engineering economics course outline

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:|:|:::: COURSE | ENGINEERING ECONOMICS

1. Analysis before launching an product

a. Technical

b. Social

c. Financial

2. Economic environment (6)

3. Financial analysis (10)

a. Time value of money

b. Interest rate

c. Various factor

d. Present worthanalysis

e. Annual worth analysis

f. Internal rate of return

g. Benefit cost ratio

h. Selection between alternative

i. Capitalized cost

j. Gradient analysis

4. Depreciationand valuation

5. Break evenanalysis

6. Linear programming

Optimal allocation of scarce resources.

a. Graphical

b. Simplex

c. Duality

d. Transportation

7. Business organization & market

a. Types of organization

i. Single ownership

ii. Partnership

iii. Corporation company

b. Operation of organization in market

i. Perfectly competitive

ii. Monopolic

iii. Oligopolic

8. Financial accounting

a. Income statement

b. Balance sheet

c. Financial statement

9. Books

a. Engineering economics by Tarquin

b. Engineering economics by Paul degammo

c. Mathematical economics by A. Chang

d. General economics by Samaulso (dictionary)

Not part of course

Engineering Economics | Course Outline

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:|:|:::: INTRODUCTION

1. Microeconomics

a. Cost

b. Profit

2. Macroeconomics

a. Inflation

b. Unemployment

3. Economic activity

a. Two sector model

i. Consumersector

ii. Business sector

b. 3 sector model

i. Government

ii. Consumer

iii. Business

c. 4 sector model

i. Government (allows import/export)

ii. Business

iii. Consumer

iv. International market

4. Flow chart

a. Input market -> finished goods

5. Basic inputs

a. Land

b. Labour

c. Capital

d. Organization

6. Five M’s of management

a. Money

b. Material

c. Machinery

d. Manpower

e. Management

7. Table: Input – agent

8. Demand & supply

a. Shortage (D>S; loss of consumer)

b. Surplus (D<S; loss of business)

9. Interest & profit

10. Principal amount & interest

11. Goods & services (flow chart)

a. Consumer goods & services (directly consumed)

b. Producer goods and services (used in further processing)


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12. Goods and services

a. Normal (aka superior goods)

b. Inferior

c. Substitute

d. Compliment

13. Demand

a. Demand curve

b. Law of demand

c. Quantity demand (Qd) : function of Qd=a-bP

i. Price

ii. Price of related good

iii. Consumer income

iv. Consumer taste (fashion)

v. Expectation (view of price in future)

d. Quantity supply (Qs) : function of Qs=-c+dP

i. Price

ii. Price of related good

iii. Price of input

iv. Technology

v. Number of firms

vi. Expectation

↑ Qs w hen ↓Future price (clearance sale)

↓ Qs w hen ↑Future price (hoarding)

e. Equilibrium

i. Qs = Qd

ii. Qs =ୟ ୠୡ

ୠା

14. Elasticity

a. Elasticity of demad (Ed)

i. Strongly elastic Ed>1

ii. Weakly elastic Ed<1

iii. Unitary elastic Ed=1

iv. Special cases

Perfectly elastic

Perfectly inelastic

v. Numerical: Elasticity of demand


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:|:|:::: LINEAR PROGRAMMING

“Optimal allocation of resources in a competing environment.”

1. Limitations

a. Financial constraints

b. Raw material constrains

c. Machine constraints

2. Maximize

a. Revenue

b. Production

c. Profit

3. Minimize

a. Cost

b. Usage of inputs

4. Steps

a. Initial program (Qualitative -> Quantitative)

i. Objective function

ii. Structural constraints

iii. Non-negative constraints

b. Method (mechanism)

c. Optimal program (quantitative)

d. Result (Qualitative result: textual)

5. Optimal program (either or)

a. Maximize profit

b. Minimize cost

6. Constrains

a. Technicalities ( X+2Y )

b. Capacities ( ≤80 )

c. Non-negative constraints

7. Methods of linear programming

a. Graphical (two variables only)

b. Simplex (two or more variables)

c. Duality

d. Transportation

8. Simplexmethod

a. Unit matrix

b. Square matrix

c. Row column operations

Master’s course


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9. Graphical method

a. Initial program

i. Objective function (maximization/ minimization)

ii. Structural constraints

iii. Non-negative constraints

b. Extreme points for each constraint

c. Graph plot

d. Feasible area for each constraint

e. Feasible areafeasible points

f. Optimal point result

g. Special cases

i. Degenerate case (corner point solution)

ii. Multiple optimal solution case

iii. Non feasible area case

10. Simplexapproach

“An iterative optimizing technique of linear programming for more complicated problems with many

variables.”

a. Steps

i. Develop initial program

ii. Rearrange initial program for matrixdevelopment

Minimization: introduce dummy variables

iii. Tableau construction

Select pivot column (highest negative value column)

Mark pivot elements (minimumୡ୭୬ୱ୲ୟ୬୲

୰ ୱ୮ ୡ୲୧୴ ୪ ୫ ୬୲୭୮୧୴୭୲ୡ୭୪୳୫ ୬)

Mark pivot row (contains pivot element)

Develop next tableau (୮୧୴୭୲୰୭୵

୮୧୴୭୲ ୪ ୫ ୬୲)

Make objective function row zero

iv. Conduct feasibility test

Minimisation (minimum one negative value in objective function row)

Maximisation (minimum one positive value in objective function row)

v. Optimality condition

Maximisation: All positive value or zero in objective function row

Minimisation: All negative value or zero in objective function row

a. Convert tableau into feasible tableau

(R11=∑ R x ��ϐ��of dummy variable x Rଵ

ଶ )

vi. Extract identity matrix from tableau

b. Special cases

i. Degenerate case

more than one pivot element

zero is constant column (except first row)

ii. Non-feasible area

Constant column repeats

Negativity shifts inany other column

Non-improving case


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:|:|:::: FINANCIAL ANALYSIS

“It considers the time value of money.”

1. Money value

a. Nominal

b. Real (used in financial analysis)

2. Cash flow diagram

a. Inflow ↑

b. Outflow ↓

3. Factors affecting value of money

a. Time

b. Interest rate

4. Interest (excess rate principle)

a. Simple interest

b. Compound interest

c. Nominal interest

d. Composite interest

5. Factors to convert money from one period to another

a. Discount factor future to present = F xଵ

(ଵା୧)

b. Reciprocal of discount factor present to future ܨ = P x (1 + i)

c. Annuality factor annual to present = A x(ଵା୧)ଵ

୧(ଵା୧)

d. Capital recovery factor present to annual ܣ = P x୧(ଵା୧)

(ଵା୧)ଵ

e. Sinking fund factor future to annual ܣ = F x୧

(ଵା୧)

f. Reciprocal of sinking fund annual to lump sum ܨ = A x(ଵା୧)ଵ

୧

g. Gradient factor gradient to present =ୋ

୧x

(ଵା୧)ଵ

୧(ଵା୧)+

(ଵା୧)

h. Gradient to annual gradient to annual ܣ =ୋ

୧x

(ଵା୧)ଵ ୧

୧(ଵା୧)ଵ

6. Steps: Financial analysis

a. Enumerate (cost and benefit)

b. Evaluate (cost and benefit)

c. Discount net benefit (outcome)

{

{

{

{


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7. Money evaluation

a. Present worthanalysis

i. Net present value = ܤ − ܥ ≥ 0

ii. Present worth cost analysis least cost ܥ = −ܥ ܤ

Different lives (take LCM of lives)

b. Annual worth analysis

“Simplifies annual instalment calculation. Useful for different or perpetual lives.”

i. Equivalent uniformannual benefit > 0

ii. Equivalent uniformannual cost ݐݏ ݐݏ

Cash flow diagram

PWNR

EUAC one life cycle

Capitalised cost =ா

Total capitalised cost = ܥ ݐ ݏ −ݐݏ ேோ

c. Internal rate of return (IRR)

i . Rate of interest at PWB-PWC=0 = ∑

(ଵା)ଵ −∑

(ଵା)

ii . Alternatives

Independent (A or B) select project with highest IRR

Mutually exclusive (incremental analysis technique)

- EUAC (products x,y,z) =ݎ %ܣ +

−(− )−%ܤ) (%ܣ

d. Benefit cost ratio ܣ ܣ/ܤ ܥ > 1i. Approaches

Conventional

i<r i>r

ܤ

ܥ=

ܤܣ

ܥ + ܯ&> 0

ܥ = ݐݐ ݎ ݐ +ݐݏ ݏݏܮ ݏ ݒ

ܦ ݎ ݐ =ݐݏ − ܨ

ܤ

ܥ=

Now


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Modified

A

l

t

e

r

n

a

t

Alternatives

- Independent (simple analysis)

- Mutually exclusive (incremental analysis)

ܤ

ܥ=

ܤܣ∆

ܥܣܧ∆

Now

ܥܣܧ = ܥ ×(ଵା)

(ଵା)ଵ

Tabulation

∆EUAC/∆B∆B∆EUACCompareAB/ACAnnualBenefit

AscendingEUAC

ܤ

ܥ=ܤܣ − ܤܦܣ − ܯ&

ܥ> 0

Now

=

ܯ&−ܤܦܣ−ܤܣ

ቂ(ܨ−)ܣ

, %,ቃ+ )ܨ )

> 0


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:|:|:::: DEPRECIATION

1. Assets worth goes down as

a. Tangible depreciation

b. Intangible amortisation

c. Natural depletion

2. Depreciation types

a. Normal depreciation

i. Physical (capacity)

ii. Functional (obsoletion)

b. Monetary depreciation

3. Terms

a. Booked value

b. Salvage value

c. Annual depreciation

d. Total depreciation

2. Depreciation calculation techniques Preferred for

a. Straight line method 1-10 years

i. Annual depreciation .ܣ =ௌ

ே

ii. Total depreciation . = .ܣ) (

iii. Booked value ܤ . = −.

b. Sum of year digit method 10-20 years

i. Depreciation ܦ = (− ) . ݎݐ

ii. Depreciation factor . =ݎݐோ௩௦ ௬

∑௬௦

iii. Booked value ܤ . = − (− ) . ݎ ݒ

iv. Depreciation reverse . ݎ ݒ =∑௩௦ ௬௦௧

∑௬௦

v. Total depreciation . = − .ܤ

c. Declining balance approach >20 years

i. Depreciation ܦ = ܤ) . ଵ)

ii. k = 1− ቀௌቁଵ/ே

iii. Booked value ܤ . = (1− )

d. Double declining balance >20 years

i. Depreciation ܦ = ܤ) . ଵ)

ii. kmax ௫ =ଶ

ே%200ݎ

iii. Booked value ܤ . = (1− )

e. Sinking fund

i. Depreciation ܦ = (− ) ݑ ݎݐ

= (− )ቂܣܨ

, %,ቃ

ii. Total depreciation . = − ቂܣ

ܨ, %, ቃ

ቂܣ

ܨ, % , ቃ

iii. Booked value ܤ . = −.


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f. Production rate ݑ/ =ݐௌ

.ை/

g. Hourly rate ݑ/ =ݐௌ

.

engineering economics course outline

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