Professional Documents
Culture Documents
ECONOMICS
AUG 2016
WHO IS WHO?
Dr. Suganti Ramarad
School of Engineering (CE)
B1.15
Ext. 5098
Suganti.Ramarad@taylors.edu.my
YOUR
HURDLES!
MY
YOUR
HURDLES!
RESPONSIBILITY!
30% continuous assessment
Overall =100%
70% final examination
1. The final examination mark must 50%
2. The overall assessment mark must 50%
MAR
K
(%)
Quiz
(Formativ
e)
NIL
Test 1
10
Test 2
10
Assignme
nt
10
Final
70
WEEK
1
10
11
12
13
14
ENGINEERING
ECONOMICS
AUG 2016
LECTURE 1 - OBJECTIVES
Interest rates, simple and compound
interest
Economic equivalence
Cash flow
Minimum attractive rate of return
PREPARED BY SUGANTI RAMARAD
INTEREST RATE/RATE OF
RETURN
INTEREST RATE/RATE OF
RETURN
INTEREST RATE/RATE OF
RETURN
INTEREST RATE/RATE OF
RETURN
earne
d
Rate
of return (ROR)
CLASS ACTIVITY
ECONOMIC EQUIVALENCE
Different sums of money at different times
may be equal in economic value
RM106
one
0
1
year from
now
RM100
nownow is said to be equivalent to RM106
RM100
one year from now, if the RM100 is invested at
the interest rate of 6% per year.
= P(1+i)n
CLASS ACTIVITY
Company ABC loaned money to an engineering
staff member for purchasing a new phone. The
loan is for RM1000 for 3 years at 5% per year.
a) How much money will the engineer repay at the
end of 3 years based on simple interest?
b) How much money will the engineer repay at the
end of 3 years based on compound interest?
SOLUTION
a) Total interest for 3 years = RM1000(3)(0.05) = RM150
Total amount due after 3 years = RM1000+ RM150 = RM1150
b) METHOD 1
Year 1 interest = RM1000 (0.05) = RM50
Amount due after year 1 = RM1000+RM50 = RM1050
Year 2 interest = RM1050 (0.05) = RM52.50
Amount due after year 2 = RM1050+RM52.50 = RM1102.50
Year 3 interest = RM1102.05 (0.05) = RM55.13
Amount due after year 3 = RM1102.50+RM55.13 = RM1157.63
METHOD 2
Total amount due = RM1000(1+0.05)3 = RM1157.63
PREPARED BY SUGANTI RAMARAD
CASH FLOW
CASH
INFLOW
YEAR
1
UNKNOWN @
TO BE
DETERMINED
TIME 0 =
PRESENT
NET CASH
FLOW
CASH
Cash
inflows are the receipts, revenues, incomes, and savings generated
OUTFLOW
by project and business activity. A + sign indicates a cash inflow.
CLASS ACTIVITY
Each year Exxon-Mobil expends large amounts of funds for
mechanical safety features throughout its worldwide operations.
Carlo Ramos, a lead engineer, plans expenditures of $1 million now
and each of the next 4 years just for improvement of field-based
pressure-release valves. Construct the cash flow diagram to find
the equivalent value of these expenditure at the end of year 4,
using a cost capital estimates for safety-related funds of 12% per
year.
CLASS ACTIVITY
An electrical engineer wants to deposit an amount P now such that
she can withdraw an equal annual amount of A1 = RM2000 per year
for the first 5 years, starting 1 year after deposit, and a different
annual withdrawal of A2 = RM3000 per year for the following 3
years. How would the cash flow diagram appear if i = 8.5% per
year?
MARR
Equity Financing the firm uses funds either from retained
earnings, new stock issues, or owners infusion of money
Debt Financing the firm borrows funds from outside
sources
The cost of debt financing = the interest rate charged on the debt
(loan) amounts
SUMMARY
DO YOU KNOW HOW TO CALCULATE
SIMPLE AND COMPOUND INTEREST?
DO YOU UNDERSTAND THE ECONOMIC
EQUIVALENCE?
CAN YOU BUILD A CASH FLOW?
CAN YOU EXPLAIN MARR?
PREPARED BY SUGANTI RAMARAD