APPLICATION OF MONEY –

TIME RELATIONSHIPS
BES 104
The two primary objectives of the application of
money-time relationships are:
A. To illustrate several basic methods for
making engineering economy studies to
consider the time value of money

B. To describe briefly the underlying

assumptions and interrelationships among
these methods.
THE FOLLOWING METHODS APPLIED TO MONEY – TIME RELATIONSHIPS ARE:

1. Determining the attractive rate of return

2. The present worth method
3. The annual worth method
4. The internal rate of return method
5. The external rate of return method
6. The payback /payout period method
7. The investment balance diagram
 All engineering economy studies of capital
projects should consider the return that a given
project will or should produce. A basic question
is whether a proposed capital investment and its
associated expenditures can be recovered by
revenue/or savings over time in addition to a
return on capital that is sufficiently attractive in
view of the risks involved and the potential
alternatives.
MINIMUM ACCEPTABLE RATE OF RETURN

 One important parameters in engineering

economics
 Minimum acceptable rate of return should be
based on company’s financial condition and
other factors
 Need to raise money for investments
 Money is no free – it has “cost”
DETERMINING THE MINIMUM ATTRACTIVE RATE OF RETURN

 The Minimum Attractive Rate of

Return, simply called as MARR, is the
minimum rate of return that the
company is willing to accept on the
money it invests. It is also called as
minimum acceptable rate of return or
hurdle rate.
THE FOLLOWING CONSIDERATIONS IN DETERMINING MARR:

1) The amount of money available for investment, and the

source and cost of these funds / i.e. , equity funds or
borrowed funds.
2) The number of good projects available for investment
and their purpose / i.e. whether they sustain present
operations and are essential or whether they expand on
present operations and are elective.
3) The amount of perceived risk associated with
investment opportunities available to the firm and the
estimated cost of administering projects over versus
long planning horizons versus short planning horizons.
4. The type of organization involved i.e.
government, public utility or competitive industry.
 In theory the MARR which is sometimes called
the hurdle rate should be chosen to maximize the
economic well-being of an organization. One
popular approach to establish a MARR involves
the opportunity cost viewpoint and it results from
the phenomenon of capital rationing. Capital
rationing exists when management decides to
limit the total amount of capital invested.