# Shared Flashcard Set

## Details

Engineering Econ.
Engineering Economics Test 2
18
Engineering
07/05/2011

Term
 loan cash flow
Definition
 when future returns are in the form of interest plus repayment of the principal.
Term
 Project Cash Flow
Definition
 Representation of future earnings, along with the capital expenditures and annual expenses.
Term
 Payback method
Definition
 Screens projects on the basis of how long it takes for net receipts to equal investment --> Payback period determined by adding the expected cash flows for each year until the sum is equal to, or greater than zero
Term
 Conventional payback method
Definition
 Ignoring time value of money in determining payback period
Term
 Discounted payback period
Definition
 Including the time value of money in determining payback period
Term
 Flaws of payback screening
Definition
 Fails to measure profitability Fails to recognize the difference between the present and future value of money (i.e. if PROJECT A had a first period earning of \$1000 and second period earning of \$3000 vs PROJECT B whose earning in period one was \$3000 and \$1000 in period 2. Project B would be the better choice because of the concept of time value of money; however payback screening does not account for this)
Term
 Net-Present-Worth Criterion
Definition
 1) Determine Interest Rate (MARR or Minimum attractive rate of return or required rate of return) 2) Estimate Service Life of Project 3) Estimate Cash INFLOW for each period over the service life 4) Estimate Cash OUTFLOW for each period over the service life 5) Determine the net cash flows for each period (net cash flow=cash inflow - cash outflow) 6) Find the present worth of each net cash flow at the MARR. Add up tehse present-worth figures; their sum is defined as the projects NPW
Term
 Project balance
Definition
 Remainder of balance due once revenues are used to pay off principle and interest (in the case of a bank loan)
Term
 Net Future Worth
Definition
 Terminal balance at the end of the project life
Term
 Capitalization of project with perpetual planning horizon
Definition
 PW(i) = A/i
Term
 Sample Capitalized-Equivalent Cost Problem A) If \$30,000 is deposited into an account today in order to accomadate maintenance costs at a sports complex, which amount to \$3,500 a year (estimated), what interest rate is needed annually inorder for \$30,000 to be sufficient at an infinite time down the road?
Definition
 PW(i) = A/i \$30,000 = \$3,500/i 30,000/3500 = i i = 11.6%
Term
 Service Projects
Definition
 Turbine plant vs Fuel Cell Plant - cost difference is in the initial purchase or investment. Revenue generated from customers is the same. PW in this case would call for the project with the lowest production costs over the life of the project in order to maximize profit.
Term
 Revenue Projects
Definition
 Revenue matters, in this both production and initial cost would be important as well as revenue generated. if PW is used we would select the model that promises to bring the largest net present worth.
Term
 Salvage value
Definition
 amount of money for which the equipment could be sold after its service to the project has been rendered, or the dollar measure of tis remaining usefulness
Term
 Annual Equivalent Worth
Definition
 AE(i) = PW(i)(A/P, i, n)
Term
 Annual equivalent of a capital cost (capital recovery cost)
Definition
 CR(i) = (I-S)(A/P, i, n) + is
Term
 Project Balance
Definition
 PB(i)n = Pb(i)n-1(1+i)+An
Term
 Interpolation
Definition
 i = iL+(ih-il)*((Valueh)/(Valueh-Valuel))
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