Engineering Economic Analysis Engineering Economic Analysis Module 1

Engineering Economic Analysis Module 1: Introductory Concepts Module 2: Evaluation of Alternatives Module 3:

MODULE 1: INTRODUCTORY CONCEPTS Cash Flow Illustrations The 5 Variables in any Cash Flow

INTRODUCTORY CONCEPTS Cash Flows John’s recent expenses: Aug 5: John’s Dad gives him $10,

INTRODUCTORY CONCEPTS CASH FLOW TABLE DATE CASH FLOW ($) Aug 5 +10, 000 Aug

INTRODUCTORY CONCEPTS Cash Flow Diagram $10, 000 $70 5 th 10 th $6, 000

INTRODUCTORY CONCEPTS Cash Flow Diagrams for Civil Engineering Projects - Yearly intervals - Amounts

INTRODUCTORY CONCEPTS Example: Reconstruction of I-90 Toll Road Dec 2000, Initial Contract Cost: $8

INTRODUCTORY CONCEPTS TOLL ROAD EXAMPLE 3 m 1 m 8 m 2 m 2

INTRODUCTORY CONCEPTS The 5 Variables in any Cash Flow Diagram PPresent Amount FFuture Amount

INTRODUCTORY CONCEPTS Discussion of the 5 Variables Present Amount, P Amount received or incurred

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

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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 Cash Flow Illustrations The 5 Variables in any Cash Flow Diagram Equivalence Equations Special Cases of Equivalence Equations Capitalized Costs Loan Amortization

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

INTRODUCTORY CONCEPTS CASH FLOW TABLE DATE CASH FLOW ($) Aug 5 +10, 000 Aug 10 -70 Aug 13 -6, 000 Aug 14 +800 Aug 15 -400

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

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

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

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

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

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”.

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