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Engineering Economy Reviewer

This document provides information on financial and accounting concepts such as simple and compound interest, bonds, depreciation methods, economic studies techniques, and comparing investment alternatives. Key points covered include definitions of variables like present value, future value, interest rate, formulas for interest calculations, cash flow diagrams, bond valuations, depreciation methods like straight line, declining balance, and sinking fund, economic techniques like rate of return, annual worth, and payback period, and comparisons of alternatives using additional rate of return, annual savings, and capitalized cost.

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Bea Abesamis
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632 views

Engineering Economy Reviewer

This document provides information on financial and accounting concepts such as simple and compound interest, bonds, depreciation methods, economic studies techniques, and comparing investment alternatives. Key points covered include definitions of variables like present value, future value, interest rate, formulas for interest calculations, cash flow diagrams, bond valuations, depreciation methods like straight line, declining balance, and sinking fund, economic techniques like rate of return, annual worth, and payback period, and comparisons of alternatives using additional rate of return, annual savings, and capitalized cost.

Uploaded by

Bea Abesamis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Beatrice Amistoso Abesamis

Simple Interest
F=P+ I
I =Pin

F=P(1+)

Remember:
- Default interest is per year.
- Value of m if:
Semi - Annually - 2
Quarterly - 4
Monthly - 12
Daily - 360
Ordinary Simple Interest
- 1 year = 360 days
Exact Simple Interest
One year is:
- 365 days if ordinary year.
- 366 days if leap year.
It is leap year if:
- Divisible by 4
- If it is century year, it must be
divisible by 400.

Compound Interest
F=P(1+i)n
F=P(1+

r mt
)
m

F=P ern

Effective Rate
ER=(1+ i)n1
ER=er 1

Cash Flow Diagram


1. Draw the cash flow diagram.
Lender's Side - F up, P down
Borrower's Side - P up, F down
2. Set the focal point.
3. Equate up = down.

Annuity

[
[

(1+i)n 1
F=A
i
P= A

1(1+i)
i

DeferredAnnuity
P= A

1(1+i)
i

(1+i)k

Perpetuity
P=

A
i

VARIABLES
F = Future Amount
P = Present Amount
I = Interest
i = Interest Rate
n = Number of Years
m = No. of Compounding Years
t = Number of Years
ER = Effective Rate
A = Annuity
k =Number of Years Before

Beatrice Amistoso Abesamis

Depreciation
Straight Line Method
- Simplest Method
d=

C oC n
n

C
( ndismantle)
C o
n
d=
D m=d (m)

d
x 100
Co

C oC n

(1+i ) 1
i

D m=d

k=

2
n

m1

2
n

( )

d m=C o 1

2
n

Sinking Fund Method


- Annuity-like
- Fixed cost for every year
- Sinking Fund Deposit Factor (Just
multiply with Co
d=

Double Declining Balance


Method
- Exactly similar as DBM but k is
2/n.

2
Cm =C o (1 )
n

Cm =C oDm
k=

Dm=C oCm

(1+i ) 1
i

Dm=C oCm

Sum of the Year's Digit Method


ReverseYear=nm+1

Years=

2
n C
=1 n
n
Co

Cm =C oDm

d m=C o Cn

d m=C o (1k )m1 k

ReverseYear
Years

Dm=d 1+ d2
D m=

Declining Balance
Method/Matheson Formula
- Fixed percentage

n(n+1)
2

(RY 1 + RY 2 )
(C oC n )
Years

Cm =C oDm

Service-Output Method

Cm =C o (1k )

k =1

k =1

Cm
Co
Cn
Co

a. Working Hours Method


d n=

Co Cn
H year
Ht

b. Output Method

Beatrice Amistoso Abesamis

d n=

Co Cn
Q year
Qt

VARIABLES
Co = First Cost
Cn = Cost After n Years / Trade-in Value
n = Life of the Property
Dm = Total Depreciation After m Years
i = Interest Rate
k = Rate of Depreciation
Ht = Total No. of Hours
Hyear = No. of Hours for a Certain Year
Qt = Total No. of Output
Qyear = No. of Output for a Certain Year

Beatrice Amistoso Abesamis

Bonds
Total Periodic Expense
A=

( 1+i )n1
i

I =Fr
A+I

Bond Value

1(1+i)
V n=Fr
i

+C(1+i )

I =Fr
A = Periodic Deposit to the Sinking Fund
Vn = Value of the Bond in n Periods Before
Redemption
F = Face Value
C = Redemption Price/Selling Price
r = Bond rate
I = Interest on the Bond per Period
F = Accumulated Amount, Amount
Needed to Retire the Bond

Gradient
P= A

] [

1( 1+i )n G 1( 1+i )n

n(1+i)n
i
i
i

P = Present Worth of All Cash


Disbursement

Economic Studies
Rate of Return Method
Net Annual Profit
Capital Invested
*Total Annual Cost
> Expenses + Owner's Salary (If given) +
Depreciation Value (Depreciation is not always
an outcome. It can also be an income.): Use
Sinking Fund and Revenue or Sales.
> When given is in %, multiply by the
investment
> If two are given like the other one is the cost
after n years, use depreciation. If ever that the
cost becomes higher after n years, it will be an
income.
* Investment is also called first cost and
project cost.
* Net Annual Profit = Revenue or Sales - Total
Annual Profit (also means earnings before
income taxes)

Beatrice Amistoso Abesamis

Annual Worth Method


*
*
*
*

Given Percent x Investment


Product +Total Annual Cost
Given Revenue - Sum
If Negative (Not Justifiable)

Present Worth Method


* Inflow: Revenue (P/A,%,n) + Salvage
Value(P/A,%,n)
^ Do this if the given has salvage value.
* Outflow: Investment + Expenses (Total
Annual Cost without Depreciation) (P/A,%,n)
* Inflow - Outflow

Future Worth Method

* Payroll taxes are deducted from labor cost.


* Annual Savings = Annual Cost A - Annual
Cost B
* Additional Investment = First Cost A - First
Cost B
* ROR less than interest rate: NO

Annual Cost Method


* Given Percent x Investment
* Product +Total Annual Cost
* Pick the lesser one.

Present Worth Method

* Refer to the Present Worth's Cash Flow


Diagram

* Two different years: Get the multiple.


* Depreciation, Final Year, and First Cost must
be aligned.

Payback (Payout) Method

EUAC

Investment Salvage Value


Net Annual Cash Flow
* Net Annual Cash Flow = Revenue - Total
Annual Cost without Depreciation

Comparing Alternatives
Rate of Return on Additional
Investment
Annual Net Savings
Additional Investment

Annual Cost ( Without Depreciation )+


n

1( 1+ i )
i

Capitalized Cost
Co +

C oC n
n

( 1+i) 1

A
i

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