KING ABDULAZIZ UNIVERSITY

FACULTY OF ENGINEERING
INDUSTRIAL ENGINEERING DEPARTMENT

IE 255
Engineering Economy

DO NOT WRITE ON THIS BOOKLET

Prepared by Eng. Mohammed Alharkan May 2014

 TABLE OF CONTENTS

No. Ch. Topic Page #

1 1 Interests and Simple and Compound Interests 1

2 2 The Cash flow of Gradients 1

3 2 Equivalence Calculations for Discrete Cash Flows 2

4 2 Equivalence Calculations for Shifted Cash Flows 3

5 3 Nominal and Effective Interest Rates 4

6 4&5 Present Worth Analysis and Annual Worth Analysis 5

7 6&7 Rate of Return Analysis and Benefit/Cost Analysis 6

8 8 Breakeven Analysis and Payback Period Analysis 7

9 9 & 10 Replacement Studies and Effects of Inflation 8

10 11 Cost Estimation 9

11 11.4 Sample Exponent Values for Cost-Capacity Equations 10

12 12 Depreciation Methods 11

13 -- Using the Calculator 12

 Ch1. Interest and its Equivalence Calculations

The Interest and Equivalence Calculations:

Item Equation
Interest (I)
Interest Rate (i),
Rate of Return (ROR) or Interest Rate per time unit:
Rate on Investment
(ROI)
The Total Simple Interest over several periods:
Simple Interest
The Future value of Payments by Simple Interest:

The Compound Interest for ONE period:

The Total Compound Interest over several periods:

Compound Interest
∑

The Future value of Payments by Compound Interest:

The Net Cash Flow at period k:

Net Cash Flow (NCF)

The Cash flow of Gradients:

The Cash Flow Equation
The Cash Flow in period k of an Arithmetic Gradient
The Cash Flow in period k of a Geometric Gradient

1
 Ch2. Equivalence Calculations for Discrete Cash Flows

The Equivalence for Discrete Cash Flows for End-of-Period Compounding:

Cash Flow Equation
Factor’s Name Notes
Series By Tabulated Factor By Formula
Single Payment
[ ]
Single Present Worth
Payment Single Payment
[ ]
Compound Amount
Uniform-Series
[ ]
Present Worth

Capital Recover [ ]
Uniform
Series Uniform Series
[ ]
Sinking Fund
Uniform Series
Compound Amount [ ]

Uniform Gradient
[ ]
Present Worth
Arithmetic
Uniform Gradient
Gradient [ ]
Uniform Series
Series
Uniform Gradient
Future Worth [ ]

( )
Geometric [ ]
Geometric Gradient
Gradient
Present Worth
Series
* +

Notes:
Item Equation
Number of payments
Number of shifts

General equation
Arithmetic Gradient
Series

2
 Ch2. Equivalence Calculations for Shifted Cash Flows

Equivalence Calculations’ for Shifted Uniform Series of n Payments:

Shifted Cash Shifted Equation
Flow Shift Backward Shift Forward
PW or FW
for shifted A
AW of n payments
for shifted A
AW of n1 payments
)
for shifted A (n1 ≠ n)

Equivalence Calculations’ for Shifted Arithmetic Gradient Series of n Payments:

Shifted Cash Shifted Equation
Flow Shift Backward Shift Forward
PW or FW
for shifted G
AW of n payments
for shifted G
AW of n1 payments
for shifted G (n1 ≠ n)
́ and ́ and
Shift a series of G

Equivalence Calculations’ for Shifted Geometric Gradient Series of n Payments:

Shifted Cash Shifted Equation
Flow Shift Backward Shift Forward
PW or FW
for shifted g
AW of n payments
for shifted g
AW of n1 payments
for shifted g (n1 ≠ n)
́ ́
Shift a series of g
and keep the value of g% as it is. and keep the value of g% as it is.

General Equations:
Item Equation

For Present or Future Worth ∑

For Annual Worth ∑

3
 Ch3. Nominal and Effective Interest Rates

The Nominal and Effective Interest Rates:

Item Equation
Effective interest rate, ie, from effective interest rate, i’:

Effective Interest Rate Effective interest rate, ie, from nominal interest rate, r:
(ie)
(IP > CP) (compounded periodically)
Effective interest rate, ie, from nominal interest rate, r:
(compounded continuously)
Effective interest rate, i’, from nominal interest rate:
Effective Interest Rate
(i')
(IP = CP) Effective interest rate, i’, from effective interest rate ie:

√
Nominal interest rate from nominal interest rate:

Nominal interest rate from effective interest rate, i’:

Nominal Interest Rate

(r) Nominal interest rate from effective interest rate, ie:
[√ ] (compounded periodically)
Nominal interest rate from effective interest rate, ie:
(compounded continuously)

The number of calculating the compounding interest in the interest period:

The General Equations for Present Worth with Nominal Interest Rate:
Item Equation
Present Worth
∑ ∑
(for Single Payments)
Present Worth
∑
(for PP = CP)
Present Worth
∑
(for PP > CP)
Present Worth
∑
(for PP < CP)

4
 Ch4-5. Present Worth and Annual Worth Analysis

Present Worth Analysis

Item Equation
[ ]
Present Worth (for LCM) or

Capitalized Cost (CC)

Annual Worth for recurring

for A from 1 to ∞
payments every k periods
Bundles of Independent
The total possible bundles = 2number of viable projects
Projects

Annual Worth Analysis

Item Equation

Capital Recovery (CR)

Annual Worth (AW)

or
of an Alternative

Annual Worth (AW)

of a Permanent Investment

5
 Ch6-7. Rate of Return Analysis and Benefit/Cost Analysis

Rate of Return Analysis

Item Equation

Interest at year t

Unrecovered Balance at the

end of year t
IRR = i*, which makes the following equations equal zero:
Internal Rate of Return (IRR)
Equation or
or
( )
Interpolation for IRR (i*)
( )

The Benefit/Cost Analysis:

B/C Ratio Equation
Benefit (B)

Total Cost (C)

Conventional B/C Ratio

Modified B/C Ratio

Benefit and Cost Difference [ ]

All money must be converted to a common equivalent worth; PW, FW or AW

6
 Ch8. Breakeven, Payback Period Analysis

The Breakeven Analysis for a Single Project:

Item Equation/Relation

Total Cost (TC)

Revenue (R)

Net Profit or Net Loss

[ ]
(or Breakeven)

Profit per unit

Breakeven Quantity

Average Cost per Unit (Cu)

The Breakeven Analysis between two Alternatives:

Item Equation

Breakeven Relation
(Cost-based)

[ ] [ ]
Breakeven Relation
(Revenue-based)

The Payback Period Analysis (or Payout Analysis):

Payback Type Equation

∑
No-Return Payback Period
( i = 0% )
If the

∑
Discounted Payback Period
( i ≠ 0% )
If the

7
 Ch9-10. Replacement Studies and Effects of Inflation

Economic Service Life

Item Equation
First Cost for Defender
Market Value at the end of
year k
The ESL = j years of service, which has the smallest total AWj in the
following equation:

⁄ ⁄
Economic Service Life (ESL) [
]
where
or

Defender Replacement RV which makes the two sides of following equation equal:
Value (RV) Equation min. AWC = AWD

The Effects of Inflation on the Money Worth:

Item Equation

The Constant-Value (CV)

dollars or Today’s dollars * Future dollars, Different-value, Inflated dollars or Then-current
dollars
The Inflation-Adjusted
Interest Rate or Market
Interest Rate (if)

The Real Interest Rate (i)

[ ] ( )
The Present Worth (PW) ( )
using Constant-Value dollars
[ ]

8
 Ch11. Cost Estimation

The Cost Estimations:

Cost Estimation Equation
The Total Estimated Cost
by using Unit Method
The Estimated Cost at time t
( )
by using Cost Indexes
The Cost-Capacity equation
( )
or
the Cost at Capacity Q2 Sample Exponent Values for Cost-Capacity Equations next page.
The Cost at time t and
( ) ( )
capacity at Q2
Total plant cost = direct cost + indirect cost
Direct cost = major equipment cost + other direct costs
The Total Plant Cost, if the indirect cost factor is applied to the cost
of the main equipment:
The Total Plant Cost , ∑
The Total Plant Cost, if the indirect cost factor is applied to the total
direct cost:
[ ∑ ]
The Learning Rate (L.R.):

or

The Learning Curve Slope Parameter:

The Total estimated Cost
by using Learning Curve
The Time for the k th unit:

The estimated Cost for k th unit:

The Total Cost for all N units:

∑ ∑

9
Sample Exponent Values for Cost-Capacity Equations

Component/System/Plant Capacity Range Exponent

Activated sludge plant 1 - 100 MGD 0.84
Aerobic digester 0.2 - 40 MGD 0.14
Blower 1000 - 7000 ft/min 0.46
Centrifuge 40 - 60 in 0.71
Chlorine plant 3000 - 350,000 tons/year 0.44
Clarifier 0.1 - 100 MGD 0.98
Reciprocating Compressor 5 - 300 hp 0.90
Compressor 200 - 2100 hp 0.32
Cyclone separator 20 - 8000 ft3/min 0.64
2
Dryer 15 - 400 ft 0.71
Sand Filter 0.5 - 200 MGD 0.82
2
Heat exchanger 500 - 3000 ft 0.55
Hydrogen plant 500 - 20,000 scfd 0.56
Laboratory 0.05 - 50 MGD 1.02
Aerated Lagoon 0.05 - 20 MGD 1.13
Centrifugal Pump 10 - 200 hp 0.69
Reactor 50 - 4000 gal 0.74
Sludge drying beds 0.04 - 5 MGD 1.35
Stabilization pond 0.01 - 0.2 MGD 0.14
Stainless Tank 100 - 2000 gal 0.67

10
 Ch12. Depreciation Methods

The Depreciation Methods:

Double Declining
Straight Line Declining Balance
Method Balance
SL DB DDB

Fixed Depreciation
Rate
( )

Annual Depreciation
Rate for a specific year
Annual Depreciation
charge for a specific
year
Book Value for a
specific year or ∑

Implied Salvage Value

S
after n years

Taxes
The First Cost or Basis

11
 Using the Calculator

Type: CASIO fx-991ES PLUS

 Mathematical Operations: +, -, ×, ÷, , ( ), √ , , , .
 Solver: Solve equations.

Write Cash Flow as $0,000.00

Write Factor Value as 0.000000

To write formula; Press SHIFT  SETUP  1: MthI0  2: Line0

Operation Example Calculation Result
∎
∎ 3 e x[ ] (-)
2 
(
5 - √∎ 16 
)
√
Complex Formula -  0.1412
| |
 ABs 1 - sin 0.5 𝜋

)
 + log 80 )
=

∑∎
 1  5  
∎ (
Summation ∑  ∎ 100  1 + 432.95

.05 )
x[ ] X


EQUATIONS Calculations:
To use EQUATION Functions; Press MODE  5: EQN
Choose the Equation type 1: anX + bnY = cn
2: anX + bnY + cnZ = dn
3: aX2 + bX + c = 0
4: aX3 + bX2 + cX + d = 0
Enter a1, =  , b1, =  , ... etc., = 
Use arrows   to see the solutions of X, Y & Z.

Solve Calculations:
To use SOLVE Functions; Press MODE  1: COMP
Write the left-side of the equation by using ALPHA for variable X  ALPHA  CALC ( = )
 the right-side of the equation  SHIFT  CALC (SOLVE)  any number  Press =
To get one value of X, which make the two sides are equal.
If L-R = 0, the value of X is accurate.

12