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SUMMARY OF ENGINEERING ECONOMY RELATIONSHIPS

Elasticity Demand Supply Arc Elasticity Demand Supply Debits|Credits - (dQ/Q) / (dP/P) or - (dQ/dP) / (Q/P) identical except without negative sign - (Q/average Q) / (P/average P) or - (Q/P) / (average Q/average P) identical except without negative sign

The account that gives value (i.e. decreases) is credited The account that receives value (i.e. increases) is debited Assets, expenses and dividends move together Liabilities, shareholder's equity and sales move together

Accounting Measures of Liquidity Working capital Current ratio Quick ratio Current Assets - Current Liabilities (positive) Current Assets / Current Liabilities (above 2.0) Liquid Current Assets / Current Liabilities (above 1.0)

Accounting Measures of Leverage Debt ratio Debt to equity ratio Times-interest-earned ratio Liabilities / [Liabilities + Shareholders' Equity] (range of 0.2 to 0.4) Long-term debt (LTD) / Shareholders' Equity (range of 0.6 to 0.8, up to 1.0) Earnings before interest on LTD and taxes / Interest on LTD (average of 10, but at least 3 to 4)

Accounting Measures of Activity Inventory turnover ratio Average collection period Fixed asset turnover ratio Total asset turnover ratio Cost of goods sold / Average inventory of finished products (av. of 5-10) Average accounts receivable / Average daily credit sales (av. of 60 days) Net sales / Average net fixed assets (average of 5 to 6) Net sales / Average total assets (average of 2)

Accounting Measures of Profit Operating cost ratio Net profit ratio Return on total assets Return on equity Total operating expenses (exclude interest on LTD and income taxes) / Net sales Profit margin is complement of this ratio. Net income / Net sales (average of 2%) Net income / Average total assets (average of 5%) (Net income - Preferred dividend) / Average common equity (average of 9%)

Note: The values given in parenthesis in the accounting measures listed above are whole-industry guidelines. Values particular to one industry may vary outside of the ranges given. These guidelines values will NOT be included in the formula sheets supplied with the class tests and final examination.

Effective Interest Rate (1 + r/m)m - 1 in which r: nominal rate per time interval m: number of compounding periods per time interval Time Value Factors Compound amount Present value Series compound amount Sinking fund Series present value Capital recovery Uniform gradient series Geometric series present value (F/P,i,n): (P/F,i,n): (F/A,i,n): (A/F,i,n): (P/A,i,n): (P/A,i,) (A/P,i,n): (A/P,i,) (A/G,i,n): (P/C,i,g,n): (P/C,i,g,) Minimisation of Project Costs: Given TC = a S + [b / S] + c, in which S represents a project size variable, and a, b and c are constants, the value of S that minimises TC is given by: S* = Cost of Capital: Debt Interest rate (Kd) that equates present value of future coupon payments as well as payment of face value (less tax saving on discount, if any) at redemption with net proceeds. Kd = I (1 - t) / NP (approximation for maturity periods over 20 years; do not use when financial calculator is available) Kp = D / NP Ke = (D1 / NP) + g (dividend evaluation model) Kre = (D1 / P) + g Ke+re = EPS1 / P (alternate method used in the absence of dividend payments) (1 + i) n 1 / (1 + i) n [(1 + i) n - 1] / i i / [(1 + i) n - 1] [1 - (1 + i) -n] / i 1/i i / [1 - (1 + i) -n] i (1 / i) - n / [(1 + i) n - 1] (1 - [(1 + g) / (1 + i)] n) / (i - g) for i g n / (1 + g) for i g 1 / (i - g) for i > g

b/a

Preferred Equity Common Equity Retained earnings Existing Common Equity Note:

Substitute net proceeds (NP) by market price (P) to determine cost of existing source.

Tax Factors OTF = (1 - t) CTFsld = 1 - [d t (P/A,i,n)] (valid only when 1/d is a whole value) CTFsld = 1 - t [ d(P/A,i,n-1) + [1 - d (n - 1)] (P/F,i,n) ] (in which n=1/d rounded up to the next whole value) CTFdbd = 1 - [d t / (d + i)] Tax credit adjustment factor for half-year rule provision in the Canadian tax system: (1 + i/2) / (1 + i)

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