagayan University (LDCU)Engineering Economy

An overview of engineering economy, including definitions of terms, simple and compound interest rates, annuities, capitalized cost, depreciation, and break-even analysis. It also includes review questions to test understanding of the concepts presented. useful for students studying engineering economics or related fields.

Typology: Study notes

2020/2021

Available from 01/13/2022

Jess_Rangcasajo
Jess_Rangcasajo 🇵🇭

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ENGINEERING ECONOMY
CONTENT:
1. Definition
2. Simple Interest
3. Rates of interest
4. Compound interest
5. Estimating doubling and tripling time of an investment
6. Annuities
7. Capitalized cost
8. Depreciation
9. Break-even analysis
DEFINITION OF TERMS
Engineering economy is the analysis and evaluation
of the monetary consequences by using the theories
and principles of economics to engineering
applications, designs and projects.
Necessities: refer to the goods and services that
are required to support human life, needs and
activities.
Necessity product or staple product: is defined as
any product that has an income-elasticity of demand
less than one. This means that as income rises,
proportionately less income is spent on such
products.
Luxuries: are those goods and services that are
desired by human and will be acquired only after
all the necessities have been satisfied.
Luxury product: is defined as any product that has
an income-elasticity of demand greater than one.
This means than as income rises, proportionately
more income is spent on such products.
Market: refers to the exchange mechanisms that
brings together the sellers and buyers of a
product, actor of production or financial security.
It may also refer to the place or area in which
buyers and sellers exchange a well-defined
commodity.
DEMAND
Demand: is the need, want or desire for a product
backed by the money to purchase it.
In economic analysis, demand is always based
on “willingness and ability to pay” for a product
not merely want or need for the product.
The demand for a product is inversely
proportional to its selling price.
SUPPLY:
Supply: is the amount of a product made available
for sale.
If the selling price for a product is high,
more producers will be willing to work harder and
risk more capital in order to reap more profit.
However, if the selling price for a product
declines, capitalists will not produce as much.
Law of supply and demand
Under conditions of perfect competition, the price
at which any given product will be supplied and
purchased is the price that will result in the
supply and the demand being equal.
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Download Engineering Economy Study Notes and more Study notes Engineering Economy in PDF only on Docsity!

ENGINEERING ECONOMY

CONTENT:

  1. Definition
  2. Simple Interest
  3. Rates of interest
  4. Compound interest
  5. Estimating doubling and tripling time of an investment
  6. Annuities
  7. Capitalized cost
  8. Depreciation
  9. Break-even analysis DEFINITION OF TERMS Engineering economy is the analysis and evaluation of the monetary consequences by using the theories and principles of economics to engineering applications, designs and projects. Necessities: refer to the goods and services that are required to support human life, needs and activities. Necessity product or staple product : is defined as any product that has an income-elasticity of demand less than one. This means that as income rises, proportionately less income is spent on such products. Luxuries: are those goods and services that are desired by human and will be acquired only after all the necessities have been satisfied. Luxury product: is defined as any product that has an income-elasticity of demand greater than one. This means than as income rises, proportionately more income is spent on such products. Market: refers to the exchange mechanisms that brings together the sellers and buyers of a product, actor of production or financial security. It may also refer to the place or area in which buyers and sellers exchange a well-defined commodity. DEMAND Demand: is the need, want or desire for a product backed by the money to purchase it. In economic analysis, demand is always based on “willingness and ability to pay” for a product not merely want or need for the product. The demand for a product is inversely proportional to its selling price. SUPPLY: Supply: is the amount of a product made available for sale. If the selling price for a product is high, more producers will be willing to work harder and risk more capital in order to reap more profit. However, if the selling price for a product declines, capitalists will not produce as much. Law of supply and demand Under conditions of perfect competition, the price at which any given product will be supplied and purchased is the price that will result in the supply and the demand being equal.

SIMPLE INTEREST

ORDINARY INTEREST:

I = Pin

F = P + I = P ( 1 +¿)

Ordinary Simple interest:  The interest is computed based on one banker’s year.  One banker’s year is equal to 360days or 12 months, each with 30days.

i =

r

-> Interest per day

Exact Simple Interest:

I = Pin

F = P + I = P ( 1 +¿)

Exact Simple Interest  The interest is based on the exact number of days of the years, where there are 365 days for an ordinary year and 366 days for leap year.

i =

r

-> for ordinary year

i =

r

-> for leap year

Note:  Leap year occurs every four years. Thus, the years exactly divisible by four are leap years except centennial years (1700, 1800, 1900 etc.) but not including those that are divisible by

Rates of Interest

Nominal Rate of Interest (NRI)

 is the one quoted in describing a variety of

compound interest.  it specifies the rate of interest and the number of interest periods per year.

r =ℑ

Where; i – interest per period m – number of periods Note: For compound interest, the rate of interest usually quoted is the NRI.  In order to accurately reflect time-value considerations, NRI must be converted into ERI before applying the formulas for compound interest. EFFECTIVE RATE OF INTEREST (ERI) Is the actual interest earned in one-year period.

ERI =( 1 + i )

m

Effective rate of interest for continuous compounding

ERI = e

r

For two nominal rates to be equal, their effective rates must be equal.

  1. Perpetuity ORDINARY ANNUITY A type of annuity wherein the payments are made at the end of each period starting from the first period.

F =

A [( 1 + i )

n

− 1 ]

i

P =

A [ 1 −( 1 + i )

− n

]

i ( 1 + i )

n DEFERRED ANNUITY A type of annuity wherein the first payment is made later than the first or is made several periods after the beginning of annuity.

F =

A [( 1 + i )

n

− 1 ]

i

P =

A [( 1 + i )

n

− 1 ]

i ( 1 + i )

m + n Annuity due A type of annuity where the payment is made at the beginning of each period

F =

A [( 1 + i )

n

− 1 ]

i

P =

A [( 1 + i )

n

− 1 ]

i ( 1 + i )

n − 1 Perpetuity A type of annuity in which the periodic payments exerted forever or continue indefinitely.

F = ∞

P =

A

i

CAPITALIZED COST

Is the sum of the first cost and the present worth of all future payments and replacements, which is assumed to continue forever.

CC = FC +

A

i

RC − SV

( 1 + i ) n − 1

DEPRECIATION

Depreciation is the decrease in value of physical property due to the passage of time. Symbols used to analyze depreciation: STRAIGHT LINE METHOD Straight line method of depreciation assumes that the loss in value of the property is directly proportional to the age of the property. Annual depreciation charge:

d =

FC − SV

L

Depreciation after “n” years:

Dn =

(

FC − SV

L )

n = d x n

Book value after “n” years:

BV n = FC − Dn

SINKING FUND

Annual depreciation charge:

d =

( FC − SV ) i

( 1 + i ) L − 1

Depreciation after “n” years:

Dn =

d [( 1 + i )

n

− 1 ]

i

Book value after “n” years:

BV n = FC − Dn

DECLINING BALANCE:

Declining balance method is also called a constant percentage method of the MATHESON FORMULA. Depreciation Charge during nth year

dn = k ( FC )( 1 − k )

n − 1 Salvage value at the end of its useful life

SV = FC ( 1 − k )

L Book value after “n” years:

BV n = FC (

SV

FC )

n L

BV n = FC ( 1 − k )

n

Rate of depreciation:

k = 1 −

n

BV n

FC

L

SV

FC

DOUBLE DECLINING BALANCE METHOD (DDBM)

Double declining balance method is just like the declining balance method just used

L

to replace the rate of depreciation k Depreciation charge during nth year

dn =

2 ( FC )( 1 −

L

n − 1

L

Salvage value at the end of its useful life

SV = FC

L )

L Book value after “n” years:

BV n = FC ( 1 −

L )

n SUM OF THE YEAR’S DIGITS (SYD) METHOD Sum of the year’s digit method assumes that the depreciation charge vary directly to the number of years and inversely to the sum of the year’s digit. Depreciation charge during nth year

dn =( FC − SV )

L − n + 1

SYD

Total depreciation after “n” years

Dn =( FC − SV )

n ( 2 L − n + 1 )

2 SYD

Sum of the Year’s Digit, SYD

SYD =

n ( n + 1 )

Break-Even Analysis

d. 3.98%

  1. What is the ordinary interest on P1,500.50 for 182 days at 5.2%? a. P39. b. P39. c. P39. d. P39.
  2. What is the type of annuity that does not have a fixed time span but continues indefinitely or forever? a. Ordinary annuity b. Perpetuity c. Annuity due d. Deferred annuity
  3. What refers to a document that shows proof of legal ownership of a financial security? a. Bond b. Bank note c. Coupon d. Check
  4. What type of bond where the corporation’s owner name are recorded and the interest is paid periodically to the owners with their asking for it? a. Preferred bond b. Registered bond c. Incorporators bond d. Callable bond
  5. What type of bond which can be redeemed before maturity date? a. Preferred bond b. Registered bond c. Incorporators bond d. Callable bond
  6. The declining balance method is also known as ______. a. Double percentage method b. Constant percentage method c. Modified sinking fund method d. Modified SYD method
  7. What type of depreciation is due to the reduction in the demand for the function that the equipment or asset was designed to render? a. Functional depreciation b. Design depreciation c. Physical depreciation d. Demand depreciation
  8. What is defined as the reduction of the value of certain natural resources such as mines, oil, timber, quarries, etc. due to the gradual extraction of its contents? a. Depletion b. Inflation c. Depreciation d. Deflation
  9. The profit derived from a project or business enterprise without consideration of obligations to financial contributors and claims of others based on profit is known as; a. yield b. earning value c. economic return d. Expected yield
  10. As applied to capitalized asset, the distribution of the initial cost by periodic changes to operation as in depreciation or the reduction of the depth by either periodic or irregular prearranged program is called a. amortization b. annuity c. depreciation d. capital recovery
  11. This law states that “When the use of one of the factors of production is limited, either in increasing cost or by absolute quantity, a point will be reached beyond which an increase in the variable factors will result in less than proportionate increase in output.” a. Law of Supply and Demand

b. Law of Diminishing Return c. Law of Gravity d. Law of diminishing Utility

  1. Which of these gives the lowest effective rate of interest? a. 12.35% compounded annually b. 11.90% compounded annually c. 12.20% compounded annually d. 11.60% compounded annually