EECE 450 — Engineering Economics — Formula Sheet

Cost Indexes: Ordinary Geometric Gradient Annuity:

Cost at time A Index value at time A 1 − (1 + g ) n (1 + i ) − n 
= P = A1  ; i ≠ g
Cost at time B Index value at time B i−g
 
Power sizing: nA1
x
P= ;i = g
Cost of asset A  Size (capacity) of asset A  (1 + i )
= 
Cost of asset B  Size (capacity) of asset B   (1 + i ) n − (1 + g ) n 
F = A1  ; i ≠ g
x = power - sizing exponent  i−g 
Learning Curve: F = nA1 (1 + i ) n −1 ; i = g
TN = Tinitial × N b A1 = payment in first period (end)
log(learning curve rate) g = periodic rate of growth
b=
log 2 P, F , i, n as above for compound interest
TN = time to make Nth unit
Simple Annuity Due:
Tinitial = time to make first unit 1 − (1 + i ) − n 
N = number of finished units P = A  (1 + i )
 i 
b = learning curve exponent
 (1 + i ) n − 1 
Simple Interest: F = A  (1 + i )
Interest earned on amount P : I = Pin  i 
Maturity value : F = P (1 + in) A = cash amount (beginning of period)
i = interest rate per time period P, F , i, n as above for compound interest
n = number of time periods Nominal, Periodic, Effective Interest Rates:
r
Compound Interest: i=
m
F = P(1 + i ) n
F = future value
(
(1 + ieff ) = 1 + mr )m
P = present value r = nominal interest rate per year
i = periodic interest rate m = number of compounding periods per year
n = number of periods ieff = effective interest rate (compounded annually)
i = periodic interest rate
Ordinary Simple Annuity:
1 − (1 + i ) − n  Equivalent Interest Rates:
P = A  (1 + i p ) p = (1 + ic ) c
 i 
i p = interest rate for payment period
 (1 + i ) n − 1 
F = A  p = number of payment periods per year
 i 
ic = interest rate for compounding period
A = periodic payment (end of period)
c = number of compounding periods per year
P, F , i, n as above for compound interest
Ordinary General Annuity:
Ordinary Arithmetic Gradient Annuity:
1 − (1 + i p ) − n 
1 n  P = A 
Aeq = G  − 
 
n ip
 i (1 + i ) − 1 
 (1 + i ) n − in − 1   (1 + i p ) n − 1 
P = G  F = A 
2
 i (1 + i )
n
  ip 
Aeq = equivalent periodic payment i p = interest rate for payment period
G = gradient amount (periodic increment) n = number of payment periods
P, i, n as above for compound interest P, F , A as above for annuities

Prepared by Ron Mackinnon, University of British Columbia, © 2008. 7-Feb-08

Perpetual Annuities: Sum-of-Years’-Digits (SOYD):
A SOYD = N(N+1)/2
Ordinary : P = Annual charge: dt = (B − S)(N − t + 1)/SOYD
i
Declining balance (DB):
A A D= proportion of start of period BV that is depreciated
Due : P = (1 + i ) = + A
i i Annual charge: dn = BD(1–D)n–1
A Book value at end of period n: BVn = B(1-D)n
Geometric Growth : P = ;i > g
i−g Capital Cost Allowance (CCA):
d= CCA rate
P, A, i, g as above for annuities
UCCn= Undepreciated capital cost at end of period n
Investment Criteria: Annual charge: CCA1 = B(d/2) for n = 1;
CF1 CF2 CFn CCAn = Bd(1–d/2)(1–d)n–2 for n ≥ 2
NPV = CF0 + 1
+ 2
+ ... + UCC at end of period n: UCCn = B(1–d/2)(1–d)n–1
(1 + r ) (1 + r ) (1 + r ) n
 BdTC  1 + i 2 
NPV = net present value PV(CCA tax shields gained) =   
 i + d  1+ i 
NFV = CF0 (1 + r ) n + CF1 (1 + r ) n −1 + ... + CFn
 SdTC   1 
NFV = net future value PV(CCA tax shields lost) =   
 i + d   (1 + i )N 
NPV
EACF = equivalent annual cash flow = TC = firm' s tax rate; i = discount rate
 1−(1+ r ) − n 
 r 
Investment Project Cash Flows:
CF j = cash flow at time j Taxable income = OR−OC−CCA−I
n = lifetime of investment Net profit = taxable income ×(1−T)
r = MARR = minimum acceptable rate of return Before-tax cash flow (BTCF) = I+CCA+taxable income
After-tax cash flow (ATCF) = Net profit + CCA + I
CF1 CF2 CFn
0 = CF0 + + + ... + = (Taxable income)×(1−T) + CCA + I
1 2
(1 + i ) (1 + i ) (1 + i ) n = (BTCF − I − CCA)(1 −T) + CCA + I
i = IRR = internal rate of return = (OR − OC)(1 −T) + I(T) + CCA(T)
Net cash flow from operations
PV(neg CFs, e fin ) × (1 + i ′) n = FV(pos CFs, e inv )
= ATCF – I – DIV
i ′ = MIRR = modified internal rate of return = (OR − OC)(1−T) + I(T) + CCA(T) − I − DIV
e fin = financing rate of return = (OR − OC − I)(1−T) + CCA(T) − DIV
e inv = reinvestment rate of return = Net profit + CCA − DIV
OR= operating revenue; OC= operating cost
PV(positive cash flows) I= interest expense; DIV = dividends; T= tax rate
Benefit - cost ratio, BCR =
PV(negative cash flows) Net cash flow = Net cash flow from operations
Probability: + New equity issued + New debt issued
+ Proceeds from asset disposal − Repurchase of equity
w1S1 + L + wk S k
E( X ) = Weighted average = − Repayment of debt (principal) − Purchase of assets
w1 + L + wk
 dT 1 + i 2 
wi = weight for Scenario i Net capital investment = B 1 − C 
 i + d 1+ i 
Si = value of X for Scenario i
 dT   1 
E( X ) = µ X = expected value of X = ∑ P( x j ) x j Net salvage value = S 1 − C   
 i + d   (1 + i )N 
all j

Var ( X ) = variance of X = ∑ P( x j )( x j −µ X ) 2 Inflation:

(1+i) = (1+i′)(1+f)
all j
P ( x j ) = Probability( X = x j ) i = i′ + f + (i′)(f)
i= market interest rate; i′= real interest rate
Depreciation: f= inflation rate
B= initial (purchase) value or cost basis
S= estimated salvage value after depreciable life Weighted Average Cost of Capital (WACC):
D E
dt= depreciation charge in year t WACC = × (1 − TC )id + × ie
N= number of years in depreciable life V V
t V = D+E
Book value at end of period t: BVt = B − ∑ di D= market value of debt; E= market value of equity
i =1 V= market value of firm
Straight-Line (SL): id= cost of (rate of return on) debt
Annual charge: dt = (B – S)/N after-tax cost of debt: idt = id(1–T)
Book value at end of period t: BVt = B − t×d ie= cost of equity

Prepared by Ron Mackinnon, University of British Columbia, © 2008. 7-Feb-08