Engineering Economy

Consumer Goods and Services – directly used by people to satisfy their needs

Producer Goods and Services – used to produce consumer goods and services

Necessities – products/services that are required to support human life

Luxuries – products/services that are desired by humans

Demand – the quantity of certain commodity bought at certain price at a given place and time

Elastic Demand – results in greater than proportionate increase in sales

Inelastic Demand – produces a less than proportionate increase in sales

Unitary Elasticity of Demand – product of volume and price is constant

Perfect Competition – there is nothing to prevent additional vendors entering the market

Monopoly – opp of perfect composition/a product that is available from a single vendor that vendor
can prevent the entry of all others in the market

Oligopoly – few suppliers of product that will inevitably result in similar actions by others

Supply – Demand

Law of Demand – the higher the price the lower the quantity demanded

Law of Supply – the higher the price the higher the quantity supplied

Law of Diminishing Returns – either in increasing cost or by absolute quantity

Time value of money – defined as the time-dependent value of money stemming both from changes
in purchasing power of money (inflation or deflation)

Interest – amount of money paid for the use of borrowed capital

Simple Interest – calculated using the principal only

Ordinary Simple Interest – computed on the basis of 12 months, 30 days each or 360

Exact Simple Interest – computed in the exact number of days in a year

Cash Flow Diagram – graphical presentation of each flows

Compound Interest – calculated on the principal plus total amount of interest accumulated in prev.
Periods

Rates of Interest:

• Nominal rate of interest – number of interest periods in one year

• Effective rate of interest – exact rate of principal during one year

Discount – interest paid in advance

Inflation – increase in the prices for goods and services

Equation of values – obtained by setting the sum of the values on a certain comparison

Continous compounding and discrete payments

• Discrete compounding – compounded at the end of each finite-length period

• Continous compounding – cash payments occur once per year but compounding continously
throjghout the year

• Capitalized cost – sum of the first cost and present worth of all cost

• Amortization – method of repaying a debt

Annuity – series of equal payments occuring at equal periods

Types

• Ordinary – payments are made at the end of each payment period

• Deferred – payment of the first amount is deferred a certain number of periods

Annuity due – payments are made at the start of each period

Perpetuity – payment period extend forever

Value – present worth of all future profits

Market value of a property – equal advantage that is under no compulsion to buy or sell

Utility or use-value of a property – property is worth to the owner as an operating unit

Fair value – determined by a disinterested third party in order to establish a price that is fair

Book Value/Depreciated – worth of property as shown in the records of enterprise

Salvage/Resale Value – obtained from the sale of property after used

Scrap value – amount of property that would sale for of diposed off as junk

Depreciation – decrease in the value of physical property

Purposes:

> To provide for the recovery of the capital

> To enable the cost of depreciation to be charged to the cost of products

Types

• Physical – due to the lessening of the physical ability of property to produce

• Functional – due to the lessening in demand for function which property was designed to render

Depreciation due to changes in price levels – almost impossible to predict

Depletion – decrease in value of property due to gradual extraction

Physical and economic life physical life of property – length of time during which is capable of
performing the function

Economic life – length of time during which property may be operated at a profit
Requirements of a Depreciation Method

1. It should be simple.

2. It should recover capital.

3. The book value will be reasonably close to the market due at any time.

4. The method should be accepted by the Bureau of Internal Revenue.

Straight line method – directly proportional to the age of property

Sinking fund method – established in which funds will accumulate for replacement

Declining balance method (DBM) – annual cost of depreciation is fixed percentage of the salvage
value

Double declining balance method (DDB) – salvage value is not subtracted from the first cost

Sum of the years digit method (SYD) – provides rapid depreciation during early years of life of
property

Service Output – total depreciation is directly proportional to the quantity of output of property

Valuation/Appraisal – process of determining the value of a certain property

Intangible asset – not physical in nature

Goodwill – business has earned through the favorable condition and patronage

Franchise – intangible item of value arising from exclusive right of company

Going value – intangible value in which company will remain in business indefinitely/still profitable

Organization cost – amount of money spent on organizing business

CAPITAL FINANCING

• Equity capital or ownership funds – supplied by the owners of enterprise taht a profit will be
earned

• Borrowed funds capital – fixed rate of interest must be paid as well as the debt at specified time

TYPES OF BUSINESS ORG.

• Individual Ownership – wherein a person uses his or her own capital to establish a business

Advantage of the Individual Ownership

1. It is easy to organize.

2. The owner has full control of the enterprise.

3. The owner is entitled to whatever benefits and profits that accrued from the business.

4. It is easy to dissolve.

Disadvantages of the Individual Ownership:

1. The amount of equity capital that can be accumulated is limited.

2. The organization ceases upon the death of the owner.

3. It is difficult to obtain borrowed capital, owing to the uncertainty of the life of the organization.

4. The liability of the owner for his debts is unlimited.

• Partnership – association of two or more persons for the purpose of engaging in business

In a business for profit.

Advantages of the Partnership

1. More capital may be obtained by the partner spooling their resources together.

2. It is bound by a few legal requirements as to its accounts, procedures, tax forms, and other items
of operation.

3. Dissolution of the partnership may take place at anytime by mere agreement of the partners.

4. It provides an easy method whereby two or more persons of differing talents may enter into
business, each carrying those burdens that he can best handle.

Disadvantages of the Partnership

1. The amount of capital that can be accumulated is definitely limited.

2. The life of the partnership is determined by the life of the individual partners. When any partner
dies, the partnership automatically ends.

3. There may be serious disagreement among the individual partners.

4. Each partner is liable for the debts of the partnership.

• Corporation – distinct legal entity; allowing to conduct various business activities just like an
individual.

Advantages of the Corporation

1.It enjoys perpetual life without regard to any change in the person of its owners, the stockholders.

2. The stockholders of the corporation are not liable for the debts of the corporation.

3. It is relatively easier to obtain large amounts of money for expansion, due to its perpetual life.

4. The ownership in the corporation is readilytransferred.

5. Authority is easily delegated by the hiring of managers.

Disadvantages of the Corporation

1. The activities of a corporation are limited to those stated in its charter.

2. It is relatively complicated in the formation and administration.

3. There is a greater degree of governmental control as compared to other types of business

organizations.

• Capitalization of corporation - acquired throight the sale of stock

> Common Stock – with no special guarantees in return

> Preffered Stock – guaranteed a definite dividend on their stock

Methods of Bond Retirement

• corporation may issue another set of bonds equal to the amount of for redemption

Bond Value – present worth of all future amounts

Rate of return method (ROR) – masures the effectiveness of an investment

Greather than desired ROR, invesment is justified

Less thandesired ROR, not justified

Annual worth method (AW) – minimun required profit

Present worth method (PW) – if PW is equal to or greater than zero, it is justified economically

Future worth method (FW) – all cashflows are compounded forward to a reference point in time

Payback (Payout) method – commonly defined as the length of time required to recover for the first
cost of an investment

The rate of return on additional investment period

The annual cost (AC) method

The equivalent uniform of annual cost (EUAC) method

The present worth cost (PWC) method

Capitalized method

Payback or payout method

Type of Costs

• Fixed costs – costs that remain constant

• Variable costs – costs that vary with output of an enterprise

• Increment costs – arise as the result of a change operations

• Marginal costs – additional of producing one or more product

• Sunk costs – money that was spent and cant be recovered due to certain reasons

Choosing a corporation over an individual or partnership provides legal separation, limiting personal
liability and allowing for diverse business transactions.

The analysis and evaluation of the factors that will affect the economic success of engineering
projects to the end that a recommendation can be made which will ensure the best use of
capital.Engineering Economy
Consumer Goods and Services – directly used by people to satisfy their needs

Producer Goods and Services – used to produce consumer goods and services

Necessities – products/services that are required to support human life

Luxuries – products/services that are desired by humans

Demand – the quantity of certain commodity bought at certain price at a given place and time

Elastic Demand – results in greater than proportionate increase in sales

Inelastic Demand – produces a less than proportionate increase in sales

Unitary Elasticity of Demand – product of volume and price is constant

Perfect Competition – there is nothing to prevent additional vendors entering the market

Monopoly – opp of perfect composition/a product that is available from a single vendor that vendor
can prevent the entry of all others in the market

Oligopoly – few suppliers of product that will inevitably result in similar actions by others

Supply – Demand

Law of Demand – the higher the price the lower the quantity demanded

Law of Supply – the higher the price the higher the quantity supplied

Law of Diminishing Returns – either in increasing cost or by absolute quantity

Time value of money – defined as the time-dependent value of money stemming both from changes
in purchasing power of money (inflation or deflation)

Interest – amount of money paid for the use of borrowed capital

Simple Interest – calculated using the principal only

Ordinary Simple Interest – computed on the basis of 12 months, 30 days each or 360

Exact Simple Interest – computed in the exact number of days in a year

Cash Flow Diagram – graphical presentation of each flows

Compound Interest – calculated on the principal plus total amount of interest accumulated in prev.
Periods

Rates of Interest:

• Nominal rate of interest – number of interest periods in one year

• Effective rate of interest – exact rate of principal during one year

Discount – interest paid in advance

Inflation – increase in the prices for goods and services

Equation of values – obtained by setting the sum of the values on a certain comparison

Continous compounding and discrete payments

• Discrete compounding – compounded at the end of each finite-length period

• Continous compounding – cash payments occur once per year but compounding continously
throjghout the year

• Capitalized cost – sum of the first cost and present worth of all cost

• Amortization – method of repaying a debt

Annuity – series of equal payments occuring at equal periods

Types

• Ordinary – payments are made at the end of each payment period

• Deferred – payment of the first amount is deferred a certain number of periods

Annuity due – payments are made at the start of each period

Perpetuity – payment period extend forever

Value – present worth of all future profits

Market value of a property – equal advantage that is under no compulsion to buy or sell

Utility or use-value of a property – property is worth to the owner as an operating unit

Fair value – determined by a disinterested third party in order to establish a price that is fair

Book Value/Depreciated – worth of property as shown in the records of enterprise

Salvage/Resale Value – obtained from the sale of property after used

Scrap value – amount of property that would sale for of diposed off as junk

Depreciation – decrease in the value of physical property

Purposes:

> To provide for the recovery of the capital

> To enable the cost of depreciation to be charged to the cost of products

Types

• Physical – due to the lessening of the physical ability of property to produce

• Functional – due to the lessening in demand for function which property was designed to render

Depreciation due to changes in price levels – almost impossible to predict

Depletion – decrease in value of property due to gradual extraction

Physical and economic life physical life of property – length of time during which is capable of
performing the function

Economic life – length of time during which property may be operated at a profit

Requirements of a Depreciation Method

1. It should be simple.
2. It should recover capital.

3. The book value will be reasonably close to the market due at any time.

4. The method should be accepted by the Bureau of Internal Revenue.

Straight line method – directly proportional to the age of property

Sinking fund method – established in which funds will accumulate for replacement

Declining balance method (DBM) – annual cost of depreciation is fixed percentage of the salvage
value

Double declining balance method (DDB) – salvage value is not subtracted from the first cost

Sum of the years digit method (SYD) – provides rapid depreciation during early years of life of
property

Service Output – total depreciation is directly proportional to the quantity of output of property

Valuation/Appraisal – process of determining the value of a certain property

Intangible asset – not physical in nature

Goodwill – business has earned through the favorable condition and patronage

Franchise – intangible item of value arising from exclusive right of company

Going value – intangible value in which company will remain in business indefinitely/still profitable

Organization cost – amount of money spent on organizing business

CAPITAL FINANCING

• Equity capital or ownership funds – supplied by the owners of enterprise taht a profit will be
earned

• Borrowed funds capital – fixed rate of interest must be paid as well as the debt at specified time

TYPES OF BUSINESS ORG.

• Individual Ownership – wherein a person uses his or her own capital to establish a business

Advantage of the Individual Ownership

1. It is easy to organize.

2. The owner has full control of the enterprise.

3. The owner is entitled to whatever benefits and profits that accrued from the business.

4. It is easy to dissolve.

Disadvantages of the Individual Ownership:

1. The amount of equity capital that can be accumulated is limited.

2. The organization ceases upon the death of the owner.

3. It is difficult to obtain borrowed capital, owing to the uncertainty of the life of the organization.
4. The liability of the owner for his debts is unlimited.

• Partnership – association of two or more persons for the purpose of engaging in business

In a business for profit.

Advantages of the Partnership

1. More capital may be obtained by the partner spooling their resources together.

2. It is bound by a few legal requirements as to its accounts, procedures, tax forms, and other items
of operation.

3. Dissolution of the partnership may take place at anytime by mere agreement of the partners.

4. It provides an easy method whereby two or more persons of differing talents may enter into
business, each carrying those burdens that he can best handle.

Disadvantages of the Partnership

1. The amount of capital that can be accumulated is definitely limited.

2. The life of the partnership is determined by the life of the individual partners. When any partner
dies, the partnership automatically ends.

3. There may be serious disagreement among the individual partners.

4. Each partner is liable for the debts of the partnership.

• Corporation – distinct legal entity; allowing to conduct various business activities just like an
individual.

Advantages of the Corporation

1.It enjoys perpetual life without regard to any change in the person of its owners, the stockholders.

2. The stockholders of the corporation are not liable for the debts of the corporation.

3. It is relatively easier to obtain large amounts of money for expansion, due to its perpetual life.

4. The ownership in the corporation is readilytransferred.

5. Authority is easily delegated by the hiring of managers.

Disadvantages of the Corporation

1. The activities of a corporation are limited to those stated in its charter.

2. It is relatively complicated in the formation and administration.

3. There is a greater degree of governmental control as compared to other types of business

organizations.

• Capitalization of corporation - acquired throight the sale of stock

> Common Stock – with no special guarantees in return

> Preffered Stock – guaranteed a definite dividend on their stock

Methods of Bond Retirement

• corporation may issue another set of bonds equal to the amount of for redemption

Bond Value – present worth of all future amounts

Rate of return method (ROR) – masures the effectiveness of an investment

Greather than desired ROR, invesment is justified

Less thandesired ROR, not justified

Annual worth method (AW) – minimun required profit

Present worth method (PW) – if PW is equal to or greater than zero, it is justified economically

Future worth method (FW) – all cashflows are compounded forward to a reference point in time

Payback (Payout) method – commonly defined as the length of time required to recover for the first
cost of an investment

The rate of return on additional investment period

The annual cost (AC) method

The equivalent uniform of annual cost (EUAC) method

The present worth cost (PWC) method

Capitalized method

Payback or payout method

Type of Costs

• Fixed costs – costs that remain constant

• Variable costs – costs that vary with output of an enterprise

• Increment costs – arise as the result of a change operations

• Marginal costs – additional of producing one or more product

• Sunk costs – money that was spent and cant be recovered due to certain reasons

Choosing a corporation over an individual or partnership provides legal separation, limiting personal
liability and allowing for diverse business transactions.

The analysis and evaluation of the factors that will affect the economic success of engineering
projects to the end that a recommendation can be made which will ensure the best use of capital.