ENGINEERING ECONOMICS I TO INVEST OR NOT TO INVEST THATIS THE OUESTION (With apologies to william Shakespeare Given one or more potential projects, how do we decide in which to invest, if any? o What criteria do we use to evaluate potential projects? 10/1599 Engineering economics 1
10/15/99 Engineering Economics 1 1 ENGINEERING ECONOMICS I TO INVEST, OR NOT TO INVEST, THAT IS THE QUESTION . (With apologies to William Shakespeare) t Given one or more potential projects, – how do we decide in which to invest, if any? t What criteria do we use to evaluate potential projects?
THE TWO BASIC INVESTMENT CONCERNS ◆ PROFITABⅠTY (HOW MUCH MONEY WILL I MAKE, ◆RISK (WHAT ARE MY CHANCES OF MAKING IT?) 10/1599 Engineering economics 1
10/15/99 Engineering Economics 1 2 THE TWO BASIC INVESTMENT CONCERNS uPROFITABILITY (HOW MUCH MONEY WILL I MAKE?) uRISK (WHAT ARE MY CHANCES OF MAKING IT?)
PROFITABILITY EVALUATION okeY to PROFITABLITY ANAL YSIS E RETURN ONINVESTMENT keY tO RETURN ON INVESTMENT E TIME VALUE OF MONEY 10/1599 Engineering economics 1 3
10/15/99 Engineering Economics 1 3 PROFITABILITY EVALUATION t KEY to PROFITABLITY ANALYSIS ð RETURN ON INVESTMENT uKEY to RETURN ON INVESTMENT ð TIME VALUE OF MONEY
TIME VALUE OF MONEY I SMPLE INTEREST- SINGLE PAYMENT 9 Example: $100 invested at 5% per annum At beginning of Year l, invest $100 Atend of Year l, receive(0.05)(100)=$5.00 At beginning of Year 2, leave the $100 on deposit Atend of Year 2, receive another $5.00 And so on, as long as we leave the s100 on deposit. 10/1599 Engineering economics 1
10/15/99 Engineering Economics 1 4 TIME VALUE OF MONEY I SIMPLE INTEREST - SINGLE PAYMENT t Example: $100 invested at 5% per annum At beginning of Year 1, invest $100 At end of Year 1, receive (0.05)(100) = $5.00 At beginning of Year 2, leave the $100 on deposit At end of Year 2, receive another $5.00 And so on, as long as we leave the $100 on deposit
TIME VALUE OF MONEY II COMPOUND INTEREST- SINGLE PAYMENT A Example: $100 invested at 5% per annum At beginning of Year 1, invest $100 At end of rear l, add(0.05)(100)=$5.00 At beginning of Year 2, have $105.00 on deposit At end of year2,dld(0.05)(105.0)=S5.25 At beginning of Year 3, have $110.25 on deposit At end of Year 3, add(0.05)(110.25)=$5.51 And so on 10/1599 Engineering economics 1
10/15/99 Engineering Economics 1 5 TIME VALUE OF MONEY II COMPOUND INTEREST - SINGLE PAYMENT t Example: $100 invested at 5% per annum At beginning of Year 1, invest $100 At end of Year 1, add (0.05)(100) = $5.00 At beginning of Year 2, have $105.00 on deposit At end of Year 2, add (0.05)(105.00) = $5.25 At beginning of Year 3, have $110.25 on deposit At end of Year 3, add (0.05)(110.25) = $5.51 And so on