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CSE/EE-301

Introduction

General Overview

Back Ground.

Intro & Importance.

Students attitude.

Attendance policy

Tests policy

Sessional marks policy.

Course Outline

Textbook: Engineering Economy

Sixtth Edition

By Leland Blank

Anthony Tarquin

Reference Book:

Engg Economy by E. Paul DeGarmo

Chapters (tentative)

Foundation of Engineering Economy

Factors: How Time and Interest Affect Money

Present Worth Analysis

Annual Worth Analysis

Rate of Return Analysis: Single Alternative

Rate of Return Analysis: Multiple Alternatives

Breakeven Analysis

Effect of Inflation

Depreciation Methods

After-Tax Economic Analysis

Engineering

It is a profession in which a

knowledge of the mathematical

and natural sciences gained by

study, experience, and practice is

applied with judgment to develop

ways to utilize, economically, the

materials and forces of nature for

the benefit of mankind

Engineering Economy Definition

Engineering economy involves formulating, estimating

and evaluating the economic outcomes when

alternatives to accomplish a defined purpose are

available.

Engineering economy is a collection of mathematical

techniques that simplify economic comparison.

A discipline that involves the systematic evaluation of

the cost and benefit of proposed technical projects.

Importance

For Engineering Activities

Government Agencies

For Individuals

Principles of Engineering Economy

Develop the Alternatives

Focus on the Differences

Use a consistent viewpoint

Use a common unit of measurement

Consider all relevant criteria

Make uncertainty explicit

Revisit your decisions

Role of Engineering Economy in

Decision Making

Techniques and Models of engineering economy

assists people in making decisions

The time frame of engineering economy is primarily

the future

Estimates involves the three essential element

Cash Flows

Time of occurrence

Interest rates

The actual value may differ from the estimated

value

Role of Engineering Economy

(Contd…)

Sensitivity Analysis is performed during the

engineering economic study.

Sensitivity analysis is concerned with the

determination of the changes in decisions

on the basis of varying estimates.

analyze outcomes of the past.

Observed data are evaluated to determine if the

outcomes have met or not met a specified criterion,

such as the rate of return requirement.

Alternative Description

Initially there are many alternatives, but only a few will

be feasible and actually evaluated.

Alternatives are stand-alone options that involve a

word description and best estimates of parameters,

such as first cost, useful life, estimated annual

incomes and expenses, salvage value, an interest

rate, and possibly inflation and income tax effects.

Estimates of annual expenses are usually lumped

together and called annual operating costs (AOC) or

maintenance and operation (M&O) costs.

Alternative Selection

On the basis of Measure of Worth

Considering non-economic Factors

If only one alternative is defines, a second is often

present in the form of do-nothing alternative

In economic analysis, financial units (dollars or

other currency) are generally used as a solid basis

for evaluation

Taxes represent a significant negative

cash flow.

A realistic economic analysis must

assess the impact of taxes.

Called an AFTER-TAX cash flow analysis

Not considering taxes is called a

BEFORE-TAX Cash Flow analysis.

Cash Flows

Inflows (Revenues)

Outflows (Costs)

time period, no engineering economy

study can be conducted.

Time Value of Money

The change in the amount of money over

a given time period is called the time value

of money; it is the most important concept

in engineering economy.

Interest Rate and Rate of

Return4

Interest is the difference between an ending

amount of money and the beginning amount

If the difference is zero or negative, there is no

interest.

There are always two perspectives to an amount of

interest

Interest paid

Interest earned

Interest is paid when a person or organization

borrows money (obtained a loan) and repays a

larger amount.

Interest is earned when a person or

organization saves, invests, or lent money

and obtains a return of larger amount.

The computations and numerical values

are essentially the same for both

perspectives.

Interest Paid

Interest = amount owed now – original amount

the original amount (principal), the result is called interest rate.

Interest rate (%) = X 100

original amount

The time unit of the rate is called Interest period.

The most common interest period used to state an interest rate is 1 year.

(but can be 6 months, 1 month and so on)

Normally stated 8.5% means over an interest period of 1-year.

Notations

Notation

I = the interest amount is $

i = the interest rate (% / interest period)

N = No. of interest periods (1 Normally)

Example 1.3

Given

You borrow $10,000 for one full year

Must pay back $10,700 at the end of one

year

Determine

Interest amount = ?

Interest rate paid = ?

Example 1.4

FME plans to borrow Rs. 200,000 from a bank

for 1 year at 9% interest for new equipment

Compute the interest and the total amount due after 1

year.

Interest Earned

Interest = total amount now – original amount

as a %age of the original amount and is called Rate of

Return (ROR). interest per unit time

Rate of Return (%) = X 100

original amount

Example 1.5

Calculate the amount deposited 1 year

ago to have $1000 now at an interest rate

of 5% per year.

Calculate the amount of interest earned

during the time period.

Quiz (5 Minutes)

A person borrows Rs. 1000 from bank and must pay a

total of 1100 after one year.

Formulae for use in problem: Interest = amount owed now – original amount

Interest rate (%) = X 100

original amount

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