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    12 views10 pages

    Economics Review

    Uploaded by

    Adriano Guedes

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    of 10
    Engineering Econ Review Erie Showalter, Ph.D., P.E Engineering Feon allows us to compare money spent or received (cash flows) in the future to an amount of money spent today. The most familiar example is an automobile Joan. Borrow $20,000 today to buy a car and pay it off in a series of 60 equal payments. How do they decide on the size of my payment? Engineering econ. As engineers we are constantly faced with decisions based on an investment today vs. a benefit in the future. Basics: Lori = the interest rate per interest period fhe nominal interest rate, often called r or APR (annual % rate) ffective interest rate n= number of compounding periods (often years, but not always) m = number of compounding periods in one year EOY = end of year (BOY is beginning of year) Payback period is the amount of time required to recoup your initial investment Return on investment is the interest rate that makes 2 investments equivalent PV=present value FV = future value Annuity (A) is a series of equal payments Gradient (G) is an increasing series, either arithmetic or geometric In the tables: n is the number of periods P is present value, F is future value, A is annuity, G is gradient ‘The P/F column is used to find (P)resent value given a (Future va ‘The P/A column is used to find (P)resent value given an (A)nnuity, ete Keys to success in solving most engineering econ problems: © Drawa cash flow diagram «Identify (P)resent values, (F)uture values, (A)nnuities, (ijnterest rate and (n)umber of periods (not all will be given) * Calculate the present value of each amount, or the annuity amount, or the future amount © Compare results Resource: hitp:/iwww.feexam.ou edu there are reviews of every area on the FE. Lonly used a few of the example questions here. (1+ im)" For example 9% nominal annual 38% effective. Effective interest rate vs. nominal. ic interest compounded monthly is (1+0.09/12)'*=1 = 0.0938 Another type is: X% annual growth with payments every Y years is an effective rate of (1+X)"-1. If costs grow by 3.5% every year, and we re-pave a road every 5 years, then the re-paving cost increases by (1+0.035)°-1 = 18.77% every 5 years. Cash flow diagram = a drawing that is used to help understand the size and timing of expenses and revenues. Be sure you are consistent: ie. all cash flows in to you should be in the same direction. Loan money today: get paid after 4 periods Borrow money today; pay back in 4 equal payments ‘Single payment now vs. single payment in the future, We expect our money to grow if we lend it, so a payment in the future should be larger than a payment today. It grows by (+i.)", On the other hand, if we know we will receive money in the future, we would accept less at the present instead. The reduction is the reciprocal of the last equation, (+e) Borrow $100 today at 4% interest. How much do you owe after 5 years? ($121.67) . #lodx (|.o4)? = 1217 walt ts i; ‘You win $1,000, payable one year from now, How much would you take today, instead, if interest is 6%? ($943.40) $1080 W/o Ga 4 tat One present payment vs. a uniforin serves of pave Be sure you understand what the cash flow diagram looks like, What happens when n—>0? —_tititt— d ? You borrow $100,000 today, tobe paid back in 10 equal payments atthe end of each year, at 6% interest. How much are the payments? ($13,590) | bot (M% Ub Dys) = $1,570" . One future payment wil EN ot payments Cash flow diagram (this one does not look “logical”), > ttt tt? @ You invest $10,000 at the end of each year for 5 years, H"i=4%, what is the value of the 54, 163), se (E/, al 4 - $10 (“a 4’ tye) 5 ILO d 4 2 ’ Arithmetic Gradients. Payments incre: cr decrease By 1 Gane amount each period. For example, $100 at the end of year one, $200 at the end of year 2, $300 at the end of year 3, ete. Cash flow diagram begins at EOY 2. You may see an arithmetic gradig top of an annuity. account at BOY 5' What is the present value iff i=6%? (85,005.85) [EoY | Receipt 0 L [$1,000 2 [$1,100 3 $1,200 $1000 4__ [81,300 3 [$1,400 124 Fw 42104 sivos(th, ble) i C+ $400 (Wy, 61h» Ry) = B87 78S Capitalized Costs, nso, When n becomes “very large,” assume that it goes'to infinity Future values generally go to infinity, but in many cases present values tend toward limit Capitalized costs go to Ali, A Vc z ' f no ce Maintenance on traffic lights costs $5,000 per year, and is expected to be required for a very long time. If i=6%, what is the capitalized cost? 5 pod 32 Iga, 299 Soe © PTZ#ETZ. Understand what the cash flow diagrams look like. If the problem cash flow diagram does not look like the cash flow diagrams of any of your cong you will have to use more than one step to find the answer. 5 BS & ' I just purchased a machine. It has a 2 year warranty. I can purchase an extendef warranty until the machine is 10 years old by making payments of $1000 per year, at the beginning of each year starting when the original warranty runs out, or by paying $7,000 today. Use (9.2048 an interest rate of 6% and determine which option is better 6 ee gt a 41060 "4 fhe bl) SOE thle Suu PAOD 04y Depreciation: Depreciation is the decrease in value of an‘asset. Straight line is the simplest form. The depreciation each year is equal to (Cost ~ Salvage)/life. Accelerated schemes are available, including MACRS. In this case the depreciation is equal to @ factor from the table times Cost Book Value: BV is the Cost minus accumulated depreciation. ‘What is the depreciation each year for a trailer that cost $10,000 new, has a life of 5 years anda savage value of 2.2007 Use traight ne depegiation What is the book valueafer2 years? 940, (9900-2000 ILY% 5 2N, 10000-1600 = 42400 BV). BHod-IG00 #0802 MACKS (SIRO) $10,000 — per + BY +h YR 1 $10,00040.2 a deh team. Lz 293200 4B 2.00 = Example oro * rape x Oae aleoD ‘An amount P is invested at interest rate i per compounding period. F is the account ——— balance after n compounding periods. Select the formula that relates F to P. @ Ferrayh (B) F=P(+i)". <— ©) Perri @) PCy" A solar heating system costs $10,000, has an estimated life of 10 years and a scrap value of $1500. Assuming no inflation and an interest rate of 4%, what uniform annual amount rust be invested atthe end ofeach ofthe 10 ears in order to replace the snachine? A) $708 d 50 (©) $1000 4 (D) $1152 4g B500 An investment has infinite life and makes annual payments of $3000 for the first 5 years and $1600 per year thereafter. Using 6% interest per annum, egmpute the present worth of the annual disbursements. 300 (A) $15,000 B) $25,000 @__ $32,600 " $50,200 Leh pit) -Peostt Interest on a debt is 12% per year compounded monthly, Compute the races annual ge (48%) 1-012 Tet (D) 13.2% A more efficient heating system adds $7,500 to the cost of your project. Adding this $]200 per year. Ifthe discount rate is $7, about how long will it take to jal investment? . U nt + (A)6 years (B) 7 years (©)8 years (D)9 years (E) 10 years 1500 , yer 1200/08 = + 1200(08 Zz \260/ 06% + 2 |20D/ 08? = 4 2000s" * % (200/\.08" : (o [220/n. 08” = Probability: A culvert is required under a highway. If the highway is overtopped. it will cost $20k to repair. If i=6% and the life of each culvert is 20 years, which of the following is most economical? Cost new | Probability of overtopping inany ong year 24 inch RCP 20 0.20 x Zor: $4000 Ditby 4 fibox | $40,000 | 0.10% $ZoFe Zep) Type of culvert Twin 3 fiby 4 fibox | $60,000 | 0.05% *2DF® 4]O60_ $20,000 + Ph poo( PA, 24s, C%e) = “Lse1t SA pK 4 $2000 (e/a ,Zo%es, Lo" 4) 402431 Fok 4 1000 (t/a, ie =TLA1O Ifthe sum of $12,000 is borrowed and the detior arf A a pay the creditor $900 for ‘each year the loan is in existence, then, the simple interest is: I would have fo assume that the $12,0(bis paid hack at the end of the loan period 400. 0.0 < 15% F12,0> ‘A Sprawl Transportation Authority bond has par value of $5000 and term of 10 years. The bond pays 5% nominal annual interest on par value. Estimate the selling price of the bond if the market interest rate is 6%. a a 5 ASOOD ~ $2SD Aasnwaret (B) $5000 (© $7500 (D) $8000 BoD 17 250 9 [Owns Vv: 4150 (4 4, bi Dy) + 00 (hl vt De) oC bez ‘Two alternative investments have the cash flows indicated fh the table. At 6% interest, sshich alternative should be selected sd o set pm] ( m FO00CA Zs, 0%) ~ 1830 (fp 2yn jet) ’ $ z N tee (% 24", 66) 22530 ( Fh, Zye, bl) == At Consider two alternatives, A and B, having cash flows as shown in the figure. If the MARR is 8%, determine which altemative should be selected using the benefit cost \ eS « analysis method. + 420 : mfp ‘ zen sth Sn Bt) oD \ Break even analysis on the FE exam is most likely a simple problem with no discounting (no interest). If there is no interest rate, then it is simply a matter of comparing cost to income, where cost is usually fixed cost + variable cost*units and income is usually income per unit* units. Corp Ine. produces 4,000 robots per year. Their fixed costs are $1,000,000 per year, and the variable cost per robot is $2,500. The selling price is $10,000 per robot. Find the breakeven point and gross profit at this maximum capacity. $|DD0000 + *2600X = = 40,000 x % = 739 Gos toveir [m= P0Dx = Ke : (10% -2,500 4000 — Fc0oe00 = 4D aaon lor 1G,80D Bill Ding borrows $10,000 today from Dale Ight and another $15,000 at the beginning of year 5, The agreed interest rate is 6%, and the loan is to be repaid in full at the end of Year 9. What amount will Bill owe Dale to pay off the loan? Prdofpear Wis the beginning of year19, Compound Interest Factors 4%. | SINGLE PAYMENT UNIFORM PAYMENT SERIES ‘GRADIENT SERIES. | [Tenmet ran | Sig Gai Gone Bast | Gade ae j| | item’ | Sf seen dant” “neat | Unto rs (eR ree ea” So tor | Ses” or fing find P| Find A finda Foo find Fin P Gene Gren | Gun Guan? = GnanA® "Gena due a | Sep re loa One aa mA mie 1 1.049615 1.0000 1.010000 962 ° 2 Lbs Sage ‘ome Ssor 30g 28 3 BS kt9o mos aap X25 20 2 bo teas ss Sts te hea 56? $ Ta 8D 3G Sig ass 6 4.265 7903 150 1908 BON S.28 12.506 5 Be 599 ines “tees TRB. O02 1.068 8 hae) Bor “igs Ia8§ 93878 Bie 5 1s ous oats IMS uasts Das Hao 1 a8) 69580312008 Bat) " 15396496 ong Bas 8760 40377 2 Gor boae boos “Hos Sng. 28 B {66s “8008 “D601 “Io01— 16827938 Sass uo Ls osi7 ‘tay 8252 10.368 61962 1 Lebr wo te thas 69.335 9 6% Compound Interest Factors 6% 1 SWGLE aE Ton PRET SES] SS Tongaund—Pesen| Sang Catal Congas Pret | Grenadin | “Arnount Worth | Fund Recovery Aout! ‘worn | Uniform Present ee fini Fed P| Fini AF As fied Baa | fd ara Gen> Gens [Cher Gyab= Guna Gna | Gna Gene no | “te pe [one Sap re pa. | SA. “pe 1 10609434 1.0000 1.0600 ‘1.000 993 ° ° 5 TSS “aso ease "Sise bog as 390 3 tir gue Sit Sra Se 2673 Sot 2308 3 te Sort Sage esos Hasan 36 3358 tars tae 3d Sa] A212 wks 7.988 6 14197080434 0M TS 49TH ; soe fest That “tase SRD TR SHO 3 seem “010 “tein 9857 6210s aR > tees Soo. smo Lisd— agi 6802 S618 24577 a Ee u 1985268 668 ams] TAK katt 38.870 108 Bm ts teat ee ers Oso “ig sass $102 A8963 2261 Oi lume ols, 9s SSH SLT i397 30 "1000 82% 97928855 a | So 27 8 4 ¥ ip p00 #\5p00 i L084 1 410,200 (140.04) = [6,898 5 p00(I.04)” 20,018 (382 C ERING ECONOMICS HIN Factor Name Converts Simbel Formula Single Payment Compound Amount WP ein UF Pua con | Single Payment j a : 1 Present Worth PE Poa den cy. Uniform Series ae i Sinking Fund int ea Capital Recovery UU Pia | a ca | Compounet Amount toF sen 4 Wa. Pon werd Uniform Series . Present Worth WP given. me) Uniform Gradient a 1 ea wae wP aiven G PG. im Me inform Gradient ; I Uniform Gradient _ ue Uniform Series OMENCLATURE AND DEFINITIONS NON-ANNUAL COMPOUNDIN Fee aa as es ed ee B Benefit wall eal~ tore Co Gn BREAK-EVEN ANAL Combined interest at er interest period Gucci ae ee ee ery feldingall ofthe oer aucn constant tis posite fata || value for that variable that makes the two alternatives equally | Future worth, value, oF amount ii aban economical. This value isthe break-even point. Poon General inflation rate per interest period : | ee eee nee Break-even analysis is used to describe the percentage of | ' capacity of operation fr @ manufacturing plant at which | Foon terest rate per interest perio eee cal ee eae jones Annual effective interest rate aoe ; aa The payback period is the period of time required far the profit es ‘umber of compounding periods per year ‘or other benefits of an investment 10 equal the cost of the ose Number of compounding periods; or the expected life investment ofan asset Pou. Prosent worth, value, or amount INFLATION Frocoooe» Nominal annual intrest rate To account for inflation, the dollars are defiated by the general | ons Expected salvage value in year 1 inflation rate per interest period fand then they are shifted ‘over the time scale using the interest rate per interest period Subscripts i. Use a combined interest rate per interest period d far | Foo at time companing present worth values P and Net P eee The formula fortis >

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