1. Engineering Orientation
Engineering Economics

2. Engineering Economics
Value and Interest
Cost of Money
Simple and Compound Interest
Cash Flow Diagrams
Cash Flow Patterns
Equivalence of Cash Flow Patterns

3. Value and Interest
“Value” is not synonymous with “amount”. For a fixed amount of money, the value may change over time.
The difference between the anticipated amount in the future and its current value is called interest.
At an annual interest rate of 10% what is the value now of the expectation of receiving $1 in one year?

4. Terms and formulae P or PV Principal is the amount borrowed
N # of pay periods
r Interest rate per period
F or FV, Future worth, value in the future of what you have to payback
Formulae:
Simple interest = P(1 + Nr) ( = $137,500)
Compound interest = P(1 + r)N ( = $143,563)

5. Pay periods Calculate FV
Assume your loan is compounded quarterly, monthly or daily instead of yearly.
Student loan of $25,000 at 8% for
Annually for two years,
Quarterly for two years and
Daily for two years

6. Pay periods

7. Study Examples
Compute the effective annual interest rate ie equivalent to 8% nominal annual interest compounded continuously.
Calculate the FV
In the limit

8. Example
What amount must be paid in two years to settle a current debt of $1,000 if the interest rate is 6% Annually?

9. Cash Flow Diagrams

10. Cash Flow Patterns

12. Example
A new widget twister, with a life of six years, would save $2,000 in production costs each year. Using a 12% interest rate, determine the highest price that could be justified for the machine. Although the savings occur continuously throughout each year, follow the usual practice of lumping all amounts at the ends of years.

13. Example
A new widget twister, with a life of six years, would save $2,000 in production costs each year. Using a 12% interest rate, determine the highest price that could be justified for the machine. Although the savings occur continuously throughout each year, follow the usual practice of lumping all amounts at the ends of years.

14. Example
How soon does money double if it is invested at 8% interest?

15. Example
Compute the annual equivalent maintenance costs over a 5-year life of a laser printer that is warranted for two years and has estimated maintenance costs of $100 annually. Use i = 10%.

16. Engineering Economics
Value and Interest
Cost of Money
Simple and Compound Interest
Cash Flow Diagrams
Cash Flow Patterns
Equivalence of Cash Flow Patterns