:|:|:::: COURSE | ENGINEERING ECONOMICS

1. Analysis before launching an product

a. Technical
b. Social
c. Financial
2. Economic environment (6)
3. Financial analysis (10)
a. Time value of money
b. Interest rate
c. Various factor
d. Present worth analysis
e. Annual worth analysis
f. Internal rate of return
g. Benefit cost ratio
h. Selection between alternative
i. Capitalized cost
j. Gradient analysis
4. Depreciation and valuation
5. Break even analysis
6. Linear programming
Optimal allocation of scarce resources.
a. Graphical
b. Simplex
c. Duality Not part of course
d. Transportation
7. Business organization & market
a. Types of organization
i. Single ownership
ii. Partnership
iii. Corporation company
b. Operation of organization in market
i. Perfectly competitive
ii. Monopolic
iii. Oligopolic
8. Financial accounting
a. Income statement
b. Balance sheet
c. Financial statement
9. Books
a. Engineering economics by Tarquin
b. Engineering economics by Paul degammo
c. Mathematical economics by A. Chang
d. General economics by Samaulso (dictionary)

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:|:|:::: INTRODUCTION
1. Microeconomics
a. Cost
b. Profit
2. Macroeconomics
a. Inflation
b. Unemployment
3. Economic activity
a. Two sector model
i. Consumer sector
ii. Business sector
b. 3 sector model
i. Government
ii. Consumer
iii. Business
c. 4 sector model
i. Government (allows import/export)
ii. Business
iii. Consumer
iv. International market
4. Flow chart
a. Input market -> finished goods
5. Basic inputs
a. Land
b. Labour
c. Capital
d. Organization
6. Five M’s of management
a. Money
b. Material
c. Machinery
d. Manpower
e. Management
7. Table: Input – agent
8. Demand & supply
a. Shortage (D>S; loss of consumer)
b. Surplus (D<S; loss of business)
9. Interest & profit
10. Principal amount & interest
11. Goods & services (flow chart)
a. Consumer goods & services (directly consumed)
b. Producer goods and services (used in further processing)

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 12. Goods and services
a. Normal (aka superior goods)
b. Inferior
c. Substitute
d. Compliment
13. Demand
a. Demand curve
b. Law of demand
c. Quantity demand (Qd) : function of Qd=a-bP
i. Price
ii. Price of related good
iii. Consumer income
iv. Consumer taste (fashion)
v. Expectation (view of price in future)
d. Quantity supply (Qs) : function of Qs=-c+dP
i. Price
ii. Price of related good
iii. Price of input
iv. Technology
v. Number of firms
vi. Expectation
 ↑ Qs w hen ↓Future price (clearance sale)
 ↓ Qs w hen ↑Future price (hoarding)
e. Equilibrium
i. Qs = Qd
ୟୢିୠୡ
ii. Qs =
ୠାୢ
14. Elasticity
a. Elasticity of demad (Ed)
i. Strongly elastic Ed>1
ii. Weakly elastic Ed<1
iii. Unitary elastic Ed=1
iv. Special cases
 Perfectly elastic
 Perfectly inelastic
v. Numerical: Elasticity of demand

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:|:|:::: LINEAR PROGRAMMING
“Optimal allocation of resources in a competing environment.”

1. Limitations
a. Financial constraints
b. Raw material constrains
c. Machine constraints
2. Maximize
a. Revenue
b. Production
c. Profit
3. Minimize
a. Cost
b. Usage of inputs
4. Steps
a. Initial program (Qualitative -> Quantitative)
i. Objective function
ii. Structural constraints
iii. Non-negative constraints
b. Method (mechanism)
c. Optimal program (quantitative)
d. Result (Qualitative result: textual)
5. Optimal program (either or)
a. Maximize profit
b. Minimize cost
6. Constrains
a. Technicalities ( X+2Y )
b. Capacities ( ≤80 )
c. Non-negative constraints
7. Methods of linear programming
a. Graphical (two variables only)
b. Simplex (two or more variables)
c. Duality Master’s course
d. Transportation
8. Simplex method
a. Unit matrix
b. Square matrix
c. Row column operations

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 9. Graphical method
a. Initial program
i. Objective function (maximization/ minimization)
ii. Structural constraints
iii. Non-negative constraints
b. Extreme points for each constraint
c. Graph plot
d. Feasible area for each constraint
e. Feasible area feasible points
f. Optimal point  result
g. Special cases
i. Degenerate case (corner point solution)
ii. Multiple optimal solution case
iii. Non feasible area case
10. Simplex approach
“An iterative optimizing technique of linear programming for more complicated problems with many
variables.”
a. Steps
i. Develop initial program
ii. Rearrange initial program for matrix development
 Minimization: introduce dummy variables
iii. Tableau construction
 Select pivot column (highest negative value column)
ୡ୭୬ୱ୲ୟ୬୲
 Mark pivot elements (minimum )
୰ୣୱ୮ୣୡ୲୧୴ୣୣ୪ୣ୫ ୣ୬୲୭୤୮୧୴୭୲ୡ୭୪୳୫ ୬
 Mark pivot row (contains pivot element)
୮୧୴୭୲୰୭୵
 Develop next tableau ( )
୮୧୴୭୲ୣ୪ୣ୫ ୣ୬୲
 Make objective function row zero
iv. Conduct feasibility test
 Minimisation (minimum one negative value in objective function row)
 Maximisation (minimum one positive value in objective function row)
v. Optimality condition
 Maximisation: All positive value or zero in objective function row
 Minimisation: All negative value or zero in objective function row
a. Convert tableau into feasible tableau
(R1 1 =∑௡ଶ R x …‘‡ˆϐ‹…‹‡–of dummy variable x Rଵ)
vi. Extract identity matrix from tableau
b. Special cases
i. Degenerate case
 more than one pivot element
 zero is constant column (except first row)
ii. Non-feasible area
 Constant column repeats Non-improving case
 Negativity shifts in any other column

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:|:|:::: FINANCIAL ANALYSIS
“It considers the time value of money.”

1. Money value
a. Nominal
b. Real (used in financial analysis)
2. Cash flow diagram
a. Inflow ↑
b. Outflow ↓
3. Factors affecting value of money
a. Time
b. Interest rate
4. Interest (excess rate principle)
a. Simple interest
b. Compound interest
c. Nominal interest
d. Composite interest
5. Factors to convert money from one period to another

{
ଵ
a. Discount factor future to present ܲ=Fx
(ଵା୧)ొ
b. Reciprocal of discount factor present to future ‫ = ܨ‬P x ( 1 + i) ୒

(ଵା୧)ొ ିଵ

{
c. Annuality factor annual to present ܲ=Ax
୧(ଵା୧)ొ
୧(ଵା୧)ొ
d. Capital recovery factor present to annual ‫=ܣ‬Px
(ଵା୧)ొ ିଵ

{
୧
e. Sinking fund factor future to annual ‫=ܣ‬Fx
(ଵା୧)ొ
(ଵା୧)ొ ିଵ
f. Reciprocal of sinking fund annual to lump sum ‫=ܨ‬Ax
୧

(ଵା୧)ొ ିଵ

{
ୋ ୒
g. Gradient factor gradient to present ܲ= x +
୧ ୧(ଵା୧)ొ (ଵା୧)ొ
ୋ (ଵା୧)ొ ିଵି୒୧
h. Gradient to annual gradient to annual ‫=ܣ‬ x
୧ ୧(ଵା୧)ొ ିଵ

6. Steps: Financial analysis

a. Enumerate (cost and benefit)
b. Evaluate (cost and benefit)
c. Discount net benefit (outcome)

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 7. Money evaluation
a. Present worth analysis
i. Net present value ܸܰܲ = ܹܲ ‫ ܤ‬− ܹܲ ‫ ≥ ܥ‬0
ii. Present worth cost analysis least cost ܹܲ ‫ ܥ ܹܲ = ܥ‬− ܹܲ ‫ܤ‬
 Different lives (take LCM of lives)

b. Annual worth analysis

“Simplifies annual instalment calculation. Useful for different or perpetual lives.”

i. Equivalent uniform annual benefit >0

ii. Equivalent uniform annual cost ݈݁ܽ‫ݐݏ݋ܿݐݏ‬
 Cash flow diagram
 PWNR
 EUAC one life cycle
ா௎஺஼
 Capitalised cost =
௜
 Total capitalised cost = ‫ݐݏ݋ܿ ݀݁ݏ݈݅ܽݐ݅݌ܽܥ‬− ܹܲ ேோ
c. Internal rate of return (IRR)
஻೙ ஼೙
i . Rate of interest at PWB-PWC=0 = ∑௡ଵ − ∑௡଴
(ଵା௜)೙ (ଵା௜) ೙
ii . Alternatives
 Independent (A or B) select project with highest IRR
 Mutually exclusive (incremental analysis technique)
ܽ
- EUAC (products x,y,z) ‫ܣ = ݎ‬% + (‫ܤ‬% − ‫ܣ‬%)
ܽ−(−ܾ)

i<r i>r

d. Benefit cost ratio ‫ܤ ܹܣ‬/‫ > ܥ ܹܣ‬1

i. Approaches
 Conventional


‫ܤ‬ ‫ܤܣ‬
= >0
‫ ܴܥ ܥ‬+ ܱ&‫ܯ‬

‫ݐݏ݋ܿ ݊݋݅ݐܽ݅ܿ݁ݎ݌݈݁݀ܽݐ݋ݐ = ܴܥ‬+ ‫݁݃ܽݒ݈ܽݏ ݊݋ݏݏ݋ܮ‬

‫ ܲ =ݐݏ݋ܿ ݊݋݅ݐܽ݅ܿ݁ݎ݌݁ܦ‬− ‫ܨ‬

Now

‫ܤ‬
=
‫ܥ‬

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  Modified

 A
‫ܤ‬
l = ‫ ܤܣ‬− ‫ ܤܦܣ‬− ܱ&‫ > ܯ‬0
‫ܥ‬
t ‫ܴܥ‬

e
Now
r
஻ ‫ ܤܣ‬−‫ܤܦܣ‬−ܱ&‫ܯ‬
n= ‫ܣ‬ >0
஼ (ܲ−‫ )ܨ‬ቂܲ,݅%,ܰ ቃ+ ‫)݅(ܨ‬
a
t
 Alternatives
- Independent (simple analysis)
- Mutually exclusive (incremental analysis)

‫ܤ‬ ∆‫ܤܣ‬
=
‫ܥܣܷܧ∆ ܥ‬

Now

௜(ଵା௜)ಿ
‫( × ܥ = ܥܣܷܧ‬ଵା௜)ಿ ିଵ

Tabulation

Ascending Annual AB/AC Compare ∆EUAC ∆B ∆EUAC/∆B

EUAC Benefit

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:|:|:::: DEPRECIATION
1. Assets worth goes down as
a. Tangible depreciation
b. Intangible amortisation
c. Natural depletion
2. Depreciation types
a. Normal depreciation
i. Physical (capacity)
ii. Functional (obsoletion)
b. Monetary depreciation
3. Terms
a. Booked value
b. Salvage value
c. Annual depreciation
d. Total depreciation
2. Depreciation calculation techniques Preferred for
a. Straight line method 1-10 years
௉ିௌ
i. Annual depreciation ‫ܣ‬. ݀݁‫= ݌‬
ே
ii. Total depreciation ܶ. ݀݁‫ܣ(݊ = ݌‬. ݀݁‫)݌‬
iii. Booked value ‫ܤ‬. ܸ = ܲ − ܶ. ݀݁‫݌‬௡
b. Sum of year digit method 10-20 years
i. Depreciation ‫ܦ‬௡ = (ܲ − ܵ)݀݁‫݌‬. ݂ܽܿ‫ݎ݋ݐ‬
ோ௘௩௘௥௦௘ ௬௘௔௥
ii. Depreciation factor ݀݁‫݌‬. ݂ܽܿ‫= ݎ݋ݐ‬
∑ ௬௘௔௥௦
iii. Booked value ‫ܤ‬. ܸ = ܲ − ( ܲ − ܵ) ݀݁‫݌‬. ‫ݒ݁ݎ‬
∑ ௥௘௩௘௥௦௘ ௬௘௔௥௦௧௜௟௟௡
iv. Depreciation reverse ݀݁‫݌‬. ‫= ݒ݁ݎ‬
∑ ௬௘௔௥௦
v. Total depreciation ܶ. ݀݁‫ ܲ = ݌‬− ‫ܤ‬. ܸ௡
c. Declining balance approach >20 years
i. Depreciation ‫ܦ‬௡ = ݇(‫ܤ‬. ܸ௡ିଵ)
ଵ/ே
ௌ
ii. k ݇= 1− ቀ ቁ
௉
iii. Booked value ‫ܤ‬. ܸ௡ = ܲ(1 − ݇) ௡
d. Double declining balance >20 years
i. Depreciation ‫ܦ‬௡ = ݇(‫ܤ‬. ܸ௡ିଵ)
ଶ
ii. kmax ݇௠ ௔௫ = ‫ݎ݋‬200%
ே
iii. Booked value ‫ܤ‬. ܸ௡ = ܲ(1 − ݇) ௡
e. Sinking fund
i. Depreciation ‫ܦ‬௡ = ( ܲ − ܵ) ܵ݅݊݇݅݊݃ ݂‫ݎ݋ݐ݂ܿܽ ݀݊ݑ‬
‫ܣ‬
= ( ܲ − ܵ) ቂ , ݅%, ܰ ቃ
‫ܨ‬
‫ܣ‬
ቂ‫ܨ‬,݅%,ܰ ቃ
ii. Total depreciation ܶ. ݀݁‫ ܲ = ݌‬− ܵ ‫ܣ‬
ቂ‫ܨ‬,݅% ,݊ቃ

iii. Booked value ‫ܤ‬. ܸ = ܲ − ܶ. ݀݁‫݌‬௡

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 ௉ିௌ
f. Production rate ݀݁‫݌‬/‫=ݐ݅݊ݑ‬
்.ை/௉
௉ିௌ
g. Hourly rate ݀݁‫݌‬/‫=ݐ݅݊ݑ‬
்.௛௥

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