Operation Analysis 2 Engineering Economy

Lecture Notes (Some of the materials are taken from Prof. Vate ’ s lecture notes)

3 Outline AccountingTerminologies Engineering Economy

4 Accounting Basis of decision making “ The language of business ” Balance Sheet: Asset versus Liability Net Worth = Assets – Liabilities “ How well am I doing? ” Income Statement: Profit/Loss = Revenues - Expenses

5 Accounting: Balance Sheet Assets Current assets Cash, account receivable, inventories Fixed assets Takes time to convert them to cash Depreciation: convert fixed assets into expenses Liabilities and stockholders ’ equity Current liabilities Other liabilities Stockholders ’ equity = net worth Common stock, Preferred stock, Treasury stock (buyback), and Outstanding stock (# shares in public) Retained earnings Paid-in capital (capital surplus): sale of stock more than the par value of the stock

6 Accounting: Income Statement Making or losing money? Revenue Net sales COGS Gross margin Operating income Net income EPS (Earning per Share)

7 Business ’ Performance Debt Management Analysis Ability to pay long-term liabilities? –Debt Ratio –Times-Interest-Earned Ratio (EBIT/interest expense) Liquidity AnalysisLiquidity Analysis Focus on working capitals –Current Ratio –Quick (Acid Test) Ratio (subtract inventory) Asset Management AnalysisAsset Management Analysis Ability to manage the assets Inventory Turnover (Sales/Average Inventory) Total Assets Turnover (Sales/Total Asset)

8 Business ’ Performance (Cont ’ d) Profitability Analysis Market Value Analysis P/E Ratio Book value per share (equity – preferred stock)/outstanding shares

9 Cost Concepts Determine COGS and COGM Direct Material Direct Labor Overhead (Indirect Material/Labor) Charge OH to production by: % of direct labor cost% of direct labor cost % direct material cost% direct material cost Rate per direct labor hourRate per direct labor hour COGM = DM + DL + OH COGS = COGM + BegInv – EndInv

10 Cost Behaviors Fixed Cost Variable Cost Mixed Cost (semi-variable cost, i.e. depreciation) Average Unit Cost, for … Fixed Cost? Variable Cost? Mixed Cost? Opportunity Cost Sunk Cost Marginal Cost, Marginal Revenue

11 Engineering Economy Notation: i = annual interest rate n = annual interest periods P = present principal sum A = single payment in a series of n equal payments made at the end of each annual interest period F = future sum P|F, i, n = Find P given F, i, n

12 A Piece of Cake Exercises How much will $150 be worth 20 years from now at annual interest rate of 12%? If $100 is set aside at the end of each year for 10 years at an annual interest rate of 12%, what would it be worth at the end of the 8 th year? How much would be required at the end of each year for 10 years to accumulate $5,000 at the end of the 10 th year if the annual interest rate is 12%? How much can be borrowed now if it can be repaid by 10 equal end- of-year payments of $100 each? Annual interest rate is 12%.

13 Present Worth Calculation $ 3,000 $ 2,000 $ 4,000 $ 3,000 $ 10,000 PV =?

14 Financial Education Game With interest rate i = 12%, what will you choose? Start investing $12/year now (your age)Start investing $12/year now (your age) Start investing $12/year at age 30Start investing $12/year at age 30