IE 343 Final Exam Review

Part 1
Chapter 2: Cost concepts and Design Economics

Types of costs
– Fixed
– Variable

Total cost = Total Fixed cost + Total Variable cost

– Recurring
– Non-recurring
– Direct
– Indirect
– Sunk (Ignore all sunk costs)
– Opportunity (Don’t ignore)
• Costs (cont.)
– Cash
– Book
– Investment
– Incremental
– Marginal
• Price demand relationship:

• Total revenue:

• Total cost:

• Total profit:

• Optimal demand:

• Optimal price:
Example: A company has determined that the price and the
monthly demand of one of its products are related by the
equation . The associated fixed costs are
$1,125/month, and the variable costs are $100/unit.
a. What is the optimal number of units that should be produced
and sold each month?

b. What is the breakeven point?

 Chapter 4: The Time Value of Money

• Money has time value: Prefer money now to money later

• Why have interest at all?

• Simple interest
– Interest is earned only on the principal
I = (P)(N)(i)

• Compound interest
– Interest is earned on both the principal and the interest accrued
• Economic equivalence

• Cash flows with the same economic effect

• Compare cash flows at the same point in time

• Willing to trade one cash flow for another that is

economically equivalent

• Cash flow diagrams can be used to visualize cash flows

– Down arrows: Cash outflows
– Up arrows: Cash inflows
• Single payments with compound interest
– Find F given P

– Single payment compound amount factor

– Find P given F: Reciprocal of F given P

– Single payment present worth factor

– We also have find N and find i

• Uniform series (Annuities)
• Cash flows occurring at fixed time intervals
• By convention, we use end of year for payments
– Find F given A

– Find P given A

– Find A given F
– Find A given P

– Understand the derivations

– With just knowledge of F given P and F given A, can derive

all the formulas

– Can even derive F given P and F given A from scratch

– Finding i and N best done using spreadsheet

• Deferred annuities are annuities where payments are not at
the end of the first year, but at the end of year J

• The present equivalent value of a deferred annuity at time 0

is given by

• Remember, can combine multiple interest formulas in the

same question
– You might have a question that has both single payments and
annuities, or one with 2 annuities
• Uniform (Arithmetic) Gradient of cash flows

• Unlike annuities, cash flows increase (or decrease) by a

constant amount G
• Derivation of present value by considering all cash flows at
time 0

• Can find values for (P/G, i%, N) in Appendix C

• Finding uniform annuity amount given G

• Also found in Appendix C

• F given G not given in Appendix

• Remember payments start at end of year 1, so might have to

use an annuity and uniform gradient series
• Geometric sequence of cash flows, where cash flows increase
(or decrease) at a rate rather than by an amount

• With P, can then find A or F using previous relationships

• Unlike uniform gradient series, payments start at end of first

year, like normal annuities
• Nominal rates list annual rate, followed by compounding
information

• Effective rates reflect actual interest earned over the period

Conversion:

• Can either have single payments, or multiple payments where

cash flow period coincides with compounding period
• If have multiple payments with cash flows less frequently
than compounding, find effective rate per cash flow period
• Example: Kris buys a car for $24,000. The dealership lets her
defer payments for 12 months. If she makes 36 end-of-month
payments, and interest is ½% per month, how much will Kris’
payments be?