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Introduction to
Engineering Economics and
Finance
1
Why Is Engineering Economics
Important?
2
What Kinds of Questions Can
Engineering Economics Answer?
Alternatives:
$18,000 now, or
$600 per month for 3 years
Which is better?
3
Engineering Economics Helps Make
Cash Flow Comparisons!
(= $21,600 total)
Which is better?
It depends!
Issue: how much is money now worth
4
Key Concept: Time Value of Money
5
Time Value of Money
Basic assumption:
Given a fixed amount of money, and
6
Time Value of Money
Basic assumption:
Given a fixed amount of money, and
Reasons:
?
?
?
?
7
Time Value of Money
Basic assumption:
Given a fixed amount of money, and
9
Time Value of Money
11
Illustration of Discounting
100
0
Present Value
80
0.01
60 0.05
40 0.1
0.2
20
0.3
0
0
8
10
12
14
16
18
20
Time
12
What Kinds of Questions Can
Engineering Economics Answer?
13
What Kinds of Questions Can
Engineering Economics Answer?
14
How Does It Do This?
BY USING SPECIFIC
MATHEMATICAL RELATIONSHIPS
TO COMPARE THE CASH FLOWS OF THE
DIFFERENT ALTERNATIVES
(typically using spreadsheets)
15
Where Does Engineering Economics Fit?
17
Where Do I Get the Data?
• Remember:
• “Tools” don’t make decisions
• People make decisions, based on values
• Engineering economics is just a set of
tools:
• It can help in decision making
• But it won’t make the decision for you
• Which alternative is “best” is up to you!
19