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34 Ansichten72 Seitenengineering economy is widely used in every aspect of business and projects

Sep 27, 2016

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engineering economy is widely used in every aspect of business and projects

© All Rights Reserved

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0 Bewertungen0% fanden dieses Dokument nützlich (0 Abstimmungen)

34 Ansichten72 Seitenengineering economy is widely used in every aspect of business and projects

© All Rights Reserved

Als PDF, TXT **herunterladen** oder online auf Scribd lesen

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1)

2)

3)

4)

5)

analysis.

Explain the meaning of equivalence in

engineering economy.

Calculate growth rate and rate of return.

Apply simple interest and compounded interest.

Explain nominal and effective growth rate in

engineering economy analyses.

MZMS/MMT

EEBab2

Simple growth.

Compounded growth.

Nominal growth rate.

Effective growth rate.

Factors involved.

Time value of money.

MZMS/MMT

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Unit time is the unit year that occur at each year end.

Basic symbols,

i)

P

Present value / present worth at time 0. It is a single value occuring

only once.

ii)

F

A single value that occur in the future, that is, at any year end

except time/year 0.

iii) A

A uniform annual value that occur in series for more than 1 year,

starting at end of year 1.

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iv) G

G is a set of values that increase uniformly (gradient series) that starts at

year 1 with the value 0.

v)

e

e is a set of values that increase geometrically or exponentially in a series

of years. This series starts with an initial value D and then increases by a

specific percentage of the previous value.

vi) i

A growth rate that occur for each year and is in the form of percentage.

vii) n

It is period of the analyses usually in unit year.

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Example 2.1

Ali planned to borrow RM30,000 now and will payback this loan in a single payment at

the end of the third year. How much will he has to pay at 12% growth rate? Determine

the symbols used in Engineering Economy in this case.

Solution:

P = RM30,000

i = 12%

n = 3 years

F=?

Example 2.2

Refering to example 2.1 how much will the cumulative value of the loan if growth rate is

12% and payment will be made every year for 3 years. Determine the symbols used in

Engineering Economy in this case.

Solution:

P = RM30,000

i = 12%

n = 3 years

A=?

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Principle

The initial or basic value of an investment or loan

Growth

Represents time value of money of the principle

Growth Rate

Initial value

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x 100%

EEBab2

Example 2.3

Ahmad made a bank loan of RM20,000 now and is required to

pay back RM21,000 one year from now. What is the growth value

and growth rate of this loan?

Solution:

Growth = RM21,000 RM20,000 = RM1,000

Growth rate = 1,000 x 100%

20,000

= 5%

Exercise:

Borrow RM50,000 now

Pay RM 65,000 one year from now

Growth?

Growth rate?

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Example

Ali deposited RM1,000 in a bank now at the rate of 5% a year. A

year later his savings become RM1,050. Thus a growth of

RM50 occurred over the one year period.

This shows that the value of RM1,000 now is equivalent to

RM1,050 one year from now at growth rate of 5%.

RM1000

Now

Equivalent

i = 5%

RM1050

After 1 year

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EEBab2

principle value.

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Example 2.4

A company provides loan facility for workers with a pay back

scheme based on simple growth. Determine the amount

owed by a worker if he borrowed RM2,000 for 5 years at the

growth rate of 10% per year.

Solution:

Total growth for 5 years = RM200 x 5 = RM1,000

Or RM 2000 x 10% x 5 = RM1,000

Therefore, the accumulated amount he owes in 5 years;

= RM2,000 + RM1,000

= RM3,000

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10

on the principle value and the total growth from

previous years.

Growth = (Principle + Total growth) x Growth rate

Example 2.5

A client borrowed RM2,000 from a bank with a

compounded growth rate of 10% a year. Determine

the total amount that he owes over a 5 year period.

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Solution:

Growth for year 1 = RM2,000 x 10% = RM200

Total accumulated debt at end of year 1

= RM2,000 + RM200 = RM2,200

Growth for year 2 = RM2,200 x 10% = RM220

Total accumulated debt at end of year 2

= RM2,200 + RM220 = RM2,420

Growth for year 3 = RM2,420 x 10% = RM242

Total accumulated debt at end of year 3

= RM2,420 + RM242 = RM2662

Growth for year 4 = RM2,662 x 10% = RM266.2

Total accumulated debt at end of year 4

= RM2,662 + RM266.2 = RM2,928.2

Growth for year 5 = RM2,928.2 x 10% = RM292.82

Total accumulated debt at end of year 5

= RM2,928.2 + RM292.82 = RM3,221.02

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Conclusion:

With simple growth, the debt became RM3,000 (in 5 years)

A difference of RM221.02

accumulated at the end of each year.

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time scale.

Cash Flow, RM

Time

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Note:

3G, 4G

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Example 2.6

A man borrowed RM5,000 now at the growth rate of 12% per

year, how much must he pay at year 5. Construct the cash

flow diagram for this problem.

Solution:

MZMS/MMT

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Example 2.7

Azman invest RM2,000 every year for 6 years. He wants to

know the amount of return in his investment accumulated

after 6 years if growth rate is 10% a year. Construct the cash

flow diagram for this problem.

Solution:

MZMS/MMT

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18

Single payment

And

Factor

And

F = P (F/P, i, n)

P = F (P/F, i, n)

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known

known

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Example 2.8

Ah Chong saves RM20,000 in a bank that promises a yearly growth

rate of 12%. How much money will be accumulated after 10 years?

Solution:

F = 20,000 (F/P, 12%, 10)

Refering to the table of

compounded growth rate,

at i = 12% and at 10 year,

F/P = 3.1058

Therefore,

F = 20,000 (3.1058)

= RM62,116

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Annual worth

And

And

And

And

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Example 2.9

How much money should be invested now to gain a return of

RM500 a year for 10 years with growth rate of 12% a year?

Solution:

From the table, P/A = 5.6502)

Thus,

P = 500 (5.6502)

= RM2825.10

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Example 2.10

If you invest RM1,000 per year starting at the end of the first

year, how much return will be accumulated at the end of the

8th year if annual growth rate is 10%?

Solution:

F = 1,000 (F/A, 10%, 8)

From the table F/A = 11.4358

Thus,

F = 1,000 (11.4358)

= RM11,435.80

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And

And

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Example 2.11

Rent for a business premise is RM500 for the first year and

increases at a constant rate of RM100 each year for 5 years.

If the annual growth rate is 8%, determine the equivalent

value of;

a) P

b) A

Solution:

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a) P

P = 500 (P/A, 8%, 5) + 100 (P/G, 8%, 5)

From the Table, P/A = 3.9927 dan P/G = 7.3724,

Therefore,

P = 500 (3.9927) + 100 (7.3724) = RM2733.59

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b) A

A = 500 + 100 (A/G, 8%, 5)

From the Table, A/G = 1.8465,

therefore,

A = 500 + 100 (1.8465)= RM684.65

5

0

500

100

684.65

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No minus sign in the formulae

For i e

And

For i = e

cost or income based on percentage

instead of fixed amount

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29

Example 2.12

Maintenance cost of a machine is RM990 in the first year and

increases at the rate of 10% a year until year 6. Calculate

present value P if the rate of return (growth rate) is;

a) 15% per year

b) 10% per year

Solution:

Where,

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-5925.29

0.1-0.15

-5400

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What is capitalised

project?

and

When n =

P/A = 1/i

A = Pi

P = A/i

very long service life

(n) such as highway,

bridge, airport etc

Case like this, n is

assumed infinity

Usually, it has yearly

maintenance cost,

recurring cost (eg.

every 5 years) and

non-recurring cost

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6,000

n=

P=?

P = A/i = 6000/0.06

= 100,000

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33

Eg. Overhaul cost ,

investment cost where it

occurs 10 years from

now. It happens only once

It is considered as single

payment, F

Use P/F factor to find

capitalised cost at year 0

Recurring cost

Eg. Major rework cost of

RM 50,000 every 15

years. Meaning, this cost

recurs every 15 years

until infinity

Consider this recurring

cost in one cycle only for

the whole project life.

Treat this as a single

payment, F

Use A/F factor to find

annual operating cost

IS

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34

inspection and yearly maintenance cost of RM10,000. The cost of

purchasing of land (right-off-way) is expected to be RM 500,000.

In addition, the concrete deck would have to be resurfaced every

10 years at a cost of RM 100,000. Determine the total budgetary

cost for the whole project now if the interest rate is 6% per year.

0

10

20

10,000

500,000

30,000,000

100,000

100,000

Recurring cost

Non-Recurring cost

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35

Annual recurring operating cost, A1 = 10,000

Annual equivalent of resurface cost (consider only 1 cycle),

A2 = 100,000 (A/F, 6, 10)

Total capitalized cost of suspension bridge = P1 + P2

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36

Conventional cases

Cash flow (A, F)

starts at first year

and P always at

year 0

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37

Unconventional cases

Cash flow (A, F, G)

starts at

somewhere in the

middle

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38

Example 2.14

Abdullah bought a piece of land with a down payment of

RM15,000 and a yearly payment of RM1,000 for 6 years. Due

to financial problems he wishes to delay the yearly payment

and start paying 3 years from now. What is the present value

of the land if growth rate is 10% per year?.

Solution:

0

2

0

3

1

8

6

A

P

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39

= 1,000 (4.3553)

= RM4,355.30

P = 4,355.30 (P/F, 10%, 2)

= 4,355.30 (0.8264)

= RM3,599.22

Therefore, total P value is,

P = 15,000 + 3,599.22

= RM18,599.22

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Example 2.15

The transaction for the purchase of a fix asset is shown in the

following table;

Year

1-3

1,000

4-7

3,000

8-10

2,000

is 12% per year.

0

Solution:

10

1,000

2,000

3,000

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= 1,000 (2.4018)

= RM2,401.80

10

1,000

2,000

= 3,000 (3.0373) (0.7118)

= RM6,485.85

P3 = 2,000 (P/A, 12%, 3) (P/F, 12%, 7)

= 2,000 (2.4018) (0.4523)

= RM2,172.67

Thus,

3,000

10

PTotal = P1 + P2 + P3

= 2,401.80 + 6,485.85 + 2,172.67

= RM11,060.32

42

MZMS/MMT

EEBab2

Solution 2.16

Income/return from a machine is shown in the cash flow

diagram below. Calculate P.

Solution:

Thus

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43

Example 2.17

Based on the following information, calculate;

i. Present worth of project

ii. Projects value at year 7

iii. Balance/remaining value of project at year 7

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44

Solution :

i.

Present value of project , P

P = - 170,000 8,000 (P/A, 10%, 12) +10,000 (P/G, 10%, 12)

= - 170,000 8,000 (6.8137) + 10,000 (29.9012)

= - 170,000 54,509.60 + 299,012

= RM74,502.40

ii.

iii.

F7 = 74,502.40 (F/P, 10%, 7)

= 74,502.40 (1.9487)

= RM145,182.82

P7

G = 10,000

70,000

7

A = 8,000

12

F8 = (8 1) (10,000) = RM70,000

Thus,

P7 = 70,000 (P/A, 10%, 5) + 10,000 (P/G, 10%, 5)

8,000 (P/A, 10%, 5)

= 70,000 (3.7908) + 10,000 (6.8618)

8,000 (3.7908)

= 265,356 + 68618 30,326.40

= RM303,647.60

MZMS/MMT

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Example 2.18

Data on a machine is as follows;

a. Expected market price after 10 years is RM30,000.

b. Revenue from the sales of product is RM12,000 per year.

c. Material and maintenance costs from year 1 to year 5 is RM5,000

per year.

d. Cost for machine overhaul is RM10,000 at year 5.

e. The maintenance cost from year 6 to year 10 is ;

Year

Value (RM)

5,000

6,000

7,000

8,000

10

9,000

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Solution:

5,000 (P/A, 10%, 10) - 10,000 (P/F, 10%, 5)

1,000 (P/G, 10%, 5) (P/F, 10%, 5)

= 12,000 (6.1446) + 30,000 (0.3855) 5,000 (6.1446)

- 10,000 (0.6209) 1,000 (6.8618) (0.6209)

= 73,735.20 + 11,565 30,723 6,209 4,260.49

= RM44,107.71

MZMS/MMT

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47

Compute the

Future worth in year

10

Present value

Equivalent annual

amount

Assume i = 12%

3000

700

200

150

10

300

800

1200

1400

1600

IS

1300

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48

F = (1 + iyear) = (1 + imonth)n

Thus,

(1 + iyear) = (1 + imonth)n

imonth

iyear = (1 + imonth)n -1

18

month

If imonth = 1%,

iyear

= (1 + 0.01)12 1

= 12.68%

MZMS/MMT

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49

statements:

Invest now RM1000 at interest

rates:

1. 12% per year compounded

annually

2. 12% per year compounded

semiannually

3. 12% per year compounded

quarterly

Calculate what will happen to the

amount of money after 1 year

investment?

F=?

CASE 1

1 year

12 months

P=1000

F = P(1 + i)n

= 1000 (1 + 0.12)1

= 1120

interest charged yearly

Compounded semiannually

means interest will be charged

2x a year (every 6 months)

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50

investment i.e first at 6 months

and the second time at the end of

year 1

F6mth = 1000 (1 + 0.06) = 1060

2nd time charging:

F12mth = 1060 (1 + 0.06) = 1123.6

rate? 12% or 12.36%

CASE 2

F=?

1 year

0

0

12

P=1000

= {(1123.6 1000)/1000}x100

= 12.36%

When compounding more than

once per year, the interest rate

becomes more than what is

stated!

IS

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investment i.e every 3 months

CASE 3

1 year

0

0

F=?

12

P=1000

2nd

time charging:

F6mth = 1030 (1 + 0.03) = 1060.9

3rd time

= {(

1000)/1000}x100

= _____%

4th time

interest rate? 12%?

= 12.55%,

F = 1000 (1 + 0.1255)1

= 1125.50

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compounded quarterly

0

months

3

months

6

months

9

months

12

months

Nominal

3%

6%

9%

12%

Effective

3%

6.09%

9.27%

12.55%

Nominal interest rate/quarter = 12/3 = 3%

Adjust interest rate to align with payment period

m is no of compounding periods

IS

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1.

ieff/period = (1 + iN/period/m)m 1

2.

period, where m is no of compounding

periods

year are there?

1. m = 1

2. m = 2

3. m = 4

3.

annually

12% per year compounded

semiannually

12% per year compounded

quarterly

eff/year

= (1 + 0.12/1)1 -1 = 0.12

eff/year

= (1 + 0.12/2)2 -1 = 0.1236

eff/year

= (1 + 0.12/4)4 -1 = 0.1255

IS

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54

means..adjust interest position so that effective interest on

the payment can be charged according to the no of

compounding period.

Three conditions available (for single payment only):

PP > CP

PP = CP

PP < CP

PP = CP

PP > CP

1 yr

1 yr

PP < CP

Eg. CP = 3

months,

Payment in

6 months

1 yr

payment within 1 year

1 year but less than CP

Eg. Payment at 6

months, CP = 6

months

months, CP = 6 months

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Case 1, PP>CP

Method 1: Use iN for a period that follow

compounding period. Eg. Compounded

semiannually (twice a year), i nominal must be

per 6 months. No of periods = 2xn where 2 is no

of compounding per year and n is no of years

Or Method 2: use ieff for 1 year period. Calculate

ieff with formula ieff/period = (1 + iN/period/m)m 1

where m is no of compounding periods within a

year

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56

Case 2, PP=CP

ieff per compounding period is equal to iN for the

payment. Eg. 12% per year compounded

semiannually and payment also at 6 months. In

this case ieff/6mth = iN/6mth = 6%.

Follow calculation using 1st method in case 1

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Case 3, PP<CP

compounding period will be charged simple interest or

without charging any interest.

Interest = (M/N)*simple interest. This interest amount will

be added to the payment (if any) at the CP. Only payment at

CP will get compounding interest

Eg. CP=6, Payment at month 3 . It is assumed that the

payment made at month 6, no interest given to payments

made from month 3-5. In withdrawal case, it is assumed

the withdrawal occurs at previous compounding period. Eg.

Withdraw at month 5 is assumed withdrew at month 0.

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e) when PP CP

that number as n

Find the effective ieff per payment period

Calculate P or F using std notation formula

IS

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MZMS

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Example 2.19

For a growth rate of 12% a year compounded every 3 months,

determine;

a. Nominal and effective growth rate for 3 months.

b. Nominal and effective growth rate for 6 months.

c. Nominal and effective growth rate for 1 year.

d. Nominal and effective growth rate for 1 month.

Solution:

In (a) growth is compounded every 3 months, that is, 4 times a

year (4 period) that growth is calculated.

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Effective growth rate = iE3m = 3%

In this case both rates are equal because both occur at the same period.

b) Nominal growth rate = iN6m = 12%/2 = 6 %

For effective growth rate; 1+iE6m = (1+0.03)2

Therefore, iE6m = 0.0609 (6.09%)

Growth is compounded twice a year.

c) Nominal growth rate per year = 3% x 4 = 12%

For effective growth rate; 1+iEyear = (1+0.03)4

Therefore, iEyear = 0.1255 (12.55%)

Growth is compounded each year.

d) There is no effective growth for period less than the compounded period. (No growth is

generated in this period).

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Example 2.20

An individual saves RM1,000 now, RM3,000 four years from

now and RM1,500 six years from now. At a growth rate of

12% a year compounded twice a year, how much money is

accumulated in his account at year 10.

Solution:

iN = 12% compounded twice yearly

(year)

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Note:

compounded semiannually

Single Payment

Case: PP > CP

3000

1500

10 year

PP = 1 year,

CP = 6 months

1000

ieff/yr =

iN / yr

1

m

- 1 = (1 + 0.12/2)2 - 1= 12.36%

compounded semiannually :

F = 1000(F/P, 6%, 10x2) + 3000(F/P, 6%, 6x2) + 1500(F/P, 6%, 4x2)

0

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64

money will she have in her account after she makes her last

deposit? Assume that the growth rate is 20% per year compounded

quarterly.

F=?

0

A = 500

0

Step:

1. Determine how many

payments? 8 x 2 = 16. So,

n = 16

2. Calculate ieff/6month , iN per

period = 10% (follow PP),

m = 2 (2x compounding

within 6 months)

3. Calculate F using ieff/6month n

= 16,

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iN6month = iE6month = 12%/2 = 6%

In this case, 2 compounded period per year of 6% per period, with a total of 20

compounded period in10 years.

In this case, the effective annual growth is used.

(1+iE6month ) = (1 + 0.06)2

iE6month = 0.1236 (12.36%)

In this case, the effective annual growth of 12.36% is used.

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Interest rate

What to find,

what is given

Standard notation

$500 semiannually

for 5 years

compounded

semiannually

Find P, given A

P= 500(P/A,8%,10)

years

compounded

monthly

Find F, given A

F= 75(F/A,2%,36)

15 years

5% per quarter

Find F, given A

F= 180(F/A,5%,60)

increase for 4

years

1% per month

Find P, given G

P= 25(P/G,1%,48)

for 6 years

1% per month

Find A, given P

A= 5000(A/P,3.03%,24)

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In single payment, if

PP > CP use iN and mn or ieff

PP = CP use iN & mn

In series A, G or e

PP > CP use ieff

PP = CP use iN & mn

iS

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Example 2.21

Calculate the nominal and effective growth if growth is

compounded every month.

Solution :

iNyear = ?

iEyear= ?

(1 + imonth) = (1.1585)1/4

imonth = 0.0364 (3.64%)

4

months

Thus,

(1 + iEmonth) = (1 + imonth)12

(1 + imonth) = (1 + 0.0364)12

(1 + imonth) = 1.5362

imonth = 0.5362 (53.62%)

times)

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Cash Flow Diagram.

Factors in analyses.

Compounded period less than 1 year.

Transformation involved.

Consideration for method of growth.

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control made deposits of $10000

at the end of year 2, $25000 at the

end of year 3, and $30000 at the

end of year 5. Determine the future

worth (in year 6) of the deposits at

an interest rate of

i. 16% per year compounded

quarterly.

ii. 6 % per six months

compounded monthly

iii. 1 % per month compounded

semiannually

10,000

25,000

20,000

30,000

1/2

iS

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manager has paid $500 every 6

months for the software

maintenance contract of a LAN.

What is the equivalent amount

after the last payment, if these

funds are taken from a pool that

has been returning 20% per year,

compounded quarterly?

PP = 6 months, CP = 3 months

PP CP, Case 1 with A series

i.e. ieff/6 months , iN/6 months = 10%

A = $500

Effective i% per 6 months

= (1 + 0.10/2)2 1 = 10.25%

F = 500(F/A, 10.25%, 14)

= 14,244.50

What is the minimum revenue

per year should the company

generate in order to recover

the maintenance cost?

IS

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Jederzeit kündbar.