Muhammad Ridwan Andi Purnomo Department of Industrial Engineering Faculty of Industrial Technology Universitas Islam Indonesia 2011

Definition

The application of economic techniques to the evaluation of design and engineering alternatives.

The role is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.

Time value of money

The reasons why IDR1.000.000 today is worth more than IDR1.000.000 one year later are inflation, risk and cost of money determined by an interest rate.

Cash flow
Cash flow is the stream of monetary (rupiah) values costs (outputs) and benefits (inputs) resulting from an activity. Usually is drawn by a time line consists of information about outflow (down direction) and inflow (up direction).

The symbols
P = Present sum of money (IDR) F = Future sum of money (IDR) N = Number of interest periods i = Interest rate per period (%)

Interest calculation
Interest is the money paid for the use of borrowed money or the return on invested capital. Two way to calculate interest: simple interest & compound interest. Simple interest: F(N) = P + (N)(P)(i) = P(1 + Ni)

Ex: What is the value of IDR1000 at 10 percent per

year for 5 year yields? F(5) = 1000(1+(5)0.1) = 1000(1.5) = IDR1500.

Interest calculation

Compound interest (like in a bank system) F(1) = P + (P)(i) = P(1 + i) F(2) = F(1) + F(1)(i) = F(1)(1+i) = P(1+i)(1+i) = P(1+i)2 F(N) = P(1+i)N Ex: What is the value of IDR1000 at 10 percent per year for 5 year yields? F(5) = 1000(1+0.1)5 = 1000(1.61051) = 1610.51

Present worth

Present worth is the value found by discounting future cash flows to the present or base time. P = F(1 + i )-N Ex: What present value will yield IDR1000 in 5 years at 10 percent of interest? P = 1000(1.1)-5 = 1000(0.62092) = IDR620.92 It means, we have to deposit IDR620.92 to a bank in order to get IDR1000 at 5 years later.

Exercise
What is the interest value in order to triple IDR1000 at 5 years later? How much money to be deposited today in order to get IDR3000 at 3 years later with interest value is 12%? After how many years if IDR1000 is deposited today with interest 10% in order to get IDR1500?

Investment analysis
Two alternatives will be considered in order to increase water supply in a town. Both alternatives has 4 years life cycle and the interest value is 10% per year. Bellow is the detail data about the 2 alternatives.
Cost Investment Operating cost/year Maintenance Salvage value Alternative A IDR5.000.000,IDR100.000,0 0 Alternative B IDR2.500.000,IDR100.000,IDR1.500.000 every 2 years. 0

Choose the cheaper alternative !

THANK YOU