Tutorial 5 of SEEM2440 A/B

October 13, 2011

Tutorial 5 of SEEM2440 A/B

Concepts Review

Learning curve When we do the same task repetitively, we learn the task and become more ecient. Cost estimating relationship(CER) A CER is a mathematical model that describes the cost of an engineering project as a function of one or more design variables. Linear regression To nd the line such that the sum of the distance between the data points and the line is the smallest among all the lines.

Tutorial 5 of SEEM2440 A/B

Concepts Review

Money-time relationships Time value of money since it has interest. The total interest is linear proportional to the amount of loan, the interest rate and the number of interest periods. Cash-ow diagrams To evaluate the cash-ow over several periods at a certain time point. Interest formulas P(F /P, i%, N), F (P/F , i%, N), A(F /A, i%, N) F (A/F , i%, N), A(P/A, i%, N), P(A/P, i%, N) Deferred annuities

Tutorial 5 of SEEM2440 A/B

Example1: Linear Regression of the Power Form

We have known that the relationship between the cost of producing a kind of food and the weight of output as follows:C = a0 v a1 , a0 > 0. Please use the following data to estimate a0 , a1 via linear regression. C(dollar) v(kg) 0.8944 0.2 1.0954 0.3 1.2649 0.4 1.4142 0.5 1.5492 0.6

Tutorial 5 of SEEM2440 A/B

Solution of Example1
STEP1: Take logarithm on both sides, log C = log a0 + a1 log v . STEP2:Set y = log C and x = log v , y = log a0 + a1 x. STEP3:Take logarithm on initial data. y=logC x=logv -0.1116 -1.6094 0.0911 -1.2040 0.2350 -0.9163 0.3466 -0.6931 0.4377 -0.5108

STEP4:Estimate log a0 , a1 via linear regression formula. 5 a1 =

5 i=1 xi yi

5 i=1 xi 5 i=1 xi 5 i=1 xi

5 i=1 yi 2

= 0.5

5 log a0 = SETP5: a0 = 2,

5 2 i=1 xi 5 i=1 yi

a1 5

= 0.6931

a1 = 0.5.
Tutorial 5 of SEEM2440 A/B

Example2:Cash-ow diagrams

In the accompanying diagram, what is the value of K on the top cash-ow diagram that is equivalent to the bottom cash-ow diagram? Let i = 12% per year. K K
6 6

2 100
6

3 210
6

4 320
6

5 430
6

540
6

650
6

Tutorial 5 of SEEM2440 A/B

Solution of Exmaple2:Direct discount

Set time 2 as the reference point(present time). K 320 K 210 430 540 650 + + = 100+ + + + 2 (1 + i)3 2 (1 + i)3 (1 + i)4 (1 + i)5 (1 + i) 1 + i (1 + i) (1) Interest formula representaion K (P/F , 12%, 2) + K (P/F , 12%, 3), Solve equation (1), we have K = $1034.26. K =F

Tutorial 5 of SEEM2440 A/B

Solution of Example2: Interest formulas

Using time 1 as the reference point, then

K (P/A,12%,2)(P/F ,12%,2)

100(P/A,12%,6)+110(P/G ,12%,6)

K (1.6901)(0.7972) = 100(4.1114) + 110(8.93) 1.3473K K = 1, 393.44 = 1, 034.26

Tutorial 5 of SEEM2440 A/B