You are on page 1of 27

ENGINEERING

ECONOMICS
AUG 2016

PREPARED BY SUGANTI RAMARAD

WHO IS WHO?
Dr. Suganti Ramarad
School of Engineering (CE)
B1.15
Ext. 5098
Suganti.Ramarad@taylors.edu.my

PREPARED BY SUGANTI RAMARAD

HOW LONG ARE YOU STUCK


WITH ME?
2 hours lecture per week
THURSDAY 2 to 4 PM

2 hours tutorial per week


FRIDAY S1 8 to10 AM
FRIDAY S2 10 AM to 12 PM
FRIDAY S3 2.30 to 4.30 PM

# We have two tutorial (Friday) falling on pubic


holidays!
PREPARED BY SUGANTI RAMARAD

YOUR
HURDLES!
MY
YOUR
HURDLES!
RESPONSIBILITY!
30% continuous assessment
Overall =100%
70% final examination
1. The final examination mark must 50%
2. The overall assessment mark must 50%

PREPARED BY SUGANTI RAMARAD

THE MOMENTS OF STRESS!


ASSESS
MENT

MAR
K
(%)

Quiz
(Formativ
e)

NIL

Test 1

10

Test 2

10

Assignme
nt

10

Final

70

WEEK
1

10

11

12

13

14

DURING EXAMINATION PERIOD


PREPARED BY SUGANTI RAMARAD

WHAT IS THE SUCCESS


MEASURE?
1. Explain the economics principles and concept
of time value of money.
2. Evaluate project proposals using economics
analysis techniques, such as Present Worth,
Future Worth, Annual Worth and Rate of Return
analysis.
3. Produce cost estimation and profitability
analysis report in Plant Design
PREPARED BY SUGANTI RAMARAD

ENGINEERING
ECONOMICS
AUG 2016

PREPARED BY SUGANTI RAMARAD

WHAT IS THE MODULE


ABOUT?
Introduction to economics-based project calculations,
considerations & selections.
The time frame of Engineering Economics is primarily
the future.
In other words, its all about engineering decision
making in terms of dollar/ringgit for future investment!
PREPARED BY SUGANTI RAMARAD

LECTURE 1 - OBJECTIVES
Interest rates, simple and compound
interest
Economic equivalence
Cash flow
Minimum attractive rate of return
PREPARED BY SUGANTI RAMARAD

INTEREST RATE/RATE OF
RETURN

PREPARED BY SUGANTI RAMARAD

INTEREST RATE/RATE OF
RETURN

The change in the amount of money


over a given time period is called the
time value of money
PREPARED BY SUGANTI RAMARAD

INTEREST RATE/RATE OF
RETURN

PREPARED BY SUGANTI RAMARAD

INTEREST RATE/RATE OF
RETURN

earne
d

Rate
of return (ROR)

a.k.a Return on investment


(ROI)
PREPARED BY SUGANTI RAMARAD

CLASS ACTIVITY

PREPARED BY SUGANTI RAMARAD

ECONOMIC EQUIVALENCE
Different sums of money at different times
may be equal in economic value
RM106
one
0
1

Interest rate = 6% per


year

year from
now

RM100
nownow is said to be equivalent to RM106
RM100
one year from now, if the RM100 is invested at
the interest rate of 6% per year.

PREPARED BY SUGANTI RAMARAD

TAKE HOME ACTIVITY

PREPARED BY SUGANTI RAMARAD

SIMPLE & COMPOUND


INTEREST

(Principal)(number of period)(interest rate) = Pni

Interest on principal only

= P(1+i)n

Interest on principal and interest


PREPARED BY SUGANTI RAMARAD

CLASS ACTIVITY
Company ABC loaned money to an engineering
staff member for purchasing a new phone. The
loan is for RM1000 for 3 years at 5% per year.
a) How much money will the engineer repay at the
end of 3 years based on simple interest?
b) How much money will the engineer repay at the
end of 3 years based on compound interest?

PREPARED BY SUGANTI RAMARAD

SOLUTION
a) Total interest for 3 years = RM1000(3)(0.05) = RM150
Total amount due after 3 years = RM1000+ RM150 = RM1150
b) METHOD 1
Year 1 interest = RM1000 (0.05) = RM50
Amount due after year 1 = RM1000+RM50 = RM1050
Year 2 interest = RM1050 (0.05) = RM52.50
Amount due after year 2 = RM1050+RM52.50 = RM1102.50
Year 3 interest = RM1102.05 (0.05) = RM55.13
Amount due after year 3 = RM1102.50+RM55.13 = RM1157.63
METHOD 2
Total amount due = RM1000(1+0.05)3 = RM1157.63
PREPARED BY SUGANTI RAMARAD

CASH FLOW
CASH
INFLOW
YEAR
1

UNKNOWN @
TO BE
DETERMINED

TIME 0 =
PRESENT

NET CASH
FLOW
CASH
Cash
inflows are the receipts, revenues, incomes, and savings generated
OUTFLOW
by project and business activity. A + sign indicates a cash inflow.

Cash outflows are costs, disbursements, expenses, and taxes caused by


business activity. A sign indicates a cash outflow.
PREPARED BY SUGANTI RAMARAD

CLASS ACTIVITY
Each year Exxon-Mobil expends large amounts of funds for
mechanical safety features throughout its worldwide operations.
Carlo Ramos, a lead engineer, plans expenditures of $1 million now
and each of the next 4 years just for improvement of field-based
pressure-release valves. Construct the cash flow diagram to find
the equivalent value of these expenditure at the end of year 4,
using a cost capital estimates for safety-related funds of 12% per
year.

PREPARED BY SUGANTI RAMARAD

CLASS ACTIVITY
An electrical engineer wants to deposit an amount P now such that
she can withdraw an equal annual amount of A1 = RM2000 per year
for the first 5 years, starting 1 year after deposit, and a different
annual withdrawal of A2 = RM3000 per year for the following 3
years. How would the cash flow diagram appear if i = 8.5% per
year?

PREPARED BY SUGANTI RAMARAD

MINIMUM ATTRACTIVE RATE


OF RETURN
Investors expect to earn a return on their
investment (commitment of funds) over time
We expect to see economic efficiencies greater
than 100%
A profitable investment should earn (return) funds
in excess of the investment amounts
Economic projects should earn a reasonable return,
which is termed:
MARR Minimum attractive rate of return

PREPARED BY SUGANTI RAMARAD

MARR is NOT a calculated


rate, but an established rate
by (financial) managers
expressed as a percent
value
projects should earn at a
rate equal to or greater than
the established MARR
MARRs are set based upon:
PREPARED BY SUGANTI RAMARAD

MARR
Equity Financing the firm uses funds either from retained
earnings, new stock issues, or owners infusion of money
Debt Financing the firm borrows funds from outside
sources
The cost of debt financing = the interest rate charged on the debt
(loan) amounts

The MARR is approximated from the weighted average


cost of all sources of capital to the firm
A firms ROR > MARR > cost of capital
PREPARED BY SUGANTI RAMARAD

TERMINOLOGY AND SYMBOL


P = a present sum of money at a time designated
as t = 0
F = a future amount of money at some point in
time later than 0
A = a series of equal, end-of-period cash flows
n = the number of interest periods
i = the interest rate or rate of return per time
period, in percent

PREPARED BY SUGANTI RAMARAD

SUMMARY
DO YOU KNOW HOW TO CALCULATE
SIMPLE AND COMPOUND INTEREST?
DO YOU UNDERSTAND THE ECONOMIC
EQUIVALENCE?
CAN YOU BUILD A CASH FLOW?
CAN YOU EXPLAIN MARR?
PREPARED BY SUGANTI RAMARAD