Engineering Economics
Engineering Economics
Engineering Economics
Time value of money comes from the concept that a dollar is worth more
today than tomorrow, coz it can be invested and generate more. In
addition there is an uncertainty of receiving a dollar in the near future. The
procedure for accounting for the delaying of receiving funds or the income
given.is to discount or penalised future cash flow ;
Interest and interest rate the manifestation of the TVM, its a fee that
someone use to pay someones money.
Interest rate is interest paid over a period of time as percentage.
Cash inflows revenues, receipts, incomes, savings generated by projects
and activities that flow in.
cash outflows disbursements (costs, expenses, taxes) caused by
projects and activities that
net cashflows = cash inflows cash outflows
cash inflows = revenues (R)
cash outflows = disbursements (D)
net cash flow (NCF) = R - D
Estimation of capital..
The key to this is to find .data
Where do you look for the information?
Similar projects from the past, external databases from other independent
projects
Design bases of a project is important
Feasibility study is the first real study of all geological, technical and economic
summary
Cashflow for the planning of feasibility study is a complex team work and is
bases for financial model
To complete a net present value analysis procedure, here are the six steps;
1. Choose an appropriate discount to reflect time value of money
2. Calculate the present value of the cash outlay
3. Calculate the benefits or annual net cashflow for each year for the
investments over its useful life
4. Calculate the present value of the annual net cash flows
5. Compute the net present value
6. Accept or reject the investment (Net present value is less than 0 = reject,
greater than 0 = accept)
Choosing an appropriate discount rate that reflects the TVM so we use the
discount rate to adjust future flows of income back to their present value,
The discount rate chosen basically reflects the minimum acceptable rate of
return of investment
How should you determine the combination of debt and equity funds used to
finance an investment
The funds that have used to acquire capital come from debt (borrowed funds)
and equity (financial contribution in business) therefore you should base the cost
of capital in combination of debt and equity capital used to finance the operation
To determine the long run cost for business there is need to weight the cost of
debt funds by the proportions of debt and equity that will be used to run our
business
d = keWe(1-t) +kdWd(1-t)
Ke = cost of equity funds (rate of return on equity capital)
We = proportion of equity funds used in business
t = is the marginal tax rate
kd = cost debt funds used in business (interest)
wd = proportion of debt funds
The purpose of weighted cost is to obtain a discount rate that accurately reflect
the long fun direct cost of debt finds and the opportunity cost of equity
Yr2
80
Yr3
120
Yr4
120
Total
320
200
16000
200
24000
200
24000
64000
13 500
350
2150
15 500
500
8000
15 500
500
8000
44500
1350
18150
18 000
150
2 500
300
5200
2000
7700
20450
-18000
0.89
2000
0.80
5200
0.71
800
0.64
-10000
-16020
-10216
1600
3692
512
-10216
Profitability index sometimes cost benefit cost ratio or present value index
-
Its calculated by taking the present value of cash inflows divide by cash
out flows
Cash flow
-1000
200
300
500
200
5
6
200
200
400
600
Risk analyses
-
Sensitivity analyses
-
Come with best case scenario, basically the NPV using assumption we
believe are accurate, then from there we use other assumptions
NPV is then calculated