Engineering

Economy
Why the engineering economy is important ?
Ans. Because we used it from buying T-shirt to buying anew car
1

m. aSalHi

Feasibility studies : help in decisions making for different

alternatives , to decide wither the project ( alternative ) is
beneficial or not
The Role of engineering economy in decision making :
1. Understand the problem and goal
2. Collect information
3. Define alternative solutions
4. Evaluate each alternative
5. Select the best alternative
6. Implement the solution and monitor the result
In engineering economy we do the steps from 2 to 5
2

m. aSalHi

Chapter 1
- Cash flow Diagram (C.F.D) (as the below diagram)
- Payment :
1- Single Payment
2- Annual Uniform Series
- Gradient :
1- increase
2- decrease
- Uniform series
Gradient
Annual Uniform Series

Years or the time interval used

Income (+)

0 1 2 3 4
Cost (outcome) (-)
3

n
Single Payment
m. aSalHi

Cash flow Diagram C.F.D

Components of C.F.D :
(1)- Time ( n years , months or days.. etc )
(2)- Payment
a- P.W.--> Present Worth (Single Payment)
b- F.W.--> Future Worth (Single Payment)
c- A.W. --> Annual Uniform Series

(3)- Interest Rate (i)

a- simple Interest Rate
b- compound Interest Rate
4

m. aSalHi

Outcomes and Incomes

Outcomes

First Cost or Initial Cost

F.C or I.C

Operating Cost or Annual Operating Cost O.C or
A.O.C

Maintenance Cost M.C

Maintenance and Operating Cost M&O.CO
Or any cost

Incomes

Salvage Value

S.V

Or any income

m. aSalHi

Interest
Rate
)(
Time value of money

Type of Interest Rate (i)
a- simple Interest Rate
b- compound Interest Rate
Ex. : 100$ with interest rate i = 10% per year
what is the value of money after 1 year ?
The interest (value) = the money * i
= 100 * 10% = 10$
The money will become = interest + the money
= 10 + 100 = 110$
6

m. aSalHi

Example (1) :
Simple and compound interest
Mr. X borrowed 1000 $ , for { 3 years } 5% per year , how much
you will repay the loan ? If the interest Simple and Compound
if Simple :- Interest Value per year = 1000 * 0.05 = 50 $
- Total Interest for 3 years = 1000 * 3 * 0.05 =150 $
- Total amount due after 3 years = 1000 + 150 = 1150 $
if Compound :year 1 interest = 1000 * 0.05 = 50 $
- Total amount due after 1 year = 1000 + 50 = 1050 $
year 2 interest = 1050 * 0.05 = 52.5 $
- Total amount due after 2 year = 1050 + 52.5 = 1102.5 $
year 3 interest = 1102.5 * 0.05 = 55.13 $
- Total amount due after 3 year = 1102.5 + 55.13 = 1157.63 $
7

m. aSalHi

Example (2) :
Loan =10,000 $
i = 10% per year
How much year should Pay often 5 years ?
1) If compound interest rate
F.W P.W ( 1 i ) n
F.W 10,000 ( 1 0.10 )5 10,000 (1.61051) 16,105.1 $

2) if simple interest rate

F.W = P.W ( i ) n + P.W
F.W = 10,000 (0.10)(5) +10,000 = 5,000+10,000 = 15,000 $
8

m. aSalHi

Example (3) :

Someone borrow 10,000 $ , repay the money often 2 year

10,700 $ . What is the value of interest rate used ? (if
simple and compound)
(1) if compound interest rate

F.W P.W ( 1 i ) n
10,700 10,000 ( 1 i ) 2
1.07 ( 1 i ) 2 1.07 ( 1 i )
1.03441 ( 1 i ) i 0.03441 3.441%

(2) if simple interest rate

F.W = P.W ( i ) n + P.W
10,700 = 10,000*(i)*2 + 10,000 i = 0,035 = 3.5%
9

m. aSalHi

Example (4) :
Which is the better to you , for business 1000 $ for 3 years
a. Simple interest 8% b. compound interest 8%

a. Simple interest 8%
F.W = P.W (i) n + P.W
= 1000(0.08)3+1000
= 1240 $

b. Compound interest 8%
F.W P.W ( 1 i ) n
1000 (1 0.08)3
1259.712$

The better is b
10

m. aSalHi

Example (5) :
Draw the cash flow diagram , given :
- First cost = 6400
- Salvage value = 350
- Operating cost (for the first 5 years , increased by 50)
A=1000
- Annual income =1000
- n = 8 years
0

1
300

11

6400

2
350

400
G=50

450

500
m. aSalHi

Example (6) :
Draw the cash flow diagram for a machine , the first cost 5000 ,
operating cost 150 increased by 50 after that , annual income 200 for
the first 3 years , 1000 maintenance cost at end of year 4 , annual
income 300 for the remaining period , the salvage value 800 , for 8
800
years
300

Note :
end of year 4
or start of year 5
or in years 4
are same
n=4
12

200
0

150

6400

2
200

250

300

G=50

1000

350

400

450

500

m. aSalHi

Factors and their used :

To find any unknown value in C.F.D

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

0
n

where (P/F , i , n) & (F/P , i , n)

is factor , we get value of it from
the tables of eng. economy

13

i=%

Note :
(P/F , i , n) we read it as :
P given F with interest rate equal
to i for a n years
m. aSalHi

For Annual Uniform Series (A.W.)

A

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

n
i=%

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

A
n

0
i=%

14

m. aSalHi

For Uniform Gradient (G)

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

Base
Payment = 100

i=%

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

0
n

i=%
P
15

m. aSalHi

To find any unknown value for any C.F.D. (with used factors ) ,
we used equation :
( incomes ) = ( outcomes )
(At time 0)
Or in any same time (for all incomes & out comes)
Incomes
F
A

Outcomes
16

m. aSalHi

 ( )factor (
)
()for the same year

?? )Ex. : (P/A , i , n) = X , (P/G , i , n) = Y find (A/G , i , n

)(P/G) * (A/P) = (A/G

(A/G , i , n) = X/Y
Note :
)(A/P , i , n) = 1/ (P/A , i , n
m. aSalHi

17

Example (1) :
P.W. =10,000$
i = 8%
n = 5 years
F.W. = ??

F =??

P = 10,000 $

18

5
i=8%

at years 5
F.W = P (F/P , i , n)
= 10,000 (F/P , 8% , 5)
= 10,000 (1.4693)
= 14,693 $

m. aSalHi

Example (2) :
P = 2,000$ , n = 10 years
i = 7% per years
0
A = ?? (from 1 to 10)

A =??
10
i=7%

P = 2,000 $

A = P (A/P , i , n)
= 2,000 (A/P , 7% , 10 )
= 2,000 ( 0.14238 )
= 284.76 $
19

m. aSalHi

Example (3) :
P = 5000 $ (at n = 0) , F = 100 $ (at n= 15)
n = 15 years , i = 10 % per year
A = ?? (from n=1 to 10)

F = 100 $

A =??

10

15

i=10%
P = 5,000 $

20

at years 0
A(P/A , 10% ,10) + F(P/F , 10% ,15) = P
A(6.1445) + 100(0.23939) = 5000
A= 809.84 $

m. aSalHi

Example (4) :
For a project Annual income 500$ from the fourth to eighth
year with i = 15%
A=500 $
Find the value
of present worth
(at time 0) ?
0
P=??

2
i=15%

at years 0
P = A (P/A,15%,5)(P/F,15%,3)
= 500 (3.3521)(0.65752)
= 1102.036 $
21

m. aSalHi

Example (5) :
Find The Value Of X , for the given C.F.D
X=??

1000 $

i=8%
800 $

at years 1
X + 1000( P/F , 8% , 5 ) = 800
X = 800 -1000(0.68058)
X = 119.42 $
22

m. aSalHi

Example (6) :
Find The Value Of Annual X

A=400 $

i=8%
X= ??

at years 0
400 (P/A,8%,5) = X(P/A,8%,7)(P/F,8%,1)
400 (3.9927) = X(5.2063)(0.92593)
X = 331.298 $
23

m. aSalHi

Example (7) :
20,000 $

Find The Value Of Payment X

i=9%
0

12,000 $

X=???

8000 $

at years 2
20,000 = 12,000 (F/P,9%,2) + X + 8000 (P/F,9%,5)
20,000 = 12,000 (1.1881) + X + 8000 (0.77218)
X = -434.64 $
24

m. aSalHi

Example (8) :
(Uniform Increasing Gradient)
Find The Value Of Present Value At 0 Time

P=??

25

i=10%

at years 0
G (P/G , 10% , 6)(P/F , 10% , 3) = P
P = 50(9.6841)(0.75131)
= 363.788 $

m. aSalHi

Example (9) :
(Uniform Decreasing Gradient)
Find The Value Of Present Value At 0 Time
P=???

Base
payment = 5000

26

i=12%

m. aSalHi



G=+150 $

A=5000 $
??=P

??=P
0

A=5000 $

()

P

A=5000 $
G=-150 $

at years 0
)P + G (P/G , 12% , 5) (P/F , 12% , 1) = A (P/A , 12% , 5) (P/F , 12% , 1
)P + 150(6.3970)(0.89286) = 5000(3.6047)(0.89286
P = 15,235.718 $
m. aSalHi

27

Example (10) :
Find the gradient G for the given C.F.D

4G

5G

3G
2G
G
0

i = 10 %
6000 $

28

at years 0
G (P/G,10%,6) = 6000 (P/F,10%,3)
G (9.6841) = 6000 (0.75131)
G = 465.491 $

m. aSalHi

Example (11) :
X=A=???

Find The Value Of Annual X

i=8%
-1

G=-100 $
Base Payment = 900

at years 0

29

X (P/A,8%,6)(P/F,8%,2) + 100(P/G,8%,7)(F/P,8%,1) =
900(P/A,8%,7)(F/P,8%,1)
X(4.6228)(0.85734) + 100(14.024)(1.080) = 900(5.2063)(1.080)
m. aSalHi
X = 894.69 $

Example (12) :
The simple interest rate for this cash flow diagram is ?
7000 $

. .. .. .....

5000 $

at years 8
F.W = P.W ( i ) n + P.W
7000 = 5000(i)(8) + 5000
i = 0.05=5%
30

m. aSalHi

Example (13) :
Given that
(A/G) = 3.0738
(P/F) = 6.1917
(F/A) = 25.958
The value of (G/P) is ?? (for the same i and n)
1
1
1
G A F
G/P (
)(
)(
) ( ) ( )( ) G/P
A/G F/A P/F
A F P
1
1
1
G/P (
)(
)(
) 2.024*10-3
3.0738 25.958 6.1917
31

m. aSalHi

Example (14) :
Find the number of years for the given C.F.D
30,500 $
3,750 $

i=10%

20,000 $

at years 0
-20,000+3750(P/F,10%,2)+30,500(P/F,10%, n) = 0
-20,000+3750(0.82645)+30,500(P/F, 10%, n) = 0
(P/F,10%,n) = 0.554125
32

m. aSalHi

 n
( )
n = 6 ( P/F ) = 0.56447
n = 7 ( P/F ) = 0.51316
and we use interpolation to find n
d

0.56447
0.554125
0.51316

n=6
n=n
n=7

a c

b d
) (n - 6 ) (0.554125 - 0.56447

) (7 - 6 ) (0.51316 - 0.56447
n 6.20162 years
m. aSalHi

33

Example (15) :
2000 $

Find the interest rate for the given C.F.D

i * =??
-1

To find the interest rate when it unknown

we used Trail and Error method

A=250 $

at years 5

250 ( F/A , i , 6 ) = 2200 250 ( F/A , i , 6 ) 2000 = 0

Try (randomize) i = 10% -71.1
i = 11% -21.8
i = 12% +28.775
34

m. aSalHi

*When i = i
the answer equal zero

( )i ( *) i
( )Interpolation :
d

i = 11% -21.8
*i = i
0
i = 12% +28.775

a c

b d
) (i * - 0.11
) (0 - - 21.8

) (0.12 - 0.11 ) (28.775 - - 21. 8

i * 0.11431 11.431%
m. aSalHi

35