Decisions! Decisions!
This is the first step in the Economic Decision-Making Process.
What is Recognize the Problem? (Chapter 1)
This is used to model the positive benefits and negative costs of engineering projects or potential investment opportunities over time.
What is a cash flow diagram? (Chapter 2)
Bonus: This type of chart is used to create a cash flow diagram in Excel. What is stacked column chart?
This equals the Present Worth of Benefits minus the Present Worth of Costs.
What is Net Present Worth (NPW)?
(Chapter 5, pg 166).
Present Worth (PW), Present Value (PV), Net Present Value (NPV) also acceptable.
This equals the Cost Basis minus the Depreciation Charges to date.
What is Book Value?
(Chapter 11, pg 400)
You deposit $500 in a credit union at the end of each year for 5 years. The credit union pays 5% interest, compounded annually. Immediately after the fifth deposit, how much can you withdraw from your account?
You would use this EXCEL function to solve.
What is FV?
=FV(rate, nper, PMT, PV, type)
"Looking the other way," that is, not to recognize the problem - Due to bribes or perhaps fear of retribution for being a "whistle-blower" is an example of this.
Ethical Lapse in Recognizing the Problem (Chapter 1)
This is the single payment compound amount formula written in factor (functional) notation.
What is F = P(F/P, i, n) or Future Value (Sum)? (Chapter 3)
This rate is set when the a bond is originally issued or sold?
What is the coupon interest rate? (Chapter 5, pg 181)
This type of depreciation is represented by:
dt = (B - S)/N
What is straight-line depreciation?
(Chapter 11, pg 401)
An energy-efficient machine costs $5000 and has a life of 5 years. If the interest rate is 8%, how much must be saved every year to recover the cost of the capital invested in it?
You would use this Excel function to solve.
What is PMT? (Chapter 4, pg 117)
=PMT(rate,nper,PV,FV,type)
This is the activity level at which total costs are equal to the revenue (or savings) generated.
What is the break-even point? (Chapter 2)
This is the uniform series capital recovery factor written in factor (functional) notation.
What is A = P(A/P, i%, n) or annual return, A (annuity)? (Chapter 4, pg 116-117)
How large does A have to be to "recover" the capital, P, invested at Time 0?
In present worth analysis situations where there are multiple alternatives, for the "Do Nothing" alternative, the NPW usually equals this.
What is zero? NPW = 0
(Chapter 5, pg 175)
1) The "property class lives" are less than the "actual Useful lives", 2) salvage values are assumed to be zero, and 3) tables of annual percentages simplify computations are all major advantages of this.
(Chapter 11, pg 406)
A firm borrows $300,000 to be repaid with 5 annual payments of $45,000 and a final balloon payment of $170,000. What interest rate is the firm paying on this loan?
You would use this Excel function to solve.
What is RATE?
(Chapter 7, pg 236-237)
This is money already spent as a result of a past decision and must be ignored in engineering analysis because current decisions cannot change the past.
What is sunk cost? (Chapter 2)
This type of series, where cash flows increase or decrease each period by a constant amount, is included in the following present worth formula:
P = A(P/A, i%, n) + G(P/G, i%, n)
What is arithmetic gradient series (G)? (Chapter 4, pg 129)
G increases or decreases by a constant amount!
In the second of the three major analysis techniques, or annual cash flow analysis, the following factor notation
P(A/P, i,n) - S(A/F,i,n), where P is the initial disbursement and S is the salvage value,
is the most commonly used method to calculate this.
What is the annual cost or capital recovery cost or equivalent uniform annual cost (EUAC)?
(Chapter 6, pg 201)
This equals Gross Income minus all expenditures (except capital expenditures) minus depreciation and depletion charges.
What is Taxable Income?
(Chapter 12, pg 437)
Consider the following Cash Flows:
Year 0: -$4,000
Year 1: $0
Year 2: $2000
Year 3: $1500
Year 4: $1000
Year 5: $500
You would use this Excel function to solve for the internal rate of return.
What is IRR?
(Chapter 7, Prob 7-22, pg 261)
This is used to estimate the costs of industrial plants and equipment. It "scales up" or "scales down" known costs, thereby accounting for economies of scale in size or capacity.
What is the Power-Sizing Model? (Chapter 2)
Cost of Equipment A / Cost of Equipment B = [Size (capacity) of Equipment A / Size (capacity) of Equipment B]^x
This is the geometric series present worth written in factor (functional) notation.
What is P = A1(P/A, g, i, n)? (Chapter 4, pg 135-137)
This is the interest rate at which the benefits are equivalent to the costs, or the present worth (PW) is 0.
What is the internal rate of return?
(Chapter 7, pg 233-234)
Computers are this type of MACRS GDS property class.
What is 5-year property class?
(Chapter 11, pg 409)
The maintenance costs for a generator have been recorded over its 5 year life below.
Year 1: $545
Year 2: $590
Year 3: $635
Year 4: $680
Year 5: $725
You would use a combination of these two (2) Excel functions to compute the EUAC assuming 7% interest.
What are NPV and PMT?
(Chapter 6, pg 203-204)