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					       Engineering Economy
          IENG 301/302
           Spring 2005

           Mahour Parast
          Ph.D. Candidate
Department of Industrial & Management
        Systems Engineering
   University of Nebraska-Lincoln
Introduction: Why learning
Engineering Economy?
   There is a philosophical concept behind each
   For example, in the filed of economics, wealth
    creation is the goal.
   Engineering economy is primarily concerned
    with comparing alternative projects on the
    basis of an economic measure of
Some Examples

   Buy a car (personal)
   Rent an apartment (personal, family)
   Construct a highway (public)

   There are a lot of variables that affect the
    decision regarding selection of a project. In
    engineering economy, we deal with financial

   Assume you want to rent an apartment:

   What are the financial variables in
    renting an apartment?
   What are the non-financial variables in
    renting an apartment?
Engineering Economy for
   Making decisions in engineering

   Determine the financial input/output of a

   Real life (credit card payment, loans,
    Time Value of Money

   The value of money changes over time.
    $1000 today does not have the same value in
    two years from now.
   If you get $1000 loan today, you need to
    return more that $1000.
   Time value of money is the main concept in
    engineering economy.
Performing an engineering
economy study
   Determine your alternatives
   Estimate cash flow
   Analyze alternatives
   Select the best alternative
    Example: Renting an apartment
   Determine your alternative : Location A, B, and C are
    the alternatives.

   Estimate Cash Flow: Rent for each location, heating,
    electricity, etc.

   Analyze alternatives: Use Engineering Economy tools
    and techniques

   Select the best alternative: Either A, B or C is selected.
Interest Rate and Rate of Return
   The change in the value of money over time is called
   For example, if you borrow $1000 and after a year
    you pay $1100, the interest is (1100-1000)= $100.
   You borrow $1000 and pay $1070 after six months.
    The interest is $70.
   As you notice, the time frame is an important factor in
    the amount of interest you pay.
    Interest Rate

   Interest Rate is defined as
    (Amount of Interest)/[original amount]

   Example: You borrow $1000 and pay $1025 after three
    months. Calculate the interest rate.
   Amount of interest: 1025-1000=25
   Interest Rate=(25/1000)=0. 025

   Note: interest rate is always represented in percentage.
    So in the above example, the interest rate is 0.25 *100,
    which is equal to %2.5 .
Rate of Return (ROR)

   Is the same as interest rate.
   When you invest on a project (you
    expect to gain interest) you deal with
    ROR. If you borrow money form an
    agency (such as a bank), then you deal
    with interest rate.
Economic Equivalence
   Different sums of money at different times are equal.
   Example: Assume you borrow $1000 today and the
    interest rate is %5 in year.
    You need to return 1000(0.05)= $50 as interest. So
    the total you owe is 1000 (original) + 50 (interest)=
   $1000 today is economically equivalent to $1050 a
    year from now at interest rate of %5.

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