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Engineering Economics Foundations

Fundamentals

Proposals
Cash flow
Business decision
making
Time value
or money
Equivalence

Basis for
comaprision
Mutually exclusive
alternatives

For-profit

Not-for-profit

Present
economy

Estimation
risk

Multiple
attribute
decisions

Engineering Economics Foundations


Fundamentals - Proposals
Fundamentals

Proposals
Cash flow
Business decision
making
Time value or money

Equivalence
Basis for comparision
Mutually exclusive
alternatives

Proposals are evaluated from


business perspective (discuss
business value of propesed
solution)
Every proposal represents a
binary choice !

Engineering Economics Foundations


Fundamentals - Proposals
Economics drive every potential project
A Request for Proposal (RFP) may be answered by
several suppliers/contractors (bidders)
For a proposal writer, the key is to diagnose
problem and propose the treatment
In diagnosing a problem, existing issues must be
addressed with specifity
A proposed treatment should include ways in which
the customer can evaluate progress

Engineering Economics Foundations


Fundamentals - Proposals
Key elements of proposal include:
Background of the project
Features and benefits
Technical elements
Related research
Management elements
Cost considerations
Risk and rewards
A description of developing organization

Test your understanding #1


Move each of the proposal elements to the correct
question

What is the estimated


schedule ?
Does the bidder know of
similar systems in
existence elsewhere ?
How will the product
make the buyers
organization more
productive ?
What are the proposed
modeling techniques ?
What is the background
of bidder ?

Management
elements

Background

PROPOSAL
ELEMENTS
Background
Features and
benefits

Description of the
bidder
Features and
benefits

Technical
elements
Related research

Risk and rewards

Related research
Management
elements
Technical elements

Test your understanding #1


Move each of the proposal elements to the correct
question

What is the process to


be followed ?
Does the client
understand why the
proposal is to replace
current software ?
How are unpredictable
revisions to the clients
requirements handled ?
What is the experience
with similar projects ?

Management
elements

PROPOSAL
ELEMENTS
Background
Features and
benefits

Background

Description of the
bidder
Risk and rewards

Risk and rewards

Description of the
bidder

Related research
Management
elements
Technical elements

Engineering Economics Foundations


Fundamentals Cash flow
Fundamentals

Proposals
Cash flow
Business decision
making
Time value or money

Equivalence
Basis for comparision
Mutually exclusive alternatives

Cash flow instances


Cash flow streams

Engineering Economics FoundationsCash Flow Bussineses make money


Business and money
Money
comes
from

Customers

Gross
revenues

Owners

Equity

Money
goes to

Banks/
Bonds

Goods/
Services

Creating/
Purchasing

Research

Cost of
selling

Taxes
/Admin/
etc.

Return
to
owners

Test your understanding #2


Move each of terms to the correct definition

A company s net worth,


the difference between
companys assets and
liabilities

TERMS
Gross revenue

Equity

Indirect material

Equity
A form of investment
that behaves like an
interest-only loan
Payments received by
business from selling
goods and services

Bond

Indirect labour
Manufacturing
overhead

Gross revenue

Bond

Test your understanding #2


Move each of terms to the correct definition

The total of indirect costs


in a manufacturing
operation
Personnel costs not
charged to production

Cost of raw material and


purchased components
not charged to
production

TERMS
Gross revenue

Manufacturing
overhead

Indirect material

Equity
Indirect labour

Indirect labour

Indirect material

Manufacturing
overhead

Bond

Engineering Economics Foundations


Fundamentals Cash flow
Cash flow in a business (during period of time)
= All of the business income
All of the cash paid out
(except to owners)

Alternative investments that are available


to businesses usually have different cash
flows

Engineering Economics Foundations


Fundamentals Cash flow
An investment can be represented by a
diagram, as the cash flow shown below

Cash flow (1000 EUR)

-15 -8
1

-5
2

5
3

15
4

8
5

4
6

4
7

8
Time (month)

Test your understanding #3


EXAMPLES
mainitain the development
salary

negotiated discounts
against material costs
increases
substitution: if buyer
manages to find another
product that performs the
same function or is able to
collaborate with a supplier
to produce a funcionally
equivalent specifiaction
that is more economical to
produce
inventory reduction
process improvement

ANSWERS

TERMS

Operating and
maintance

Cost avoidance

Operating and
maintance
Cost avoidance

Initial
investment
Income

Test your understanding #3


EXAMPLES
software customization
salvage value

ANSWERS

TERMS

Income

Cost avoidance

Operating and
maintance
training
equipment

Initial investment

Initial
investment
Income

Test your understanding #4


DEFINITIONS
For software , a small
percentage overall
expenses, but probably
not zero
Selling
Typically included benefits
such as vacation,
insurance, bonuses, stock
options etc.
Taxes

ANSWERS

TERMS

Costs of goods
sold-materials

Costs of sold
labor

Operating
expenses

Costs of sold
labor

Operating
expenses

Operating
expenses
Investmentrelated expenses
Return on equity
Costs of goods
sold-materials

Test your understanding #4


DEFINITIONS
Interest on loans

ANSWERS
Investmentrelated expenses

Costs of sold
labor

Return on equity

Operating
expenses

Cash dividends on stock

Depreciation

TERMS

Investmentrelated expenses

Investmentrelated expenses
Return on equity

General and
administrative

Operating
expenses

Costs of goods
sold-materials

Test your understanding #5


You are project manager assigned to a project
early in the project lifecycle. One of the things
that must be done is to do a justification to the
project. Since very little information is known
about the project, the estimates are considered
to be rough estimates.

Test your understanding #5


The following table is the project managers
estimate of the cash flow that will take place
over next five years. What is the net cash flow at
the end of five years ?
Cash flow in
EUR

Year

Cash flow out


in EUR

0,00

500.000,00

ANSWERS

300.000,00

90.000,00

50.000,00

400.000,00

100.000,00

-50.000,00

100.000,00

175.000,00

100.000,00

50.000,00

35.000,00

150.000,00

Engineering Economics Foundations


Fundamentals Business decision
making
Fundamentals

Proposals
Cash flow
Business decision
making

State the problem


Identify alternatives
Evaluate the
alternatives

Time value of money


Make a decision

Equivalence
Implement decision
Basis for comparision
Mutually exclusive
alternatives

Engineering Economics Foundations


Fundamentals Business decision
making
Understand
the real
problem

Define the
selection
criteria
Identify all
reasonable
technically
feasible
solutions

Evaluate
each
proposal
against the
selection
criteria

Select the
preferred
proposal

Monitor the
perfomance
of the
selected
proposal

Engineering Economics Foundations


Fundamentals Time value of money
Fundamentals

Proposals
Cash flow
Business decision
making

Time value of
money
Equivalence
Basis for
comparision
Mutually exclusive
alternatives

Interest is the time


value of money
It is the relationship
between the value
of a EUR today and
the value of a EUR
at some time in the
future

Engineering Economics Foundations


Fundamentals Time value of money
Fundamentals

Proposals
Cash flow
Business decision
making

Time value of
money
Equivalence
Basis for
comparision
Mutually exclusive
alternatives

It is the rate that


someone or some
business will pay to
use someones else
money
The equivalent of
these amounts can
be computed using
various formulas

Engineering Economics Foundations


Fundamentals Common variables in
interest formulas
P = value or amount of money at a time
designated as the present or time 0
P is also referred to as present worth (PW),
present value (PV)
F = value or amount of money at some
future time
F also called future worth (FW) and future
value (FV)

Engineering Economics Foundations


Fundamentals Common variables in
interest formulas
i = interest rate or rate of return per time
period; percent per year, percent by month
n = number of interest periods; years,
months, days
A = series of consecutive, equal, end-ofperiod amounts of money. A is also called
the annual worth (AW) and equivalent
uniform annual worth; EURs per month,
EURs per day

Engineering Economics Foundations


Fundamentals Common variables in
interest formulas
NPV = net present value, the sum of all
present values
t = time, stated in periods; years, months
days

Engineering Economics Foundations


Fundamentals Time value of money Formulas
Future value (F) of present amount (P) year end total (Compound interest)
= (1 + )

Engineering Economics Foundations


Fundamentals Time value of money Formulas
Future value (F) of present amount (P) over n years end total (Compound
interest)

= 1+

Engineering Economics Foundations


Fundamentals Time value of money Formulas
Present amount (P) required to equal
some future amount (F) at some
assumed interest rate (i)

= / 1 +

Test your understanding #6


If a software development had:
Gross revenue of 14.025.000,00 EUR last year
Various costs of labour, material, operating expenses etc. of
9.050.00,00 EUR
Income taxes of 2.040.300,00 EUR
What was their actual profit and profit margin ?

a) 2.497.700,00 EUR ; 33.50% margin


b) 1.669.800,00 EUR; 13.36% margin
c) 2.934.700,00 EUR; 20.92% margin
d) 2.040.300,00 EUR; 34.91% margin

Test your understanding #6


Formulas:
Gross revenue (costs+taxes) = Actual profit
Actual profit/ Gross revenue = Profit margin
Actual profit = 14.025.000,00 EUR-(9.050.00,00
EUR+2.040.300,00 EUR) = 2.934.700,00 EUR
Profit margin =2.934.700,00 EUR/ 14.025.000,00 EUR
Profit margin = 20.92%

Test your understanding #7


If 15.000,00 EUR is invested at 6% compunded
annually, what is the future value of the
investment after 10 years ?
a) 15.000,00 EUR x 10 x 0.06
b) 15.000,00 EUR x 1.06
c) 15.000,00 EUR + 10 x (0.06 x 15.000,00 EUR)
d) (0.06 = 15.000,00 EUR) 10

Engineering Economics Foundations


Fundamentals Time value of money Formulas
Net Present Value (NPV) = The difference
between the present value of cash inflows and
the present value of cash outflows.

NPV is used in capital budgeting to analyze the


profitability of a projected investment or
project.

Engineering Economics Foundations


Fundamentals Time value of money Formulas
The following is the formula for calculating NPV:

=1
(1+)

Ct = net cash inflow during the period t


Co = total initial investment costs
r = required rate of return
t = number of time periods

Test your understanding #8


The software company is deciding whether
or not develop the new product. It will
have to invest in developers training
100.000,00 EUR, expects 30.000,00
EUR/year in sales and will reserve 5.000,00
EUR/year for expenses. The required rate
of return is 10%.
What is the Net Present Value (NPV) ?

Test your understanding #8


End of
Year
0

Cash flow EUR


0,00

Present value
EUR
-100.000,00

(30.000-5.000)/(1+0,10) 1

22.727,00

(30.000-5.000)/(1+0,10) 2

20.661,00

(30.000-5.000)/(1+0,10) 3

18.783,00

(30.000-5.000)/(1+0,10) 4

17.075,00

A)

24.404,00 EUR

(30.000-5.000)/(1+0,10) 5

15.523,00

B)

10.888,00 EUR

(30.000-5.000)/(1+0,10) 6

14.112,00

C)

5.231,00 EUR

D)

8.881,00 EUR

ANSWERS

Net Present Value (NPV) is the sum of the Present Values. Since the
NPV is greater than zero, it would be better to invest in the project
than to do nothing.

Test your understanding #9


If a software company would like to receive
1.331.000,00 EUR in three years and assumes
an interest rate of 10 percent, how much that
company need to invest now ?
A) 751.314,00 EUR
B) 887.334,00 EUR
C) 1.000.000,00 EUR
D) 1.210.000,00 EUR

Test your understanding #9


Present ammount required to equal some
future amount at some assumed interest
rate: = / 1 +
1.331.000,00
P=
(1+0,10)3
P = 1.000.000,00 EUR

Engineering Economics Foundations


Fundamentals Equivalence
Fundamentals

Proposals
Cash flow
Business decision
making

Time value of
money
Equivalence
Basis for
comparision
Mutually exclusive
alternatives

Economic
equivalence is
established when
we are indifferent
between a future
payments and a
present sum of
money

Test your understanding #10


Select a correct answer for scenario:
Microsoft is offering a product for 8.825,00
EUR if you will pay full price now or
1.000,00 EUR/year for next 12 years. If
interest is 7% which is better deal ?
A) Full price now
B) 1.000,00 EUR/year

Test your understanding #10


Assuming a reasonable interest rate, investing
now 8.825,00 EUR will grow, with compound
interest, to an amount greater then 12.000,00
EUR.
= 1+

= 8.825,00x2.252

= 19.875,00

Test your understanding #11


STU Software has decided to buy a new
server farm and has begun to shop locally.
As a startup , they have a little cash for
investment. They found a server farm for
35.000,00 EUR, including taxes, delivery,
installation, etc. One dealer offers a 5-year
loan at 0% interest, with a 5.000,00 EUR
down payment.

Test your understanding #11


What would the STU Software monthly
payments be if they took the offer ?
A)
B)
C)
D)

500,00 EUR
583,34 EUR
666,67 EUR
625,00 EUR

Engineering Economics Foundations


Fundamentals Bases for Comparison
Fundamentals

Proposals
Cash flow
Business decision
making

Time value of
money
Equivalence
Basis for
comparision
Mutually exclusive
alternatives

To compare the
alternatives that
provide the same
service over
extended periods of
time where interest
is involved we must
reduced them to an
equivalent basis

Engineering Economics Foundations


Fundamentals Bases for Comparison
ROI and IRR
Return on Investment (ROI) and Internal
Rate of Return (IRR) can be used to
compare investments, both want to get
more value out of a financial venture that
was put in

Engineering Economics Foundations


Fundamentals Bases for Comparison
ROI
Return on Investment (ROI):

Expressed as an interest rate


Gives quick assessment of investment
perfomance and can be computed manually
Is useful when comparing two investments
over the same period
Does not allow comparison of investments
over different time periods

Engineering Economics Foundations


Fundamentals Bases for Comparison
IRR
Internal Rate of Return(IRR):

Mathematically more complicated than ROI


Annualized compund rate that can be earned
on invested money, also known as the yield
Takes into account the investment growth, but
unlike ROI, also accounts for the timing of the
cash flows
Calculating IRR uses spreadsheets and on-line
automated calculators

Engineering Economics Foundations


Fundamentals Bases for Comparison
ROI
In general you can calculate ROI once you
know:
The starting investment value - 0
The ending investment value - 1
The general formula is:
(1 0 )
=
0

Engineering Economics Foundations


Fundamentals Bases for Comparison
IRR

In general you can calculate IRR once you


know:
The cash flows of the investment (0 , 1 )
The time elapsed in years after the first
cash flow ( 1 , 2 ) where 0 = 0
The IRR is the value that solves equatioin:

1
0=
(1 + )
=0

Engineering Economics Foundations


Fundamentals Bases for Comparison
IRR and NPV

Both Net Present Value (NPV) and IRR are


used to evaluate the desirability of
investment of projects
NPV can be thought of as the flipside of
IRR
NPV is the discounted value of a stream
of cash flows, generated from an
investment

Engineering Economics Foundations


Fundamentals Bases for Comparison
IRR and NPV
IRR computes the break-even rate of return
showing the discount rate, bellow which an
investment results in a postive
Recall that IRR is the basis for comparison that
represents the value of a cash flow stream in
terms of a compound interest rate over the
planning horizont
Present Worth (PW) is the basis for comparison
that translates a cash flow stream into an
equivalent single cash flow instance at the
beginning of the planning horizon

Test your understanding #12


Using a simple short term (less than one year)
ROI calculation : 1.000,00 EUR is invested ; the
investment earns 1.250,00 EUR. What is the
ROI ?
A)
B)
C)
D)

18%
20%
25%
30%

Test your understanding #12


The starting investment value
0 = 1.000,00 EUR
The ending investment value
1 = 1.250,00 EUR
Formula:
(1 0 )
=
= 25 %
0

Engineering Economics Foundations


Fundamentals Mutually Exclusive
Alternatives
Fundamentals

Proposals
Cash flow
Business decision
making

Time value of
money
Equivalence
Basis for
comparision
Mutually exclusive
alternatives

Mutually exclusive
proposals are two or
more proposals that
dont fit together
Either you do one,
the other or neither

Engineering Economics Foundations


Fundamentals Mutually Exclusive
Alternatives
When presented with a choice, you can
either choose to carry out a specific
proposal or you can choose not to. But
the real choices confronting an
organization typically are not so simple
Any given set of proposals may be turned
into a set of mutually exclusive
alternatives. The choice can then be
made from among these alternatives

Engineering Economics Foundations


Fundamentals Proposals Mutually
Exclusive

Engineering Economics Foundations


For-profit
Decision
Making
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life
Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accounting
Income Taxes

Every
good
proposal
contains the promise that
new software will be
finished on schedule, with
planned budget, bringing
increased
organization
profitability ..

For profit decision analysis is


investing resources - time,
money, people, materials ...

Engineering Economics Foundations


For profit decision analysis
In for profit businesses a decision can be made
among mutually exclusive investment alternatives
by selecting the greatest net present value, net
future value or annual equivalent value
The decision maker can select the alternative
which has the highest Internal Rate of Return
(IRR) where IRR is defined as interest rate which
causes the net present value to be equal 0

Engineering Economics Foundations


For profit decision analysis
There are frequently short term budget
constraints whithin a business that prevents
the organization from investing in all projects
with a positive NPV
In most of these cases the cash flow in the
first year will be negative (followed by a few
additional negative years), then several years
with positive cash flow

Engineering Economics Foundations


For profit decision analysis

Engineering Economics Foundations


For-profit
Decision
Making
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life

Investing in new or
modified software
involves a risk

Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accounting
Income Taxes

Minimum Attractive
Rate of Return MARR
- the lowest IRR that
owners of the business
would consider to be a
good investment

Engineering Economics Foundations


For profit decision analysis - MARR
In a for-profit environment the investment will be
beneficial to the business if the net present value
(NPV) of the cash flow will be greater then zero:
=

=
(1 + )
=0

Where is the cash flow in year t, n is the


duration of teh cash flow in the years, and i is the
minimum attractive rate of return (MARR)

Test your understanding #13


In an analysis and determination of an
organizations MARR (Minimum Attractive Rate
of Return) which of the following issues should
be considered ?
A) MARR does not apply to for-profit organizations
B) If a proposal is elective, MARR may be set lower
C) As the number of proposal rises, MARR must be
increased
D) MARR should be set at least to the highest interest rate
for low-risk investments

Test your understanding #14


Given a before-tax MARR of 17% and an
effective income tax rate of 20% , what is
the after-tax MARR ?

A) 13.6%
B) 17%
C) 11.7%
D) 3.4%

MARR after tax = MARR before tax * (1 eff.inc.tax rate)

MARR after tax = 17% * (1 20%) = 0,136

0,136 *100 = 13,6%

Test your understanding #15


Given a after-tax MARR of 18% and an
effective income tax rate of 22% , what is
the before-tax MARR ?

A) 13.6%
B) 12.3%
C) 11.7%
D) 23.1%

MARR after tax = MARR before tax /(1 eff.inc.tax rate)

MARR after tax = 18% / (1 22%) = 0,2307

0,2307 *100 = 23,1%

Engineering Economics Foundations


For-profit

Planning
horizon
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life
Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accounting
Income Taxes

Consistent time span


that will be used to
compare two or more
proposals

Engineering Economics Foundations


For-profit Planning horizon
Definitions and formulas:
BAC (Budget at Completion) total budget
allocated to the project
ETC (Estimate to Complete) - estimated cost
to complete remaining of the project
EAC (Estimate at Completion) estimated
cost of the the project at the end of the
project

Engineering Economics Foundations


For-profit Planning horizon

Definitions and formulas:


AC (Actual Cost) total amount today
CPI (Consumer Price Index) measures changes
in the price level of a market basket of consumer
goods and services purchased by households

EAC = BAC/CPI
ETC=EAC-AC

Test your understanding #16


You are the project manager for a software redesign
project. The customer asked you for a forecast for the
cost of project completition. The project has a total
budget of 80.000,00 EUR and CPI of 0.95. The project
has spend 25.000,00 EUR of its budget. How much
more money do you plan to spend on project ?

A) 55.000,00
B) 57.894,00
C) 84.210,00
D) 109.210,00

EAC = BAC/CPI
EAC = (80000 25000) / 0,95
EAC = 57894

Engineering Economics Foundations


For-profit

Replacement
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life
Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accounting
Income Taxes

At some point of life


of an asset the owner
compares costs of
upkeep with costs
and
benefits
of
replacement

Engineering Economics Foundations


For-profit Replacement
Process is essentaly the same as making a
choice between proposals, for example:
Keep a legacy system
Develop a new system
Additional economics factors:
Sunk costs (spent on legacy system before)
Salvage value (the estimated sale value of an
asset)

Engineering Economics Foundations


For-profit

Inflation
For profit decision
For-profit Decision
Making

analysis
MARR

Inflation
(deflation)
is
measured using a price index:

Economic Life

Price Index now=


(Price now/Price then)
x 100

Planning horizon
Replacement and
Retirement Decisions

Annual inflation rate

Inflation

(0 1 ) /1 x 100%

Depreciation
General Accounting
and Cost Accunting
Income Taxes

0 current average price


current average price a yer ago

Test your understanding #17


Assume that a software development price
index in 2013 was 214.537 and in 2014 the
index was 218.056. What was the software
development inflation rate between 2013
and 2014 ?

A) 1.01 %
B) 1.6 %
C) 1.8 %
D) 2.0 %

((PO P1)/P1) * 100


218.056-214.537 * 100 = 1,6%

Engineering Economics Foundations


For-profit

Depreciation
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life

Assets are loosing value over


time

Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accounting
Income Taxes

Actual
Depreciation
Depreciation
Accounting

Straight Line
Declining
Balance

Engineering Economics Foundations


For-profit Depreciation
Straight-line depreciation is a value-time
function that assumes the asset looses at a
constant rate over its life time
value
Salvage
value

time

Engineering Economics Foundations


For-profit Depreciation
In this example piece of equipment was
purchased for 12.000,00 EUR, useful life is
estimated to be five years.
Year

Current value

Depreciation

Book value
12.000,00

12.000,00

2.000.00

10.000,00

10.000,00

2.000.00

8.000,00

8.000,00

2.000.00

6.000,00

6.000,00

2.000.00

4.000,00

4.000,00

2.000.00

2.000,00

Test your understanding #18


A set of servers cost 22.500,00 EUR, have a
five year useful life, and expected salvage of
500,00 EUR. What is a depreciation amount
per year?

A) 3.750,00 EUR
B) 4.500,00 EUR
C) 3.667,00 EUR
D) 4.400,00 EUR

SALVAGE = ACC.VALUE - DEPRECIATION


500 = 22500 - DEPRECIATION
DEPRECIATION = 22000, t = 5 years
ANNUAL = DEPRECIATION/t =
22000/5 = 4400

Engineering Economics Foundations


For-profit Declining balance
Asset losses value as fixed percentage of its
remaining value of its lifetime

value
Salvage
value

time

Test your understanding #19


Whats true about this table ?
Year

Book value at the


beginning of year

Depreciation
expense

Accumulated
depreciation

Book value at
the end of the
year

17.000,00 EUR

3.000,00 EUR

3.000,00 EUR

14.000,00 EUR

14.000,00 EUR

3.000,00 EUR

6.000,00 EUR

11.000,00 EUR

11.000,00 EUR

3.000,00 EUR

9.000,00 EUR

8.000,00 EUR

8.000,00 EUR

3.000,00 EUR

12.000,00 EUR 5.000,00 EUR

5.000,00 EUR

3.000,00 EUR

15.000,00 EUR 2.000,00 EUR

A) It represents a declining balance value-time function


B) It is a straight line depreceation
C) The sunk cost is 15.000,00 EUR
D) The physical depreciation indicates it is not software

Engineering Economics Foundations


For-profit

Inflation
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life

General accounting is the


process of the recording the
financial history of an
organization

Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accunting
Income Taxes

Cost accounting is the part of


general accounting that gives
a company a basis to manage
the cost of production

Engineering Economics Foundations


For-profit

Inflation
For profit decision
For-profit Decision
Making

analysis
MARR
Economic Life
Planning horizon
Replacement and
Retirement Decisions
Inflation
Depreciation
General Accounting
and Cost Accunting
Income Taxes

Nothing in life is certain


except death and taxes ...

Engineering Economics Foundations


For-profit Income taxes
Taxes will have an impact on profitability
Taxes may be included as an expense cash
flow instance(s) in a proposals cash flow
stream
Income taxes are charged against an
organizations net income
An effective income tax rate is an average tax
rate over a range of incomes
Depreciation is deductible from gross revenue

Test your understanding #20


Suppose this table represents income tax in
Slovakia. If a company has a taxable income of
42.375 EUR what is the tax liability ?
Corporations tax
able income
34.401,00 EUR
>34.401 EUR
A) 6.536,19 EUR
B) 10.593,75 EUR

Marginal tax rate


19%
25%

Test your understanding #21


Suppose this table represents income tax in
Slovakia. If a company has a taxable income of
42.375 EUR what is the tax liability ? Assume that
first 34.401,00 EUR is taxed with 19% and next
amount with higher tax rate.
Corporations tax
able income
34.401,00 EUR
>34.401 EUR
A) 6.536,19 EUR
B) 10.593,75 EUR
C) 8.529,69 EUR

Marginal tax rate


19%
25%

Engineering Economics Foundations


For-profit Decision
Summary:
Recognize the primary factors considered by
for-profit as they make decisions about
acquiring software
Define the time value of money and calculate
present value, future value and net present
value
Explain and calculate break-even points and
explain the logic of optimization analysis
Differentiate among the techniques for
estimating software engineering projects