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Foundations of Engineering Economy
Foundations of Engineering Economy
1. Questions 7. Symbols
2. Decision making 8. Spreadsheet
functions
3. Study approach
9. Minimum
4. Interest rate
attractive rate of
5. Equivalence return
6. Simple and 10.Cash flows
compound
11.Doubling time
interest
12.Spreadsheets
0 1
Interest rate = 6% per year
$100 now
a) The amount of $98 now is equivalent to $105.60 one year from now
b) A truck battery cost of $200 one year ago is equivalent to $205 now
a) The amount of $98 now is equivalent to $105.60 one year from now
FALSE
b) A truck battery cost of $200 one year ago is equivalent to $205 now
FALSE
c) A $38 cost now is equivalent to $39.90 one year from now
TRUE
d) A $3000 cost now is equivalent to $2887.14 one year ago
FALSE
e) The carrying charge accumulated in 1 year on an investment of
$2000 worth of batteries is $100
TRUE
Simple Interest:
Interest = (principal)(number of periods)(interest rate)
Compound Interest:
Interest earns interest on interest
Compounds over time
Interest = (principal + all accrued interest) (interest rate)
Definition of terms
Cash Inflows - amount of funds flowing into the
firm
Cash Outflows – amount of funds flowing out of the
firm
Net Cash Flow equals
cash inflows – cash outflows
Assumption for analysis – end of period
Funds flow at the end of a given (interest) period
0 1 2 … … … n-1 n
One time period
0 1 2 … … … n-1 n
Cash flows are shown as directed arrows (+ for up or – for down) ---
(+) inflow; (-) outflow
Slide Sets to accompany Blank, Tarquin &
Iverson, Engineering Economy, Canadian Edition 1-25 © 2008 McGraw-Hill Ltd.
Sct 1.11 Rule of 72: Estimating Doubling
Time or Interest Rate
Common question:
Estimate the number of time periods it takes for a
cash flow to double in size
Given an interest rate i% per period
The approximate time n for an investment at time
t = 0 to double in value is given by:
n = 72/i
e.g., $10,000 at 7% per year doubles to $20,000 in
10.3 years