Muhammad Ridwan Andi Purnomo

Department of Industrial Engineering

Faculty of Industrial Technology
Universitas Islam Indonesia
2016
Definition
The application of economic techniques to
the evaluation of design and engineering
alternatives.

The role is to assess the appropriateness of a

given project, estimate its value, and justify it
from an engineering standpoint.
Time value of money

The reasons why IDR1.000.000 today is

worth more than IDR1.000.000 one year
later are inflation, risk and cost of money
determined by an interest rate.
Cash flow
Cash flow is the stream of monetary (rupiah)
values costs (outputs) and benefits
(inputs) resulting from an activity.
Usually is drawn by a time line consists of
information about outflow (down direction)
and inflow (up direction).
The symbols

P = Present sum of money (IDR)

F = Future sum of money (IDR)
N = Number of interest periods
i = Interest rate per period (%)
Interest calculation
Interest is the money paid for the use of
borrowed money or the return on invested
capital.
Two way to calculate interest: simple interest &
compound interest.
Simple interest: F(N) = P + (N)(P)(i) = P(1 + Ni)
Ex: What is the value of IDR1000 at 10 percent per
year for 5 year yields?
F(5) = 1000(1+(5)0.1) = 1000(1.5) = IDR1500.
Interest calculation
Compound interest (like in a bank system)
F(1) = P + (P)(i) = P(1 + i)
F(2) = F(1) + F(1)(i)
= F(1)(1+i) = P(1+i)(1+i) = P(1+i)2
F(N) = P(1+i)N
Ex: What is the value of IDR1000 at 10 percent
per year for 5 year yields?
F(5) = 1000(1+0.1)5 = 1000(1.61051) = 1610.51
Present worth
Present worth is the value found by discounting
future cash flows to the present or base time.
P = F(1 + i )-N
Ex: What present value will yield IDR1000 in 5
years at 10 percent of interest?
P = 1000(1.1)-5
= 1000(0.62092) = IDR620.92
It means, we have to deposit IDR620.92 to a
bank in order to get IDR1000 at 5 years later.
Exercise
What is the interest value in order to triple
IDR1000 at 5 years later?
How much money to be deposited today in
order to get IDR3000 at 3 years later with
interest value is 12%?
After how many years if IDR1000 is deposited
today with interest 10% in order to get
IDR1500?
 Investment analysis
Two alternatives will be considered in order to
increase water supply in a town. Both alternatives
has 4 years life cycle and the interest value is 10%
per year. Bellow is the detail data about the 2
alternatives.
Cost Alternative A Alternative B
Investment IDR5.000.000,- IDR2.500.000,-
Operating cost/year IDR100.000,- IDR100.000,-
Maintenance 0 IDR1.500.000
every 2 years.
Salvage value 0 0

Choose the cheaper alternative !

THANK YOU