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Engineering Economic Analysis

Engineering Economic Analysis. Engineering Economic Analysis. Module 1: Introductory Concepts Module 2: Evaluation of Alternatives Module 3:Depreciation Module 4:Bonds & Inflation Module 5: Financial Environment Module 6: Risk and Decision Theory. MODULE 1: INTRODUCTORY CONCEPTS.

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Engineering Economic Analysis

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  1. Engineering Economic Analysis

  2. Engineering Economic Analysis • Module 1: Introductory Concepts • Module 2: Evaluation of Alternatives • Module 3:Depreciation • Module 4:Bonds & Inflation • Module 5: Financial Environment • Module 6: Risk and Decision Theory

  3. MODULE 1: INTRODUCTORY CONCEPTS • Cash Flow Illustrations • The 5 Variables in any Cash Flow Diagram • Equivalence Equations • Special Cases of Equivalence Equations • Capitalized Costs • Loan Amortization

  4. INTRODUCTORY CONCEPTS Cash Flows John’s recent expenses: Aug 5: John’s Dad gives him $10,000 Aug 10: Car Rental, Chicago-Purdue $70 Aug 13: Pays Tuition Fees $6,000 Aug 14: Receives $800 gift from Auntie Aug 15: Pays rent $400

  5. INTRODUCTORY CONCEPTS CASH FLOW TABLE

  6. INTRODUCTORY CONCEPTS Cash Flow Diagram $10,000 $70 $6,000 $800 $400 5th 10th 13th 14th 15th Amounts spent: upward arrows Amounts received: downward arrows

  7. INTRODUCTORY CONCEPTS Cash Flow Diagrams for Civil Engineering Projects • Yearly intervals • Amounts received or incurred during year are assumed to have happened at end of year, or at beginning of year

  8. INTRODUCTORY CONCEPTS Example: Reconstruction of I-90 Toll Road Dec 2000, Initial Contract Cost: $8 mil 2001-2008, Toll receipts: $2 million at end of every year Dec 2004, Major Maintenance $3 mil Dec 2006, Minor Maintenance $1 mil

  9. INTRODUCTORY CONCEPTS TOLL ROAD EXAMPLE 3m 1m 8m 2m 2m 2m 2m 2m 2m 2m 2m 00 01 02 03 04 05 06 07 08

  10. INTRODUCTORY CONCEPTS The 5 Variables in any Cash Flow Diagram P- Present Amount F- Future Amount A- Annual Amount I- Interest rate N- Pay period Typically, 3 of the above variables (including i and N) are given and we need to calculate for the 3rd, using equivalence equations.

  11. INTRODUCTORY CONCEPTS Discussion of the 5 Variables Present Amount, P Amount received or incurred in Year 0. Typically a large amount, e.g., construction cost, car loan, etc. Future Amount, F Amount received or incurred after some years (See Toll Road Example). Also called “discounted amount”.

  12. INTRODUCTORY CONCEPTS Discussion of the 5 Variables (cont’d) The Concept of Interest Rationale:

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