Engineering Economics

Is application of economic technics to evaluate engineering designs and

engineering alternatives
Subset of economics
Engineering economics phase;
1. Formulation; designs, simulations/configurations
2. Estimation; cost estimation, revenue estimation
3. Evaluation; process of weighing options. Justification of economic
viability of projects. This process involves mathematical technics to
simplify the evaluation e.g. discounted cash-flow analyses

Basic concepts of engineering economics

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Time value of money comes from the concept that a dollar is worth more
today than tomorrow, coz it can be invested and generate more. In
addition there is an uncertainty of receiving a dollar in the near future. The
procedure for accounting for the delaying of receiving funds or the income
given.is to discount or penalised future cash flow ;
Interest and interest rate the manifestation of the TVM, its a fee that
someone use to pay someones money.
Interest rate is interest paid over a period of time as percentage.
Cash inflows revenues, receipts, incomes, savings generated by projects
and activities that flow in.
cash outflows disbursements (costs, expenses, taxes) caused by
projects and activities that
net cashflows = cash inflows cash outflows
cash inflows = revenues (R)
cash outflows = disbursements (D)
net cash flow (NCF) = R - D

cost estimation of different stages of mine projects

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Estimation of capital..
The key to this is to find .data
Where do you look for the information?
Similar projects from the past, external databases from other independent
projects
Design bases of a project is important

Feasibility study is the first real study of all geological, technical and economic
summary
Cashflow for the planning of feasibility study is a complex team work and is
bases for financial model

To complete a net present value analysis procedure, here are the six steps;
1. Choose an appropriate discount to reflect time value of money
2. Calculate the present value of the cash outlay
3. Calculate the benefits or annual net cashflow for each year for the
investments over its useful life
4. Calculate the present value of the annual net cash flows
5. Compute the net present value
6. Accept or reject the investment (Net present value is less than 0 = reject,
greater than 0 = accept)
Choosing an appropriate discount rate that reflects the TVM so we use the
discount rate to adjust future flows of income back to their present value,
The discount rate chosen basically reflects the minimum acceptable rate of
return of investment
How should you determine the combination of debt and equity funds used to
finance an investment
The funds that have used to acquire capital come from debt (borrowed funds)
and equity (financial contribution in business) therefore you should base the cost
of capital in combination of debt and equity capital used to finance the operation
To determine the long run cost for business there is need to weight the cost of
debt funds by the proportions of debt and equity that will be used to run our
business
d = keWe(1-t) +kdWd(1-t)
Ke = cost of equity funds (rate of return on equity capital)
We = proportion of equity funds used in business
t = is the marginal tax rate
kd = cost debt funds used in business (interest)
wd = proportion of debt funds
The purpose of weighted cost is to obtain a discount rate that accurately reflect
the long fun direct cost of debt finds and the opportunity cost of equity

Discount cash flow Analyses

Yr 1
Gold
prodcd
Price($/g)
Sales
rvnue
Site op cst
Refining
Oprtng
prft
Income tax
Captl
expnd
Nt cshflw
Dscn
fctr(12%
PV
NPV ($)

Yr2
80

Yr3
120

Yr4
120

Total
320

200
16000

200
24000

200
24000

64000

13 500
350
2150

15 500
500
8000

15 500
500
8000

44500
1350
18150

18 000

150

2 500
300

5200
2000

7700
20450

-18000
0.89

2000
0.80

5200
0.71

800
0.64

-10000

-16020
-10216

1600

3692

512

-10216

Profitability index sometimes cost benefit cost ratio or present value index
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Its calculated by taking the present value of cash inflows divide by cash
out flows

Pv( cash Inflows)

Pv (cash outflow)
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The decision criteria is to accept profitability index greater than 1

Using this criteria, the project will be ranked with one with highest

*****Internal rate of Return is another discount of

Money discounted cash flow method,
Payback period approach- one of the evaluation criteria used by mining company.
This is the number of years required for cash income from a project to return the
initial cash investment of the project.
Calculate payback period;
Cash outlays (investments) / annual cash flows
The following steps are needed to calculate the PPA
1. Lay out your years and cash flows
2. Accumulate the cash flows
3. Identify where the accumulation goes from negative to positive
year
0
1
2
3
4

Cash flow
-1000
200
300
500
200

Accumulated cash flow

-1000
-800
-500
0
200

5
6

200
200

400
600

Risk analyses
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Starts with the

Influences future cash, reve

Sensitivity analyses
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Come with best case scenario, basically the NPV using assumption we
believe are accurate, then from there we use other assumptions
NPV is then calculated