ENGINEERING ECONOMICS (INDEX)

FORMULA SYMBOLS/NOTATION
Total Costs TC=C f + C v C f = Total fixed costs
C v = Total Variable Costs
Total Revenue TR=p •D p = price
D= Demand
Profit Profit=TR - TC TR = Total Revenue
TC = Total Costs
Law of Demand
Relationship of Price p=a-bD a= intercept on the price y(axis)
& Demand b= slope, the amount by which D
increases for each unit decrease in p
D= Demand
P= Price
Total Revenue a
w/ D’=
2b
TR= p×D= (a-bD)×D= aD-b D 2

Profit Profit = TR-TC

= (aD-b D 2)-(C f + C v D )
= -C f + ¿ ¿
Demand that will a−+ C v
maximize profit D*=
2b
Indexes In k = reference year (e.g., 2000) for
C n=C k ( ) which cost or price of item its known.
Ik
n= year for which cost or price is to be
estimated (n>k)
C n= estimated cost or price of item in
year n.
C k = cost or price of item in reference
year k.
Power-Sizing CA S A x C A= cost for plant A
Technique =( ) C B= cost for plant B
CB SB
SA
x S A = size of plant A
C A = CB ( ) S B= size of plant B
SB
X= cost-capacity factor to reflect
economics of scale
n
Learning Curve Zu =K (u ) u= the output unit number
Zu = the number of input resource
units needed to produce output unit
u;
K= the number of input resource units
needed to produce the first output
unit;
s= the learning curve slope parameter
expressed as a decimal (s=0.9 for a
90% learning curve)
log s
n= = the learning curve
log 2
exponent.

Interest Interest = ending amount – beginning amount

IR or ROR(%) Interest accrued per unit time IR = Interest Rate
IR = ×100%
Original Amount ROR = Rate Of Return
Nominal Interest r=im
Rate
Effective interest i= r/m i= effective interest rate per
rate per compounding period
compounding period r= nominal interest rate per year
m= number of compounding periods
per year
Effective annual r m
i a= [1+ ¿ ¿ −1
interest rate m
i a=[1+i ¿¿ m-1
Simple Interest I = PNI P= Principal amount borrowed
N= number of interest periods
i= interest rate per interest period
Single-Payment 𝐹 = future sum of money; the
Compound-Amount equivalent worth of one or more cash
Factor (𝑭/𝑷) flows at a reference point in time
called the future
𝐴 = end-of-period cash flows in a
series of equal payment (uniform
series) continuing for a specified
number of periods, starting at the end
of the first period and continuing
through the last period, also often
called annuity
Finding the Interest
Rate Given P, F, and
N
Uniform Series
Present Worth
Factor (𝑷/𝑨)

Capital Recovery
Factor (𝑨/𝑷)

Sinking Fund Factor

(𝑨/𝑭)

Uniform Series
Compound Amount
Factor (𝑭/𝑨)

Arithmetic Gradient
Factors (𝑷/𝑮 𝒂𝒏𝒅
𝑨/𝑮)

Geometric Gradient
Series Factors

Present Worth (PW) 𝑃𝑊 (𝑖%) = 𝐹0 (1 + 𝑖) 0 + 𝐹1 (1 + 𝑖) −1 + 𝐹2 (1 + 𝑖) i = minimum attractive rate or return

Method −2 + ⋯ + 𝐹𝑛 (1 + 𝑖) –𝑛 (MARR)
Or k = index for each compounding
𝑃𝑊 (𝑖%) = ∑𝐹𝑘 (1 + 𝑖) ^ −k period (0 <k
PW= (P/A,i,n)+(P/F,i,n)

Future Worth (FW) 𝐹𝑊 (𝑖%) = 𝐹0 (1 + 𝑖) 𝑛 + 𝐹1 (1 + 𝑖) 𝑛−1 + 𝐹2 (1 +

Method 𝑖) 𝑛−2 + ⋯ + 𝐹𝑛 (1 + 𝑖) 0
Or
𝐹𝑊(𝑖%) = ∑𝐹𝑘 (1 + 𝑖) 𝑛−k

Annual Worth (AW) 𝐴𝑊 (𝑖%) = 𝑅 − 𝐸 – 𝐶R

Method 𝐶𝑅 (%) = 𝐼 × (𝐴/𝑃, 𝑖%, 𝑛) − 𝑆𝑉 × (𝐴/𝐹, 1%, 𝑛)

Internal Rate of ∑𝑅𝑘 (𝑃/𝐹, 𝑖 ∗%, 𝑘) 𝑛 𝑘=0 = ∑𝐸𝑘 (𝑃/𝐹, 𝑖 ∗%, 𝑘) 𝑛 R = net revenues or savings for the kth
Return (IRR) Method 𝑘=0 year
Or E = net expenditures including
𝑃𝑊 = 0 = ∑𝑅𝑘(𝑃/𝐹, 𝑖 ∗%, 𝑘) 𝑛 𝑘=0 − ∑𝐸𝑘(𝑃/𝐹, 𝑖 ∗ investments for the kth year
%, 𝑘) n = project life (or study period)
Benefit/Cost Ratio 𝐵/𝐶 = 𝐴𝑊 AW = annual worth B = annual
Method (𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡)/ 𝐴𝑊 equivalent worth of benefits of the
(𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡) proposed project
CR = capital recovery cost
O & M = equivalent annual operating
and maintenance expenses of the
proposed project
Conventional B/C 𝐵/𝐶 = 𝐵/ 𝐶𝑅 + (𝑂&𝑀)
ratio:
Modified B/C ratio: 𝐵/𝐶 = 𝐵 − (𝑂&𝑀) / 𝐶𝑅
Capitalized 𝐶𝐸𝐴 = 𝑃 = 𝐴(𝑃/𝐴, 𝑖%, ∞)
Equivalent Amount 𝐶𝐸𝐴 = 𝑃 = 𝐴 ( 1 /𝑖 )
(CEA) or Capitalized
Worth (CW) Method
DEPRECIATION
Depreciation 𝑑𝑘 = annual depreciation deduction in
Methods year k (1 < N)
𝑑𝑘 ∗ = cumulative depreciation
 Straight-line through year k 𝐵
Method 𝑉𝑘 = book value at end of year k
B = cost basis, including allowable
adjustments
𝑆𝑉𝑁 = estimated salvage value at end
of year N
N = depreciable life of the asset in
years
Sum-of-the-years-
Digits (SYD) Method

Declining Balance
Method

Sinking Fund A’ = C (A/F, i%, n) A' = sinking fund deposit

Method C = purchase price of replacement
asset – net salvage value of current
The depreciation in year k, which includes asset
interest earned at that time, is given as: n = useful life of current asset
i = annual interest rate