Engineering Economy – the analysis and evaluation of the factors that will affect the economic success of engineering

projects to the end

that a recommendation can be made which will ensure the best use of capital.
Consumer Goods and Services – directly used by people to satisfy their needs
Producer Goods and Services – used to produce consumer goods and services
Necessities – products/services that are required to support human life
Luxuries – products/services that are desired by humans
Demand – the quantity of certain commodity bought at certain price at a given place and time
Elastic Demand – results in greater than proportionate increase in sales
Inelastic Demand – produces a less than proportionate increase in sales
Unitary Elasticity of Demand – product of volume and price is constant
Perfect Competition – there is nothing to prevent additional vendors entering the market
Monopoly – opp of perfect composition/a product that is available from a single vendor that vendor can prevent the entry of all others in
the market
Oligopoly – few suppliers of product that will inevitably result in similar actions by others
Supply – Demand
Law of Demand – the higher the price the lower the quantity demanded
Law of Supply – the higher the price the higher the quantity supplied
Law of Diminishing Returns – either in increasing cost or by absolute quantity
Time value of money – defined as the time-dependent value of money stemming both from changes in purchasing power of money
(inflation or deflation)
Interest – amount of money paid for the use of borrowed capital
Simple Interest – calculated using the principal only
Ordinary Simple Interest – computed on the basis of 12 months, 30 days each or 360
Exact Simple Interest – computed in the exact number of days in a year
Cash Flow Diagram – graphical presentation of each flows
Compound Interest – calculated on the principal plus total amount of interest accumulated in prev. Periods
Rates of Interest:
• Nominal rate of interest – number of interest periods in one year
• Effective rate of interest – exact rate of principal during one year
Discount – interest paid in advance
Inflation – increase in the prices for goods and services
Equation of values – obtained by setting the sum of the values on a certain comparison
Continous compounding and discrete payments
• Discrete compounding – compounded at the end of each finite-length period
• Continous compounding – cash payments occur once per year but compounding continously throjghout the year
• Capitalized cost – sum of the first cost and present worth of all cost
• Amortization – method of repaying a debt
Annuity – series of equal payments occuring at equal periods
Types • Ordinary – payments are made at the end of each payment period
• Deferred – payment of the first amount is deferred a certain number of periods
Annuity due – payments are made at the start of each period
Perpetuity – payment period extend forever
Value – present worth of all future profits
Market value of a property – equal advantage that is under no compulsion to buy or sell
Utility or use-value of a property – property is worth to the owner as an operating unit
Fair value – determined by a disinterested third party in order to establish a price that is fair
Book Value/Depreciated – worth of property as shown in the records of enterprise
Salvage/Resale Value – obtained from the sale of property after used
Scrap value – amount of property that would sale for of diposed off as junk
Depreciation – decrease in the value of physical property
Purposes:
> To provide for the recovery of the capital
> To enable the cost of depreciation to be charged to the cost of products
Types
• Physical – due to the lessening of the physical ability of property to produce
• Functional – due to the lessening in demand for function which property was designed to render
Depreciation due to changes in price levels – almost impossible to predict
Depletion – decrease in value of property due to gradual extraction
Physical and economic life physical life of property – length of time during which is capable of performing the function
Economic life – length of time during which property may be operated at a profit
Requirements of a Depreciation Method
1. It should be simple.
2. It should recover capital.
3. The book value will be reasonably close to the market due at any time.
4. The method should be accepted by the Bureau of Internal Revenue.
Straight line method – directly proportional to the age of property
Sinking fund method – established in which funds will accumulate for replacement
Declining balance method (DBM) – annual cost of depreciation is fixed percentage of the salvage value
Double declining balance method (DDB) – salvage value is not subtracted from the first cost
Sum of the years digit method (SYD) – provides rapid depreciation during early years of life of property
Service Output – total depreciation is directly proportional to the quantity of output of property
Valuation/Appraisal – process of determining the value of a certain property
Intangible asset – not physical in nature
Goodwill – business has earned through the favorable condition and patronage
Franchise – intangible item of value arising from exclusive right of company
Going value – intangible value in which company will remain in business indefinitely/still profitable
Organization cost – amount of money spent on organizing business
CAPITAL FINANCING
• Equity capital or ownership funds – supplied by the owners of enterprise taht a profit will be earned
• Borrowed funds capital – fixed rate of interest must be paid as well as the debt at specified time
TYPES OF BUSINESS ORG.
• Individual Ownership – wherein a person uses his or her own capital to establish a business
Advantage of the Individual Ownership
1. It is easy to organize.
2. The owner has full control of the enterprise.
3. The owner is entitled to whatever benefits and profits that accrued from the business.
4. It is easy to dissolve.
Disadvantages of the Individual Ownership:
1. The amount of equity capital that can be accumulated is limited.
2. The organization ceases upon the death of the owner.
3. It is difficult to obtain borrowed capital, owing to the uncertainty of the life of the organization.
4. The liability of the owner for his debts is unlimited.
• Partnership – association of two or more persons for the purpose of engaging in business
In a business for profit.
Advantages of the Partnership
1. More capital may be obtained by the partner spooling their resources together.
2. It is bound by a few legal requirements as to its accounts, procedures, tax forms, and other items of operation.
3. Dissolution of the partnership may take place at anytime by mere agreement of the partners.
4. It provides an easy method whereby two or more persons of differing talents may enter into business, each carrying those burdens that
he can best handle.
Disadvantages of the Partnership
1. The amount of capital that can be accumulated is definitely limited.
2. The life of the partnership is determined by the life of the individual partners. When any partner dies, the partnership automatically
ends.
3. There may be serious disagreement among the individual partners.
4. Each partner is liable for the debts of the partnership.
• Corporation – distinct legal entity; allowing to conduct various business activities just like an individual.
Advantages of the Corporation
1.It enjoys perpetual life without regard to any change in the person of its owners, the stockholders.
2. The stockholders of the corporation are not liable for the debts of the corporation.
3. It is relatively easier to obtain large amounts of money for expansion, due to its perpetual life.
4. The ownership in the corporation is readilytransferred.
5. Authority is easily delegated by the hiring of managers.
Disadvantages of the Corporation
1. The activities of a corporation are limited to those stated in its charter.
2. It is relatively complicated in the formation and administration.
3. There is a greater degree of governmental control as compared to other types of business organizations.
• Capitalization of corporation - acquired throight the sale of stock
> Common Stock – with no special guarantees in return
> Preffered Stock – guaranteed a definite dividend on their stock
Methods of Bond Retirement
• corporation may issue another set of bonds equal to the amount of for redemption
Bond Value – present worth of all future amounts
Rate of return method (ROR) – masures the effectiveness of an investment
Greather than desired ROR, invesment is justified
Less thandesired ROR, not justified
Annual worth method (AW) – minimun required profit
Present worth method (PW) – if PW is equal to or greater than zero, it is justified economically
Future worth method (FW) – all cashflows are compounded forward to a reference point in time
Payback (Payout) method – commonly defined as the length of time required to recover for the first cost of an investment
The rate of return on additional investment period
The annual cost (AC) method
The equivalent uniform of annual cost (EUAC) method
The present worth cost (PWC) method
Capitalized method
Payback or payout method
Type of Costs
• Fixed costs – costs that remain constant
• Variable costs – costs that vary with output of an enterprise
• Increment costs – arise as the result of a change operations
• Marginal costs – additional of producing one or more product
• Sunk costs – money that was spent and cant be recovered due to certain reason