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ISYE 3025 Engineering Economics - Week 1

by: Moriah Mattson

ISYE 3025 Engineering Economics - Week 1 ISYE 3025

Marketplace > Georgia Institute of Technology > Industrial Engineering > ISYE 3025 > ISYE 3025 Engineering Economics Week 1
Moriah Mattson
Georgia Tech
GPA 3.67
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About this Document

These notes cover the first two videos in Learning Cycle 1, which are titled Basic Concepts and The Concept of Equivalence.
Engineering Economy
Kelly Bartlett
Class Notes




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Popular in Industrial Engineering

This 5 page Class Notes was uploaded by Moriah Mattson on Saturday August 27, 2016. The Class Notes belongs to ISYE 3025 at Georgia Institute of Technology taught by Kelly Bartlett in Fall 2016. Since its upload, it has received 31 views. For similar materials see Engineering Economy in Industrial Engineering at Georgia Institute of Technology.

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Date Created: 08/27/16
ISYE 3025 Engineering Economics ­ Week 1    Video ­ Basic Concepts  This course is focused on how to make the most economic decision on a  day­to­day basis.    Questions that we will discuss the pros and cons of:  ­ If you were to win the lottery, is it more economical to get partial  payments for 20 years, or to take a third party’s offer to pay you a  lump sum now in exchange for you first 10 years of payments (you  receive the next 10 years as planned)  ­ If you have cash to pay for a car, but you actually save >$500 to  finance the car, would you still pay cash?  ­ If you have the option to pay six months of insurance upfront, which  has a premium of $150, or to pay half now and half in 60 days with a  $5 service charge. Which option would you take?    What you will learn in this course…  ­ How to compare alternatives  ­ How to recognize and assess trade­offs  ­ How to evaluate justifications  ­ Learn and be comfortable with financial language    Four Basic Principles  1) All alternatives must be considered.   ­ An economic decision is not always the best choice.  ­ Not all choices are obvious  ­ There are always alternatives (at least two options)  ­ One alternative could be to simply “do nothing”       2) The most economic decision is no better than the forecasts   describing each alternative.  ­ Forecasting is trying to predict how something will look like in  the future. In this setting it is talking about the effect each  alternative will have on the future if it were to be chosen.  ­ The decision relies on the certainty of the facts of the other  alternatives.  ­ Forecasting includes monetary amounts, monetary timing, and  non­monetary factors.        3) The differences among the alternatives should be used to determine    the most economic decision.  ­ The similarities between alternatives are irrelevant.  ­ The past is also irrelevant, unless it is being used in forecasting.  ­ One example of relevant history is if it is a “sunk cost”  ­ Sunk cost: a cost that has already been incurred and  cannot be recovered.        4) An economics decision should be based on the objective of making    the “best” use of limited resources.  ­ This includes both monetary and non­monetary resources.    Video ­ The Concept of Equivalence (“Time Value of Money”)    Two Viewpoints of Interest:  1) Borrower’s Viewpoint:  ​ Interest is the cost/the money they paid for the  use of borrowed funds.  2) Investor’s Viewpoint:  ​ Interest is the return/capital growth from the  productive investment of capital (money loaned with the expectation  of a return greater than the initial investment)    Interest Rate:  ​ ​i = Amount accrued/unit time  ­ Often given as a percentage    Compound Interest:  Capital Growth = P(1 + i)​   N Capital Growth (can be represented as F): ​  the total amount of   money after a period of time  N​: amount/number of units of time after initial investment   (e.g. number of years)  P​: initial investment at time equals zero  i​: interest rate in decimal form    N Interest Gained = iP(1 + i)​   Interest Gained: ​  the interest accrued from time (t) to time (t+1)  ­> all variables are same as above)    Cash Flow Diagram (see below examples similar to those in video)  ­ A visual representation of cash flow  ­ An arrow up means money invested/positive income    Compounding​: Calculating an equivalent amount of money in the f ​ amount given some amount of money in the ​present. (aka: calculating how  a present amount of money will grow over time)  ­ Equivalence: determining if an investment of a certain amount is  equal to receiving an amount in the future  ­ Equivalence depends on amount, timing, and interest rate    Discounting​: Calculating an equivalent amount of money in the p ​ resent  ​ amount given some amount of money in the ​future. (opposite of  compounding)     


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