Engineering Economics Revision Types of Market Structure Monopoly Oligopoly Only | supplier has control over an entire market for a good or service. Ex: Some countries have only I water or electricity supplier. A few large firms offer the same product & compete aggressively for market dominance. Ex: Telecommunications & petroleum companies. Perfect Competition Monopolistic Competition Many buyers & sellers of a product (which isn’t unique; due to its availability). Ex: Agricultural markets. Many buyers & sellers, but each firm sells a branded product. Ex: Refrigerator producers. Types of Economy [Economic Systems] Market Command Individuals own & operate production factors. Government owns & operates production factors. Traditional Mixed Based upon customs & traditions, (e.g. agriculture & hunting). Has features of both market & command economies. Production is shared between private & public sectors. Law of supply & demand: “Tf 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.”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 ie. 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. 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.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. *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. (ie. interest on interest)*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 = aoe /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.