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# ENGINEERING

ECONOMICS
AUG 2016

WHO IS WHO?
School of Engineering (CE)
B1.15
Ext. 5098

## 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!

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%

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

## 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

ENGINEERING
ECONOMICS
AUG 2016

## WHAT IS THE MODULE

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!

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

INTEREST RATE/RATE OF
RETURN

INTEREST RATE/RATE OF
RETURN

## The change in the amount of money

over a given time period is called the
time value of money

INTEREST RATE/RATE OF
RETURN

INTEREST RATE/RATE OF
RETURN

earne
d

Rate
of return (ROR)

## a.k.a Return on investment

(ROI)

CLASS ACTIVITY

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.

INTEREST

= P(1+i)n

## Interest on principal and interest

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?

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

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

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

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.

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?

## 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

## 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:

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

## 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