EBMC3103 Engineering Economic Notes

Topic 5
By the end of this topic, you should be able to:

1. Compare the better of two alternatives using the present worth (PW) calculations for
alternatives;
2. Apply the capitalized cost of a series of disbursements, if given the disbursements, their
respective dates, and the interest rate; and
3. Compare the better of two alternatives on the basis of capitalized cost, if given the cash flow
for each alternative and the interest rate.
PRESENT WORTH EVALUATION
Present worth is an equivalence method of analysis in which a project cash flows are
discounted to a lump sum at present time. This method is popular because future expenditure or
receipts are transformed into equivalent RM now. Present worth is often called discounted cash
flow and interest is called the discounted rate.
CAPITALISED COST (CC) CALCULATIONS
This is the problem of calculating the present worth for a project with an annual receipt over an
infinite service life. Projects such as airports, highways, dams and canals are assumed to last
forever and are therefore deemed to have an infinite service life.
The steps that should be taken are as follows:
(a) Draw the Cash Flow Diagram (CFD) for two cycles.
(b) Find the PW of all non-recurring expenses or receipts.
(c) Find the equivalent uniform annual worth (A value) through one cycle of
all recurring expenditure and uniform annual cost series.
(d) Divide the AW from step (c) by the interest rate to get the capitalised cost
(CC) value (equation 5.2).
(e) Add the CC values obtained in steps (b) and (d).

Equivalent Uniform Annual Worth (EUAW) evaluation means that all irregular and uniform
disbursements must be converted to an equivalent uniform annual cost (EUAC)
The Need for Engineering Economy
• The decision to choose between altenatives depend on the monetary factors

• The decision made is a balance between a combination of technical and economic
aspect.
May be categorized into 3 programs:
• Program to increase profit; example, development of a new product, increasing new

production capacity, and improving customer service centre.
• Cost control programs such as, defect reduction programs because each defect is
costly, efficiency improvement, waste reduction and liabilities reduction programs.
• Facilities/ infrastructure programs such as construction of roads, bridges, playground
etc. These programs are not profit oriented but rather focus on increasing convenience
and comfort at minimum cost.
:Decisión is classified into 3 :
• Expansion; production capacity, exploring new market for product or service.

• Replacement ; replacing existing method with the optimum and least costly method,
equipment, process or location.
• Closure ; usually the last resort; more towards investment decision such as closing
down factory, termination of projects and others.
Engineering economics is a set of mathematical techniques that simplify economic

comparisons of an engineering project, which means it is a tool to help decide which
method of achieving the objectives of an engineering project is the most economical
one
• Basic terminology of engineering economics:
– Interest is the fee that is charged for money that is leased or

rented, or borrowed; the interest rate in per cent is calculated
(normally on a yearly basis) as:
Interest accrued per unit time

% Interest  Original amount
rate (100)
– Equivalence refers to the equivalent economic value of money,

which means the value of money, though in different amounts, can
be the same at different times
– Simple interest (SI) is interest that is charged on the principal

amount, or the portion of principal (original) amount that remains
unpaid.
– Compound interest (CI) is basically interest on top of interest, that

is, interest charged on the principal as well as on the total amount
of interest accumulated in previous periods; CI is interest that is
affected by the time value of money.
– MARR stands for the minimum attractive rate of return, which

means the minimum reasonable profit or acceptable rate of return
that can be received from an investment.
– An alternative refers to another option, another way, or another

method of accomplishing a given task in engineering practice,
which is compared to the use of an evaluation criterion based on
monetary value, such as MARR, or SI.
– A cash flow diagram (CFD) is a tool used to represent the

transactions (such as initial investments, projected earnings and
savings) that will take place over the course of a given project.
 P, F and A calculations in CFD:

– P = Sum of money at present time
– F = Sum of money at future time
– A = A series of periodic equal amounts of money
4

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Topic 5

By the end of this topic, you should be able to:

PRESENT WORTH EVALUATION

CAPITALISED COST (CC) CALCULATIONS

The steps that should be taken are as follows:

(b) Find the PW of all non-recurring expenses or receipts.

all recurring expenditure and uniform annual cost series.

(CC) value (equation 5.2).

(e) Add the CC values obtained in steps (b) and (d).

The Need for Engineering Economy

• The decision to choose between altenatives depend on the monetary factors

May be categorized into 3 programs:

• Program to increase profit; example, development of a new product, increasing new

:Decisión is classified into 3 :

• Expansion; production capacity, exploring new market for product or service.

Engineering economics is a set of mathematical techniques that simplify economic

• Basic terminology of engineering economics:

– Interest is the fee that is charged for money that is leased or

Interest accrued per unit time

– Equivalence refers to the equivalent economic value of money,

– Simple interest (SI) is interest that is charged on the principal

– Compound interest (CI) is basically interest on top of interest, that

– MARR stands for the minimum attractive rate of return, which

– An alternative refers to another option, another way, or another

– A cash flow diagram (CFD) is a tool used to represent the

 P, F and A calculations in CFD:

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