ENGINEERING ECONOMY

Simple Interest

𝐹 =𝑃+𝐼
𝐼 = 𝑃𝑟𝑡
F= P (1+rn)

Ordinary Simple Interest

𝐷
𝐼 = 𝑃𝑟
360
Exact Simple Interest

𝐷
𝐼 = 𝑃𝑟
365
Compound Interest

𝐹 = 𝑃(1 + 𝑖)𝑛

𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒

𝑖=
# 𝑜𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔/𝑦𝑒𝑎𝑟
𝑟
=
𝑚

Where:

n=mt

m=# of compounding
Single Payment Compound Factor = (1 + 𝑖)𝑛

Single Payment Present Worth Factor = (1 + 𝑖)−𝑛

Continuous Compounding

𝐹 = 𝑃𝑒 𝑟𝑡

Effective Rate of Interest, ER

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑎𝑟𝑛𝑒𝑑 𝑖𝑛 1 𝑦𝑒𝑎𝑟
𝐸𝑅 =
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝐷𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑎𝑡 𝑦𝑟

𝑟 𝑚
𝐸𝑅 = (1 + ) −1
𝑚

Effective Rate of Interest for Compounded Continuously;

𝐸𝑅 = 𝑒 𝑟 − 1

For Compounded Continuously: (1 + 𝑖)𝑛 change to erx

Annuity
𝑼𝑳

𝑨 ∑[(𝟏 + 𝒊)𝒙 ]
𝑳𝑳

Upper limit, UL= ref-start

Lower limit, LL = ref-end

Ordinary Annuity

𝐴[(1 + 𝑖)𝑛 − 1]
𝐹=
𝑖
𝐴[(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛 𝑖

Compound Amount Factor:

(1 + 𝑖)𝑛 − 1
𝐶𝐴𝐹 =
𝑖
Present Worth Factor:

(1 + 𝑖)𝑛 − 1
𝑃𝑊𝐹 =
(1 + 𝑖)𝑛 𝑖

Capital Recovery Factor:

(1 + 𝑖)𝑛 𝑖
𝐶𝑅𝐹 =
(1 + 𝑖)𝑛 − 1

Uniform Payment Series with Continuous Compounding

𝐴(1 − 𝑒 𝑟𝑛 )
𝑃=
𝑒𝑟 − 1
𝐴(𝑒 𝑟𝑛 − 1)
𝐹=
𝑒𝑟 − 1
𝑒 𝑟𝑛 − 1
𝐶𝐴𝐹 = 𝑟
𝑒 −1
 1 − 𝑒 −𝑟𝑛
𝑃𝑊𝐹 =
𝑒𝑟 − 1

Deferred Annuity

𝐴[(1 + 𝑖)𝑥 − 1]
𝑃1 =
𝑖(1 + 𝑖)𝑥

𝑃1
𝑃=
(1 + 𝑖)1

Annuity Due

𝐴[(1 + 𝑖)𝑛 − 1]
𝑃𝐷 =
(1 + 𝑖)𝑛−1 𝑖

𝐴[(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛−1+𝑚 𝑖

𝐴[(1 + 𝑖)𝑛+1 − 1]
𝐹= −𝐴
𝑖
Perpetuity

𝐴
𝑃=
𝑖
Depreciation

1. Straight-Line Method

Mode 3-2
𝐹𝐶 − 𝑆𝑉
𝐷= x y
𝑛
𝐹𝐶 − 𝑆𝑉 0 FC
𝑑𝑚 = (𝑚)
𝑛
𝐵𝑉𝑚 = 𝐹𝐶 − 𝐷 n SV

BVm = m𝑦̂

2. Sinking Fund

(𝐹𝐶 − 𝑆𝑉)𝑖
𝑑=
(1 + 𝑖)𝑛 − 1

𝐴[(1 + 𝑖)𝑚 − 1]
𝑑𝑚 =
𝑖

3. Declining Balance / Constant Percentage

𝑑𝑚 = 𝐹𝐶(1 − 𝑘)𝑚−1 𝑘

Annual rate of depreciation, k

𝑛 𝑆𝑉
𝑘 =1− √
𝐹𝐶
 𝑆𝑉 1/𝑛
1−𝑘 =( )
𝐹𝐶
𝑚
𝑚
𝑆𝑉 𝑛
𝐵𝑉𝑚 = 𝐹𝐶(1 − 𝑘) = 𝐹𝐶 ( )
𝐹𝐶

dm = BVm-1 - BVm

Mode 3-6
x y
O FC
n SV
BVm = m𝑦̂

4. Double Declining Balance

Mode 3-6
2 𝑚−1 2
𝑑𝑚 = 𝐹𝐶 (1 − ) ( ) x y
𝑛 𝑛
𝑚
2 0 FC
𝐵𝑉𝑚 = 𝐹𝐶 (1 − )
𝑛 1 2
(1 − )(FC)
𝑛

BVm = m𝑦̂
5. Sum of Years Digit

Life of Property, n=10

𝑛
∑ 𝑦𝑒𝑎𝑟𝑠 = (𝑛 + 1) = 55
2
(𝐹𝐶 − 𝑆𝑉)𝑛
𝑑1 =
∑ 𝑦𝑟𝑠

(𝐹𝐶 − 𝑆𝑉)(𝑛 − 1)
𝑑2 =
∑ 𝑦𝑟𝑠

(𝐹𝐶−𝑆𝑉)[𝑛+(𝑛−1)]
Total Depreciation @ the end of 2nd year =
∑ 𝑦𝑟𝑠

Year Depreciation
1 (𝐹𝐶 − 𝑆𝑉)10/55
2 (𝐹𝐶 − 𝑆𝑉)9/55

Mode 3-3
dm = BVm-1 - BVm x y
D= FC - BVm 0 FC
n SV
n+1 SV
BVm = m𝑦̂
6. MARCS (Modified Accelerated Cost Recovery System)

Assumption: A shift from SL to DDM

1 1
𝑑1 = ( 𝐹𝐶 − 0)
2 𝑛
2
𝑑2 = (𝐹𝐶 − 𝑑1 )
𝑛
2
𝑑3 = (𝐹𝐶 − 𝑑1 − 𝑑2 )
𝑛
Working Hours Method

Mode 3-2

x y
0 FC
Working hr SV
Dyr= FC- (unit1 + unit2) 𝑦̂

Service Output Method

Mode 3-2

x y
0 FC
unit SV
Dyr= FC- (unit1 + unit2) 𝑦̂
7. Gradient
𝑈𝐿

∑[𝑦(1 + 𝑖)𝑥 ]
𝐿𝐿

Arithmetic: y = A + Bx

Mode 3-2

x y
0-1 m1
0-2 m2
AC

Shft 1-5-1 A

Shft 1-5-2 B

Mode 1 (input formula above)

Geometric: y = ABx

Mode 3-6

x y
0-1 m1
0-2 m2
AC

Shft 1-5-1 A

Shft 1-5-2 B
Mode 1 (input formula above)
Annual Cost, AC

(𝐹𝐶 − 𝑆𝑉)𝑖
𝐴𝐶 = (𝐹𝐶)𝑖 + 𝑂𝐶 +
(1 + 𝑖)𝑛 − 1

𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡
𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑒𝑑 𝐶𝑜𝑠𝑡 =
𝑖

𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑊𝑜𝑟𝑡ℎ 𝐵𝑒𝑛𝑒𝑓𝑖𝑡𝑠

𝐵𝑒𝑛𝑒𝑓𝑖𝑡 𝐶𝑜𝑠𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑊𝑜𝑟𝑡ℎ 𝐶𝑜𝑠𝑡
𝐹𝑖𝑥𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝑎𝑦𝑜𝑢𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝.

𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡

𝑛𝑒𝑡 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 =
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃(1+𝑖)𝑛 𝑖
EUAC =
(1+𝑖)𝑛 −1
Inflation
𝑓𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 =
(1 + 𝑓)𝑛

𝑖𝑓 = 𝑖 + 𝑓 + (𝑖)(𝑓)

f= rate of inflation

i =real rate of return

i’ = inflated’ rate of return

Break-even Analysis

Revenue, R = amount is dependent on quantity sold

Total Cost, TC = FC+VC

Profit, P = R-TC = R – (FC + VC)

Break-even Point, set R = TC