Engineering Economics Revision

‫ أسئلة وردت في امتحانات السنين السابقة‬-1

Types of Market Structure
Monopoly Oligopoly
Only 1 supplier has control over an A few large firms offer the same
entire market for a good or service. product & compete aggressively for
market dominance.
Ex: Some countries have only 1 water or Ex: Telecommunications & petroleum
electricity supplier. companies.
Perfect Competition Monopolistic Competition
Many buyers & sellers of a product Many buyers & sellers, but each
(which isn’t unique; due to its firm sells a branded product.
availability).
Ex: Agricultural markets. Ex: Refrigerator producers.

Types of Economy [Economic Systems]

Market Command
Individuals own & operate Government owns & operates
production factors. production factors.
Traditional Mixed
Based upon customs & traditions, • Has features of both market &
(e.g. agriculture & hunting). command economies.
• Production is shared between
private & public sectors.
Law of supply & demand:
“If there’s a low supply & a high demand, the price will be high. If there’s
a great supply & a low demand, the price will be low.”

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 Break-Even point Payback period
It’s a point where total revenue It’s the period of time needed for
equals total costs (TR=TC). an investment's profit to equal its
i.e. There’s no net gain nor loss. initial cost.

Interest Rate Rate of Return

It's a percentage paid over a time It's more general & shows how
period & is always a result of much money is earned on any kind
lending money. of investment.

Depreciation:
It’s a decrease in an asset’s value because of age, wear, or obsolescence.
(A machine is “obsolete” if it’s no longer needed or useful)

Why is depreciation considered important to engineering economy?

• Because it’s a tax-allowed deduction included in tax calculations
in almost all industrialized countries.
• Because it’s a tax-deductible expense and reduces tax cost.
How does depreciation affect a company's cash flow?
Depreciation reduces tax cost, so it has a +ve impact on cash flow.

‫ بقية األسئلة‬-2
What would be manufacturing company’s objectives?
• Minimize manufacturing & distribution costs.
• Maximize customer service.
Mention the steps to establish the objectives of an organization.
1) Establishing the objectives & goals.
2) Expert judgment & group consensus methods.
3) Weighing the objectives for their importance in decisions.

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Accounting: It’s the keeping or preparation of the financial records,
the analysis, verification and reporting of such records.
Cash Inflows Cash Outflows
• Indicated by a + sign. • Indicated by a + sign.
• Are the revenues, incomes, and • Are the costs, expenses, and taxes
savings generated by project and caused by projects and business
business activity. Cash flow activity.
Net Cash Flow: Cash Inflows – Cash Outflows.

End-of-period assumption:
Funds flow at the end of a given interest period.
Mention some of the major financial statements used by accountants and
business owners.
• Balance sheets • Income statements • Statement of cash flows
• Statement of stockholders' equity
What’s the importance of a balance sheet?
It shows what a company owns & what it owes to other parties.
An alternative is a stand-alone solution for a given situation.
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*Interest is the fee paid to use someone else’s money.
• It’s the difference between an ending amount of money & the
beginning amount. If the difference is zero or negative, there
is no interest.
*The Principal is the 1st deposit in a saving account.
Simple Interest Compound Interest
It’s an interest paid only on the It’s the addition of interest to the
principal. principal sum of a loan or deposit.
(i.e. interest on interest)

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*Equivalence occurs when different cash flows at different times are equal
in economic value at a given interest rate.
*Nominal interest rate/year (r) is the annual interest rate without
considering the effect of any compounding. (e.g. r = 12%)
*Interest rate/period (i) is the nominal interest rate per year divided by
the number of interest compounding periods.
(e.g. monthly compounding: i = 12% /12 months per year = 1%).
*Effective interest rate/year (ieff /EIR) is the annual interest rate by
considering the effect of multiple compounding periods in the year.
(e.g. r = 12% compounded monthly = 12.68% year compounded yearly.)
*Continuous Compounding occurs when the time intervals between “times
when interests is paid” are infinitely small.
*Time Value of Money:
money grows into larger future sums and is smaller in the past.
*Annuity are equally-spaced cash flows of equal size.
Ordinary Annuity (Deferred) Annuity Due
It has cash flows that occur at the It has cash flows that occur at the
end of each period. beginning of each period.
*An annuity due is > an equivalent ordinary annuity;
because interest will compound for an additional period.
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#Depreciation is a noncash cost that requires no exchange of dollars.
#Depreciation may be performed for two reasons or purposes:
Book Depreciation Tax Depreciation
It’s the use of depreciation by a It’s the use of depreciation in tax
corporation or business for internal calculations per government
financial accounting. regulations.

#First cost or basis:

It’s the delivered and installed cost of the asset including purchase price,
installation fees, and any other depreciable direct costs.
#A Recovery period is the depreciable life (n) in years.
Market value Book value
It’s the estimated amount for which It’s the remaining un-depreciated
an asset can be sold on the open investment, and is determined at
market. the end of each year.
Value to the owner Salvage value (S)
It's the value of a specific item to It’s the estimated resale value of an
an investor based on his asset at the end of its useful life.
requirements and expectations.

*Because of the structure of depreciation laws, the book value and market
value may be substantially different; For example:
Commercial Building IT Equipment
Market Value Increases. Much lower
B o o k Decreases Much higher; due to rapidly
V a l u e with time. changing technology.
#Depreciation rate or recovery rate (dt) is the fraction of the 1st cost
removed by depreciation each year.

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#There are 2 types of property for which depreciation is allowed:
Personal Property Real Property
It’s the income-producing, tangible Includes real estate and all
possessions of a corporation. improvements.
• vehicles. • construction assets. • office buildings. • factories.
• manufacturing, computer, or • warehouses. • apartments.
chemical equipment. • Land itself is considered so, but
it’s not depreciable.

#Half-year convention:
“Assets are placed in service or disposed of in midyear, regardless of
when these events actually occur.”
#Classical Depreciation Methods:
Straight Line (SL) Declining Balance (DB)
The simplest and It accelerates the write-off of asset value;
best-known because the annual depreciation is determined by
depreciation method. multiplying the book value at the beginning of a
year by a fixed % d.
• The amount of depreciation decreases each year.
• DB applies a constant depreciation rate to the
property's declining book value.
Sum-Of-Year Digits (SOYD)
This method results in:
• larger charges than (SL) during an asset's early years.
• Smaller charges as the asset nears the end of its depreciable life.
“In 1981, all these classical methods were disallowed as acceptable procedures for
income tax purposes and replaced by the Accelerated Cost Recovery System (ACRS).”