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IE 255 (Engineering Economy) is a three credit hours core course being offered each semester by
the Faculty of Engineering King Abdulaziz University Jeddah – Saudi Arabia. In an effort to
help the students who take this course, the faculty members group (who teach IE 255 course)
prepare and update the supplementary material for students on ‘as and when required’ basis. The
current version of ‘Formulae for Problem Solving in Engineering Economy’ is the latest version
that is updated in Spring Semester 2010.
We hope that this supplementary material for the students of IE 255 Engineering Economy
course will prove to be a time saver in solving engineering economy problems.
Members / Instructors
Mr. Muhammad Rehan Maqbool
Mr. Abubakar Razzaq Abubakar Ishak
Mr. Mohammed Abdullah AlHarkan
Mr. Syed Wasiul Hasan Rizvi
Table of Contents
Formulae For Discrete Cash Flows with End Of Period Compounding ...................................................... 3
Interest and Interest Rate ......................................................................................................................... 4
Factors: How Time and Interest Affect Money ........................................................................................ 4
Nominal and Effective Interest Rate Statements....................................................................................... 4
Present Worth Analysis ........................................................................................................................... 4
Annual Worth Analysis ........................................................................................................................... 4
Rate of Return Analysis........................................................................................................................... 5
Benefit / Cost Analysis and Public Sector Projects................................................................................... 5
Breakeven Analysis................................................................................................................................. 5
Discounted Payback Period Analysis ....................................................................................................... 5
No-return Payback Period Analysis ......................................................................................................... 5
Replacement and Retention Decisions ..................................................................................................... 6
Depreciation Methods - Straight Line (SL) Method ................................................................................. 6
Depreciation Methods - Declining Balance (DB) & DDB Methods .......................................................... 6
Effects of Inflation ................................................................................................................................... 7
A/F A = F (A/F,i,n) i
Sinking Fund AF
(1 i) 1
n
F /A F = A (F/A,i,n) (1 i) n 1
Uniform-series F A
compound amount i
Arithmetic F of Arithmetic
- 1 (1 i ) n 1
Gradient F G n
Gradient
Compound Amount i i
G 1 i 1 n
P/G PG= G (P/G,i,n) n
Arithmetic gradient P
i i 1 i n (1 i ) n
present worth
A/G AG=G(A/G,i,n) 1 n
Annual worth of AG
i (1 i ) 1
n
gradient
Geometric Geometric gradient 1 g n
Gradient present worth (Pg) 1
1 i
P A1 when g i
ig
n
P A1
1 i when g = i
2. CC = A/i = AW / i
Breakeven Analysis
1. Profit (or loss) = Revenue (R) – Total Cost (TC) = rQ – [FC + vQ]
2. TC = VC (variable cost) + FC (fixed cost)
FC
QBE
3. r v
ୋ୴୕
4. Average cost per unit Cu = ቂ ୕
ቃ
P
2. n p (When NCF values are same)
NCF
2. CRk P A , i, k Sk A , i, k
P F
3. (AW of AOC)k = AOC1 P , i,1 AOC2 P , i, 2 ...... AOCk P , i, k A , i, k
F F F P
BS
1. Depreciation charge (D)for year t Dt ( B S )d
n
2. Book value (BV) after t years of service BVt B tDt
3. Depreciation or recovery rate (d) d = dt = 1/n
Effects of Inflation
Dollars in period t2
1. Dollar in periodt
1 Inflation rate between t1 and t2
Future Dollars
2. CV dollars
(1 f ) n