GEG 501- ENGINEERING

ECONOMICS ASSIGNMENT

OGUNKA UCHENNA EMMANUEL

100404048
MECHANICAL ENGINEERING

With appropriate mathematical equations define all the following concepts

1) Effective Rate (Effective Yield): This is the interest rate of the interest gained over n
periods, i.e. an interest that is compounded more frequently in a year.
r M
i= 1+
1
M

Where I = effective interest rate

M = Number of subperiods per year
R = nominal interest rate

2) Straight Line Depreciation: The depreciation per year is the cost minus the salvage
value divided by the years of life. The straight line method of depreciation interprets a
fixed asset as an asset that offers its services in a uniform fashion. The asset provides
an equal amount of service in each year of its useful life. The straight-line method
charges, as an expense, an equal fraction of the net cost of the asset each year, as
expressed by the relation:

Where Dj = depreciation charge during year n

C = Cost of the asset, including installation expenses
Sn = Salvage value at the end of the assets useful life
N = number of useful years
3) Present Value of an Ordinary Annuity: This is the value of a
stream of expected or promised future payments that have been
discounted to a single equivalent value today.
The mathematical representation of this is:

PVoa = A

( ( ))
1

1
( 1+i )n
i

Where: PVoa = Present value of an ordinary annuity

A = Amount of each payment
I = Discount rate per period
N = number of periods

4) Sum of the Years-Digits Depreciation: An accelerated method for calculating an

asset's depreciation. This method takes the asset's expected life and adds together the
digits for each year.
Sum of the years' digits method of depreciation is one of the accelerated depreciation
techniques which are based on the assumption that assets are generally more
productive when they are new and their productivity decreases as they become old.
The formula to calculate depreciation under SYD method is:
SYD Depreciation =
Remaining Useful Life

Depreciable Base

Sum of the Years' Digits

In the above formula, depreciable base is the difference between cost and salvage
value of the asset and sum of the years' digits is the sum of the series:
1, 2, 3, n; where n is the useful life of the asset in years.
Sum of the years' digits can be calculated more conveniently using the following
formula:
Sum of the Years' Digits =

n(n+1)
2

Sum of the years' digits method can also be applied on monthly basis, in which case
the above formula to calculate the sum of the years' digits becomes much useful.
5) Present Value of a Single Amount: is an amount today that is
equivalent to a future payment, or series of payments, that has
been discounted by an appropriate interest rate.
Mathematical representation of this is:
PV =FV

[ ]
1
( 1+i )n

Where: PV = Present Value

FV = Future Value
i = Interest Rate per Period
n = Number of Compounding Periods

6) Perpetuities and Capitalized Cost: Pertuity is an annuity that has no

end, or a stream of cash payments that continues forever. It is
an annuity in which the periodic payments begin on a fixed date and

continue indefinitely. It is sometimes referred to as a perpetual

annuity. Fixed coupon payments on permanently invested
(irredeemable) sums of money are prime examples of perpetuities.
Scholarships paid perpetually from an endowment fit the definition
of perpetuity.

Where PV = Present Value of the Perpetuity, A = the Amount of the periodic payment,
and r = yield, discount rate or interest rate.
It is a constant stream of identical cash flows with no end. The formula for determining the
present value of a perpetuity is as follows:

An asset's capitalized cost is the original cost of the asset, plus the present value of an infinite
number of replacements, plus the present value of maintenance costs in perpetuity.
Capitalized cost refers to the present worth of cash flows which go on for an
infinite period of time.

The basic equation involved in capitalized cost calculations is:

P=A/ i
Where A= Interest
I= interest rate
P=Principal

The Capitalized Cost calculation enables you to choose rationally between alternatives. All
you need to do is compare their capitalized costs: they represent the present value of all costs
involved with purchasing, maintaining and replacing the assets.

7) Annualized Cost: the equivalent annual cost (EAC) is the cost per year of owning and
operating an asset over its entire lifespan. It is calculated by dividing the NPV of a
project by the "present value of annuity factor":

, where
Alternatively, EAC can be obtained by multiplying the NPV of the project by the "loan
repayment factor".
The annual cost of owning an asset over its entire life. Equivalent annual cost is often used by
firms for capital budgeting decisions. Eqivalent annual cost is calculated as:

8) Capitalized Cost by Capitalizing Expenses: This is the annual amount divided by the
interest rate. It is an expense that is added to the cost basis of a fixed asset on a
company's balance sheet. Capitalized Costs are incurred when building or financing
fixed assets. Capitalized Costs are not expensed in the period they were incurred, but
recognized over a period of time via depreciation or amortization. A capitalized cost is
recognized as part of a fixed asset on a company's balance sheet, rather than being
charged to expense in the period incurred. Capitalization is used when an item is
expected to be consumed over a long period of time. If a cost is capitalized, it is
charged to expense over time through the use of amortization (for intangible assets) or
depreciation (for tangible assets).
Expenses can be expensed as they are incurred, or they can be capitalized. A company
is able to capitalize the cost of acquiring a resource only if the resource provides the
company with a tangible benefit for more than one operating cycle. In this regard,
these expenses represent an asset for the company and are recorded on the balance
sheet.

9) Inflation-Adjusted Interest Rate: A measure of return that accounts for the return
period's inflation rate. Inflation-adjusted return reveals the return on an investment
after removing the effects of inflation.
It is calculated as follows:

Where i/f = inflation adjusted interest rate

i = effective interest rate with inflation accounted for (real interest rate)
f = inflation rate for the item under consideration
10) Sinking Fund Factor: This is the process corresponding to the
inverse of series compounding is referred to as a sinking
fund; i.e., what size regular series payments are necessary to acquire a given future
amount?
Solving the series compound amount equation for A,
i
A=F {

[ ( 1+ i) N1 ]
Where F= Future value
I= interest rate
N= number of years
11) Annualized Equivalent (Of Capital):
The equivalent annual annuity (EAA) approach calculates the constant annual cash
flow generated by a project over its lifespan if it was an annuity. The present value of
the constant annual cash flows is exactly equal to the project's net present value
(NPV). When used to compare projects with unequal lives, the one with the higher
EAA should be selected.

12) Capitalized Equivalent (Of Expenses):

This represents the amount of money that must be invested today to yield a certain
return A at the end of each and every period forever, assuming an interest rate of i

13) Discounted Cash Flow Rate of Return:

This analysis is a method of valuing a project, company, or asset using the concepts of
the time value of money. All future cash flows are estimated and discounted by using
cost of capital to give their present values (PVs). The sum of all future cash flows,
both incoming and outgoing, is the net present value (NPV), which is taken as the
value or price of the cash flows in question.

The discounted cash flow formula is derived from the future value formula for
calculating the time value of money and compounding returns.

Thus the discounted present value (for one cash flow in one future period) is
expressed as:

where

DPV is the discounted present value of the future cash flow (FV),
or FV adjusted for the delay in receipt;

FV is the nominal value of a cash flow amount in a future period;

r is the interest rate or discount rate, which reflects the cost of tying up
capital and may also allow for the risk that the payment may not be received
in full;[4]

n is the time in years before the future cash flow occurs.

Where multiple cash flows in multiple time periods are discounted, it is necessary
to sum them as follows:

14) Net Present Value: The net difference of the present time equivalent value of all the
costs and benefits incurred during the years of the system.
NPV = PV (Benefits) PV (Costs)
15) Discounted Break-Even Period:
In the break-even point (BEP) in economics, business, and specifically cost
accounting, is the point at which total cost and total revenue are equal: there is no net
loss or gain, and one has "broken even." A profit or a loss has not been made,
although opportunity costs have been "paid," and capital has received the riskadjusted, expected return. In short, all costs that needs to be paid are paid by the firm
but the profit is equal to 0. In the linear Cost-Volume-Profit Analysis model (where

marginal costs and marginal revenues are constant, among other assumptions),
the break-even point (BEP) (in terms of Unit Sales (X)) can be directly computed in
terms of Total Revenue (TR) and Total Costs (TC) as:

where:
TFC is Total Fixed Costs,
P is Unit Sale Price, and
V is Unit Variable Cost.
The Break Even Point can alternatively be computed as the point where Contribution
equals Fixed Costs. The quantity,
, is of interest in its own right, and is called
the Unit Contribution Margin (C): it is the marginal profit per unit, or alternatively the
portion of each sale that contributes to Fixed Costs. Thus the break-even point can be
more simply computed as the point where Total Contribution = Total Fixed Cost:

To calculate the break-even point in terms of revenue (a.k.a. currency units, a.k.a.
sales proceeds) instead of Unit Sales (X), the above calculation can be multiplied by
Price, or, equivalently, the Contribution Margin Ratio (Unit Contribution Margin over
Price) can be calculated:

R=C, Where R is revenue generated,

C is cost incurred i.e. Fixed costs + Variable Costs or Q * P (Price per unit) = TFC +
Q * VC (Price per unit),

Q * P - Q * VC = TFC,
Q * (P - VC) = TFC, or,
Break Even Analysis Q = TFC/c/s ratio=Break Even