Date: July 8,2014

To: Dr. Carlito G. Impas, Sr.

ES25 Facilitator
From: Neil John Perez
Re: Chapter 1 Synthesis
Engineering Economics is the use of engineering abilities, skills and
techniques in order to come up with effective economic decisions.
Engineering economics usually deals with the future in order to predict,
estimate and plan for future occurrences.
Noneconomic factors should also be considered in your estimates and plans.
One of the ways for this is the sensitivity analysis.
There are 9 measures of worth used in Engineering Economy: Personal Worth,
Future Worth, Annual Worth, Benefit/Cost, Rate of Return, Payback Period,
Capitalized Cost, Cost Effectiveness, and Economic Value Added.
It is a known reality that the value of money changes over time
Like the scientific process, there is also engineering economy process. They
should be in order
1. Identify the problem
2. Collect and analyze data
3. Estimate the cash flow
4. Identify ways that help you arrive a good decision
5. Consider noneconomic factors and do sensitivity analysis
6. Choose the best decision
7. Implement and Monitor
Engineering Economy Is heavily linked with the Engineering Morals and
Ethics. It is the responsibility of the engineers to do their task not solely for
the purpose of money but for the common good.
Morals and ethics can be broken down to different types:
o Universal/Common Morals-morals held by all people
o Individual/Personal Morals-morals formed through the experience and
principles of one person
o Professional/Engineering Ethics-professionals are guided by a Code of
Ethics where they should practice their profession with honesty and
integrity.
Interest is an increase in the borrowed money to be repaid by a certain
percentage over a period of time.
Interest can either be a gain or a loss depending on the perspective used.
Interest paid is the money to be paid by the borrower to the lender after
applying the interest. It is usually used in the perspective of the borrower to
represent the loss.

 Interest earned is the money is the money to be earned by the lender from
the borrower after applying the interest. It is usually used in the perspective
of the lender to represent their gain
It is important to be knowledgeable on the perspective of the interest to
avoid confusion in problems.
Interest paid/earned=total money after the interest is applied-principal
Interest paid over a period of time expressed in percentage is called interest
rate. Interest earned over a period of time is called Rate of Return.

Interest RateRate of Return=

interest accrued per timeunit

100
principal

In Europe, people use Rate of Return (RoR) meanwhile in America, the people
use the term Return of Investment (RoI).
One major factor that can increase interest rate is inflation. Inflation, simply
put, means that your money now might not have the same value after a
specific value of time. As an example the P30 that can buy a kilo of rice in the
1990 might not already be able to buy a kilo of rice in the 2010.
In order to be good in computing for interest, rate of return and other
engineering economy terms, we must first be familiar with the different
Terminologies and Symbols.
To remember them easily, we can use the acronym PanFit
o (P)ersonal Worth-money that one presently have.
o (A)nnual Worth-series of consecutive, equal, end-of-period money
o (n)umber of interest periods-the time required to acquire the interest
amount
o (F)uture Worth-money that one will have in a future time
o (i)nterest rate per time period-the rate in which the interest rate will
increase at a specific number of period
o (t)ime stated in periods-the timeframe of your objective or project.
The difference between number of interest periods and time stated in periods
is that number of interest periods (n) usually deals with the timeframe when
the money reaches a certain amount with a certain interest rate or Rate of
Return. Meanwhile, time stated in periods is the time for your project or
objective.
Cash flow is an estimate of the movement of money from one entitys hands.
That entity maybe an individual or a firm/company. It can either be a
positive(gain) or a loss(negative)

 The study of cash flow is important in the study of Engineering Economy in

order to trace both your gains and losses which will be a determinant in an
entitys decision making and future planning.
A positive cash flow is called a cash inflow estimate. It represents the gains,
revenue, receipts, income, returns and savings an entity has made.
A negative cash flow is called a cash outflow estimate. It represents the
losses, expenses, costs and taxes an entity has made.
Cash flows are only limited to estimates because most ordinary people dont
have the necessary knowledge for higher statistics.
Once all inflows and outflows are determined, the net cash outflow can now
be determined. The net cash outflow can be determined by subtracting the
cash outflow from the cash inflow
Net Cash Outflow=Cash Inflow-Cash Outflow
Net Cash Flow is usually assumed to occur at the end of the interest period
(n).
A Cash flow diagram is a graphical representation of our cash flow, It is useful
in checking the net cash flow in a specific interest period.
The usual convention for a cash flow diagram is that the interest
period(usually in years) is put In the x-axis while the the cash flow is the yaxis.
An arrow pointing up indicates a cash inflow while an arrow pointing
downward indicates a cash outflow. The bold arrow signifies the unknown
value to be solved In the illustration below, the red arrows symbolizes the
outflow, the blue arrows symbolizes inflow while the bold orange arrow is the
unknown.

Economic Equivalence -interest rate and time value of money to determine

the different amounts of money at different points in time that are equal in
economic value.
There are two types of commonly used interests: the simple interest and the
compound interest.

 Simple interest involves the same principal added by the interest per year.
We can express simple interest in the equation I=Pni where (I)=interest
earned or paid, (P) is the principal, (n) is the number of interest periods and(i)
is the interest rate expressed in decimal form. I=Pni
Examples of institutions that uses simple interest are some cooperatives and
friendly lending.
Compound interest, on the other hand, is where the amount accrued last year
will be the one that will be added by the interest per year. We can express
compound interest

(C1) as the product of the sum of the principal (P) and

all the acquired money(I); and the interest rate(i)

Ci=(P+I)(i)
Total due to n years= n=P(1+i)n
Most banks are already implementing compound interest. 5-6 also makes use
of compound interest.
Minimum Attractive Rate of Return(MARR) is a benchmark in order to make
an investment feasible. The MARR is a major factor in order for a proposed
investment to be accepted or rejected.
The returns of should be at least greater than the MARR in order for the
investment to be economically viable.
MARR is highly dependent on the cost of capital which is still the interest. It is
ideal to make your cost of capital or Weighted Average Cost of Capital to
minimum
To summarize : RoRMARR>WACC
Spreadsheets is widely used to record transactions as well as the cash flow of
a economic entity.
One very famous spreadsheet used worldwide is the Microsoft Excel. Excel
contains a lot of functions that will help us in different mathematics, statistics
and engineering economy problems. Example of which is a function to help
us find the compound interest CI: RATE( n, A, P, F )
Prepared by: Neil John Perez/ES25/TTH/3:00-4:30