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These lecture notes on Engineering Economy cover essential accounting principles, decision-making terminology, financial performance metrics, and cost behavior analysis. Key topics include the balance sheet elements, income statement components, debt and liquidity management, profitability analysis, cost concepts, and present worth calculations. The notes also provide practical exercises related to interest rates and investment scenarios. Ideal for engineering students seeking a solid foundation in financial analysis and accounting relevant to engineering practice.
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Operation Analysis 2 Engineering Economy
Engineering Economy Lecture Notes (Some of the materials are taken from Prof. Vate’s lecture notes)
Outline • Accounting • Terminologies • Engineering Economy
Accounting • Basis of decision making • “The language of business” • Balance Sheet: Asset versus Liability Net Worth = Assets – Liabilities “How well am I doing?” • Income Statement: Profit/Loss = Revenues - Expenses
Accounting: Balance Sheet • Assets • Current assets • Cash, account receivable, inventories • Fixed assets • Takes time to convert them to cash • Depreciation: convert fixed assets into expenses • Liabilities and stockholders’ equity • Current liabilities • Other liabilities • Stockholders’ equity = net worth • Common stock , Preferred stock, Treasury stock (buyback), and Outstanding stock (# shares in public) • Retained earnings • Paid-in capital (capital surplus): sale of stock more than the par value of the stock
Accounting: Income Statement • Making or losing money? • Revenue • Net sales • COGS • Gross margin • Operating income • Net income • EPS (Earning per Share)
Business’ Performance • Debt Management Analysis Ability to pay long-term liabilities? • Debt Ratio • Times-Interest-Earned Ratio (EBIT/interest expense) • Liquidity Analysis Focus on working capitals • Current Ratio • Quick (Acid Test) Ratio (subtract inventory) • Asset Management Analysis Ability to manage the assets • Inventory Turnover (Sales/Average Inventory) • Total Assets Turnover (Sales/Total Asset)
Business’ Performance (Cont’d) • Profitability Analysis • Market Value Analysis • P/E Ratio • Book value per share (equity – preferred stock)/outstanding shares
Cost Concepts • Determine COGS and COGM • Direct Material • Direct Labor • Overhead (Indirect Material/Labor) Charge OH to production by: • % of direct labor cost • % direct material cost • Rate per direct labor hour • COGM = DM + DL + OH • COGS = COGM + BegInv – EndInv
Cost Behaviors • Fixed Cost • Variable Cost • Mixed Cost (semi-variable cost, i.e. depreciation) • Average Unit Cost, for… • Fixed Cost? • Variable Cost? • Mixed Cost? • Opportunity Cost • Sunk Cost • Marginal Cost, Marginal Revenue
Engineering Economy • Notation: i = annual interest rate n = annual interest periods P = present principal sum A = single payment in a series of n equal payments made at the end of each annual interest period F = future sum P|F, i, n = Find P given F, i, n
A Piece of Cake Exercises • How much will $150 be worth 20 years from now at annual interest rate of 12%? • If $100 is set aside at the end of each year for 10 years at an annual interest rate of 12%, what would it be worth at the end of the 8th year? • How much would be required at the end of each year for 10 years to accumulate $5,000 at the end of the 10th year if the annual interest rate is 12%? • How much can be borrowed now if it can be repaid by 10 equal end-of-year payments of $100 each? Annual interest rate is 12%.
PV =? $ 3,000 $ 3,000 $ 4,000 $ 4,000 $ 10,000 $ 2,000 Present Worth Calculation
Financial Education Game With interest rate i = 12%, what will you choose? • Start investing $12/year now (your age) • Start investing $12/year at age 30
