ENGINEERING ECONOMY

Presented By : IEM Academic Club - IAC

Table of content

1 2

Cost Time
Concept Value
 01
Cost concept
 COST TERMINOLOGY
Fixed cost Variable cost

vary in total with the

unaffected by changes
changes in the quantity
1.

2.

3.

4. Optimal demand that maximizes revenue:

5.
6.

7.
8.

9.
 Example
The Company is producing Product A and Product B. Its sales quantities,
variable costs, revenues are as follows; identify the break-even quantity of
Product A&B

Sales quantity Variable cost Selling

Product Fixed cost (USD)
(PCS) (USD) price (USD)

A 15 6 12
1860
B 9 9 30
 Example
Step 1 Estimate sales mix

Step 2 Calculate contribution margin

Step 3 Calculate the fixed cost (ratio)

Step 4 Identify break-even (revenue)

 Example
Revenue = Sales quantity x selling price
Product A revenue = 15*12 = $180
Product B revenue = 9*30 = $270
Total revenue of product A and B: TR = 180 + 270 = $450

Estimate sales mix:

Product A: 180/450 = 40%
Product B: 270/450 = 60%

Contribution margin = sales quantity x (selling price - variable cost)

Product A: 15*(12-6) = $90
Product B: 9*(30-9) = $189
Total contribution margin = 90 + 189 = $279
 Example
Total variable cost = 15*6 + 9*9 = $171
% total variable cost / total revenue = 171/450 = 38%

Fixed cost (ratio) = fixed cost / total contribution margin = 1860/279 = 6.67

Break-even (revenue) = revenue x fixed cost (ratio)

Product A: 180*6.67 = $1200
Product B: 270*6,67 =$1800
Total break-even revenue = 1200 + 1800 = $3000

Break-even (quantity) = Break-even (revenue) / selling price

Product A: 1200/12 = 100 pcs
Product B: 1800/30 = 60 pcs
 02
Time Value
 formulas
Simple interest
 formulas
Compound interest
Find F given P at i% interest per period for N interest periods

Find P given F

Find interest rate

Find N
Notation
 formulas
Uniform series
A (annual equivalent value) occurs at the end of periods 1 through N,
inclusive.
Find F given A

Find P given A

Find A given F

Find A given P
 formulas
Uniform Gradient
The G is known as the uniform gradient amount.
Find P given G

Find A given G

Find F given G
 formulas
Geometric Gradient
 Example
Mr. A borrows $20,000 from a finance company at 10% per annum with the
understanding that he will pay back $11,500.24 each at the end of the first and second
year.
a. Determine the principal amount and interest in each payment
b. Compute the principal amount remaining to be paid at the end of each year.
c. Draw a cash-flow diagram
Solution
Solution
Cash flow diagram
 Example
3. Consider an EOY geometric gradient that increases at f = 6% per
year for 15 years is shown in the accompanying diagram. The annual
interest rate is 8%
a. What is the present equivalent value of this gradient?
b. Determine the value of the gradient amount, G
Example
Solution
 Example
When the little daughter of a young couple, Liam and Betty, turned 8 year-old, they have
decided to set aside some money to fund their daughter's college education. So they
immediately started the plan by opening a bank account with initial deposit of $5000
and keep funding this account by making deposits of $7500, $9500 and $8000 every 2
years since the first deposit. In addition, on the child’s 9th birthday, they started to
secure an education fund with annual deposit of $500 in 6 years. Then, from the child’s
19th birthday to 22nd birthday, partial amounts of money are withdrawn from the
account at $4000, $3000, $2000, $1000. (Annual interest rate at 10%)
a) Draw the cash-flow diagram
b) How much is the remaining saving in the account after the withdrawal made at 22nd
birthday of the child (computation)
 Solution
a) Cash-flow diagram
b) Solution
Thank you