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Summary Engineering Economics: - Formulary

Engineering Economics (University of Manitoba)

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Simple interest: F = P(1+iN)

Compound interest: F = P ( 1+i )N

Factor To Find Given Formula

Compound amount F P (F/P, i%, N) (1+i) N
Present worth P F (P/F, i%, N) 1
(1+i) N
Sinking funds A F (A/F, i%, N) i
(1+i) N −1
N
Series compound amount F A (F/A, i%, N) (1+i) −1
i
Capital recovery A P (A/P, i%, N) i(1+i) N
(1+i) N −1
N
Series present worth P A (P/A, i%, N) (1+i) −1
i(1+i) N
Arithmetic gradient conversion A G (A/G, i%, N)

Factor relationships

(F/P, i%, N) = i(F/A, i%, N) + 1

(P/F, i%, N) = 1 – (P/A, i%, N)i

(A/F, i%, N) = (A/P, i%, N) – i

i
(A/P, i%, N) =
1−( P/ F ,i % , N )

Gradient Calculations

Name To Find Given Equation

Future worth of gradient series (F/G, i%, N) F G F 1
= [
G i
N
(1+i) −1
- N]
i
Uniform series worth of a gradient series (A/G, i%, N) A G A 1
= -
G i
N
N
(1+i) −1
Present worth of a gradient series (P/G, i%, N) P G P 1
= [
G i
(1+i) N −1
-
i(1+i) N
N
N ]
(1+i)
Only (A/G, i%, N) from tables

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When G > 0, A” = A’ + G(A/G, i%, N)

When G < 0, A” = A’ – G(A/G, i%, N)

When G is percentage:

g>i 1+g
i¿ = −1
1+i
g=i N A'
P=
(1+i)
g < i (most cases) 1+g A'
i¿ = −1 and P = (P/A, i¿ ,
1+i 1+g
N)

Interpolation: when N or i% is unknown

Find i% for P = 1,500, F = 4,500 , N = 8

F
= (F/P, i%, N)
P

4,500
= (F/P, i%, 8) = 3
1,500

From tables

(F/P, 14, 8) = 2.8525

(F/P, 15, 8) = 3.0590

3.0000−2.8525
i = 0.14 + 0.01
3.0590−2.8525

i = 0.147143

i = effective rate; r = nominal rate; m = number of compounding periods per year

r m
(1 + i) = (1+ )
m

N r mN
(1+i) = (1+ )
m

Continuous compounding
r
i= e -1

Payment periods differ from compounding periods

m = number of compounding periods per year

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k = number of periods per year

c = number of interest period

c
r r
Effective interest rate per period i = (1+ ) - 1 OR i = e k -1 for continues compounding
ck

Changing interest rate

F = P(1 + i1)(1 + i2)….(1 + in)

Loans

Balance with N-n payments remaining B n = A(P/A, i%, N-n)

Interest during period n In = ( B n−1 ¿ i = A(P/A, i%, N – n + 1)i

Pn = A - I n = A(1 – (P/A, i%, N – n + 1)i)

Pn = A(P/F, i%, N – n + 1)

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Continuous cash flow

rN r
(F/P, r, N) e ( e −1)
F=P r
re
r
(P/F, r, N) e −1
P=F rN
re
(A/F, r, N) r
A=F Rn
e −1
(F/A, r, N) er N −1
F=A
r
(A/P, r, N) r erN
A=P
erN −1
(P/A, r, N) erN −1
P=A
r erN

A
Perpetuities and Capitalized cost (uniform series forever): P =
i

A
Capitalized worth = -P +
i

Disbursements
When there is no revenues: Capitalized cost = P + ( Annualized )
i

Economic evaluators

Present Worth Evaluators

Net Present Value (NPV); present worth of cash inflows less present worth of cash outflows
N
C
NPV = ∑ (1+i)
t
t ;
t=0

Ct is positive for cash inflows and negative for cash outflow for the period t

i the discount rate per period

N number of periods

Present Worth of Annual Cost (PWAC)

Present Worth of Capital Expenditure (PWCE)

Annualized Evaluators

Equivalent Annual Cost (EAC) = (P – S) (A/P, i%, N) + Si ; where S: Salvage Value

Equivalent Annual Worth (EAW)

Economic Ratios

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PWCE ratios:

NPV
Net benefit as percentage of total capital
PWCE

NPV +PWCE
express gross benefit
PWCE

PWAC ratios

NPV
Net benefit as percentage of total capital
PWAC

NPV + PWAC
express gross benefit
PW A C

Rate of Return
N
C
Internal Rate of Return (IROR): is by definition when NPV = 0 = ∑ (1+i)
t
t ; we need to find i
t=0

1
NPV
Rate of Return on Capital (RORC) = (1 + i) ( +1) N –1
PWCE

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