Professional Documents
Culture Documents
John Ayers
September 17, 2004
Engineering Economics
Why is it important?
Value and Interest
Cash Flow Diagrams and Patterns
Equivalence of Cash Flow Patterns
Evaluating Alternatives
Break-Even Analysis
Income Tax and Depreciation
Inflation
Conclusion
2
$1166
present
future
annual
gradient
( F / P )in
( P / F )in
( A / P )in
( A / G )in
Formula
(1 i) n
1
(1 i) n
i (1 i ) n
(1 i ) n 1
1
n
i (1 i ) n 1
Solution:
1
P
n
(
1
i
)
1
%
P ( P / A)12
A
A
7
n
i (1 i )
(1 0.12) 7 1
$50,000
7
0.12(1 0.12)
4.56 $50,000 $228k
Evaluating Alternatives
Price
JACO
$220k
$20k
$30k
10 years
Cheepo
$100k
$35k
5 years
%
10%
ANEV ( A / P )10
220
k
20
k
(
A
/
F
)
10
10 30k
%
ANEV ( A / P )10
5 100k 35k
$61.4k
JACO
Incremental Approach
For a set of mutually exclusive alternatives, only
the differences in amounts need to be considered.
Model
Price
JACO
$220k
$20k
$30k
10 years
Cheepo
$100k
$35k
5 years
JACO- Cheepo:
%
10%
10%
PNEV 120k ( P / A)10
15
k
(
P
/
F
)
100
k
(
P
/
F
)
10
5
10 30k
120k 92.2k 62.1k 11.6k $45.9k
JACO
Benefit/Cost Comparisons
The benefit/cost ratio is determined from
B
uniform net annual benefits
Break-Even Analysis
Break-even point: the value of an independent
variable such that two alternatives are equally
attractive.
For values above the break-even point, one
alternative is preferred.
For values below the break-even point, the other is
preferred.
Break-even analysis is useful when dealing with a
changing variable (such as MARR).
Inflation
The buying power of money changes with time.
Inflation, if anticipated, can be put to good use by
fixing costs and allowing income to rise by
Entering long-term contracts for materials or wages
Purchasing materials long before they are needed
Stockpiling product for sale later.
Conclusion
For-profit enterprises exist to make money.
Non-profit entities also make decisions to
maximize the goodness of outcomes by
assigning dollar values.
Your engineering decisions will be shaped
by economics.