Engineering Economy Formulas

A. Break Even Points

B. Optimization Conditions (Continuous Case)
F.O.C.
S.O.C.
C. Single Payment Conversion Factors (Discrete Compounding, Discrete Flows)
Tabulated values are available
D. Uniform Series Payments Conversion Factors (Discrete Compounding, Discrete
Flows)
Tabulated values are available
B E Q u a n t i t y
F i x e d t s
S a l e s i c e A v e r a g e V a r i a b l e C o s t s

c o s
P r
B E C a p a c i t y U t i l i z a t i o n
F i x e d C o s t s
S a l e s v e n u e T o t a l V a r i a b l e C o s t s

( ! e )

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d y
d x
f x a t x ( )
$
#
< > f x f o r f o r ( ) m a % & m i n
$
# #
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( ' , , ) ( ) P F i i i

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(. Uniform Aritmetic !radient Series Payments Conversion Factors (Discrete
Compounding, Discrete Flows)
Tabulated values are available )or !P"#$i%$& and !A"#$i%$&, but not )or !F"#$i
%$&.
F. !eometric !radient Series Payments Conversion Factors (Discrete
Compounding, Discrete Flows)
Tabulated values are not available.
f * t+e average rate at w+ic+ cas+ )lows are c+anging
A
"
* t+e cas+ )low at t+e end o) t+e )irst ,ear
-. "arying #nterest $ate Conversion Factors (Discrete Compounding, Discrete
Flows)
Tabulated values are not available.
.. Effective #nterest $ates (Discrete Compounding, Discrete Flows)
r * nominal annual interest rate
( * number o) compounding periods in a ,ear
i * e))ective annual interest rate
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( ' , , )
( ' , , )
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A # i P # i A P i
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#. Continuous Compounding %iscrete Flo&s Conversion Factors
Tabulated values are available.
r * nominal annual interest rate wit+ continuous compounding
i * e))ective annual interest rate i) compounded annuall,
'. Continuous Compounding Continuous Flo&s Conversion Factors
Tabulated values are available.
(. Evaluation of Pro)ects
P0 * P0 o) cas+ in)lows 1 P0 o) cas+ out)lows
F0 * F0 o) cas+ in)lows 1 F0 o) cas+ out)lows
20 * 20 o) cas+ in)lows 1 20 o) cas+ out)lows
3!! * internal rate o) return or, t+e interest rate at w+ic+ P0 * #
4et
P+!,i
"
%& - . a
P+!,i
/
%& - / b (note5 i
/
0 i
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)
T+en
(!! * t+e e%ternal rate o) return or, t+e interest rate at w+ic+
F0 o) P (6(!!) * F0 o) all net cas+ in)lows (6 ), w+ere P is t+e P0 o)
net cas+ out)lows (6) and is t+e interest rate t+at could be earned i) cas+ is
invested elsew+ere (e%ternal reinvestment rate)
*. Pay+ack Period
Simple pa,bac7 period is t+e minimum number o) ,ears w+en P0 (6#) * #.
Discounted pa,bac7 period is t+e minimum number o) ,ears w+en P0 (682!!)*#.
,. Evaluation of #ndependent Pro)ects &it no Budget Constraint on #nvestment
i e
F P r e
P F r e
F A r
e
e
P A r
e
e e
r
r
r
r
r
r
r r

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a b
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2ccept all pro9ects t+at +ave (0 # or t+e rate o) return (3!! or (!!) 82!!.
-. Evaluation of ,utually E.clusive Pro)ects
". 0+en Pro9ects +ave t+e same :se)ul 4i)e
C+oose t+e pro9ect wit+ t+e +ig+est positive (0
Or
C+oose t+e +ig+est investment pro9ect t+at +as incre2ental (0() #
Or
C+oose t+e +ig+est investment pro9ect t+at +as t+e incre2ental rate o) return, i.e.,
3!!() or (!!() 82!!
/. 0+en Pro9ects +ave di))erent :se)ul 4ives
3) t+e pro9ects are repeatable,
Calculate 20 o) eac+ pro9ect )rom cas+ )lows o) its one use)ul li)e and c+oose
t+e pro9ect wit+ t+e +ig+est 20
Or
C+oose t+e lowest common multiple o) all use)ul lives as t+e common stud,
period& assume t+at t+e pro9ects are repeated as man, times necessar, over t+e
stud, period, develop cas+ )lows )or all repeated use)ul lives, and calculate (0 o)
eac+ pro9ect. C+oose t+e pro9ect wit+ t+e +ig+est (0 or c+oose t+e +ig+est
investment pro9ect t+at +as positive incremental (0, or t+e c+oose t+e +ig+est
investment pro9ect t+at +as incremental !O! e%ceeding 82!!.
3) t+e pro9ects are not repeatable,
Coterminate all pro9ects in t+e same planning period, generate additional
in)ormation t+at ma, be necessar,, and use an, one o) t+e met+ods t+at are
discussed )or evaluation o) same use)ul li)e alternatives.
O. Capitalized &ort /C01 of an infinite stream of annual payments /A1
P. %epreciation Formulas
B * cost basis& ; * use)ul li)e& S<
;
* Salvage value at t+e end o) li)e ;
d
7
* t+e depreciation in =ear 7& B<
7
* boo7 value at t+e end o) =ear 7
1f an old 2ac3ine is traded in 43ile buying a ne4 2ac3ine5
Cost Basis (B) = Actual Cash Paid + Book Value of the old machine
Straig+t 4ine 8et+od

Declining Balance 8et+od
! * t+e constant percentage o) depreciation
C +
A
i

d
B S V

a n d B V B ) d
)

) )

i f 6 e c l i n i n g B a l a n c e
*

i f 6 e c l i n i n g B a l a n c e

" >
" > #
/
/ # #
.
,
,
d * B V a n d B V * B
) ) )
)

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Sum1o)1t+e1=ears1Digits (S=D) 8et+od
2ctual :sage, or :nits o) Production 8et+od
? * t+e estimated li)etime production in units
@
7
* t+e actual production in =ear 7 in units
2. %eprecia+le Assets and !%S and A%S $ecovery Periods
2ssets or Depreciable 2ssets :sed in Business -DS !ecover,
Period
2DS !ecover,
Period
O))ice )urniture and e@uipment A "#
3n)ormation s,stems, computers > >
2utomobile, ta%is > >
Buses > B
4ig+t general purpose truc7s > >
.eav, general purpose truc7s > C
Tractor units )or use over t+e road D E
8ining A "#
Production o) petroleum and natural gas A "E
Petroleum re)ining "# "C
Construction > C
8anu)acture o) carpets > B
8anu)acture o) wood products A "#
8anu)acture o) c+emicals and allied products > B.>
8anu)acture o) rubber products A "E
8anu)acture o) cement "> /#
8anu)acture o) )abricated metal products A "/
8anu)acture o) electronic components, products and
s,stems
> C
8anu)acture o) motor ve+icles A "/
8anu)acture o) aerospace products A "#
Telep+one central o))ice e@uipment "# "F
(lectric utilit, steam production plant /# /F
-as utilit, distribution )acilities /# D>
S 7 6

S 7 6 f a c t o r
)
S 7 6
d B S V S 7 6 f a c t o r
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B S V
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$. !%S $ecovery $ates for te Si. Personal Property Classes
For a property class of 9/year$ t3e recovery period is 9.:$ because of t3e 3alf/year
ti2e convention;
=ear D1,ear >1,ear A1,ear "#1,ear ">1,ear /#1,ear
" #.DDDD #./### #."E/B #."#### #.#>## #.#DA>
/ #.EEE> #.D/## #./EEB #."F## #.#B># #.#A//
D #."EF" #."B/# #."AEB #."EE# #.#F>> #.#CCF
E #.#AE" #."">/ #."/EB #."">/ #.#AA# #.#C"F
> #."">/ #.#FBD #.#B// #.#CBD #.#>A"
C #.#>AC #.#FB/ #.#ADA #.#C/D #.#>/F
A #.#FBD #.#C>> #.#>B# #.#EFB
F #.#EEC #.#C>> #.#>B# #.#E>/
B #.#C>C #.#>B" #.#EEA
"# #.#C>> #.#>B# #.#EEA
"" #.#D/F #.#>B" #.#EEC
"/ #.#>B# #.#EEC
"D #.#>B" #.#EEC
"E #.#>B# #.#EEC
"> #.#>B" #.#EEC
"C #.#/B> #.#EEC
"A #.#EEC
"F #.#EEC
"B #.#EEC
/# #.#EEC
/" #.#//D
". T+e D1,ear, >1,ear, A1,ear and "#1,ear propert, class recover, rates )or -DS are
calculated as /## declining balance wit+ switc+over to straig+t line.
/. T+e ">1,ear and /#1,ear propert, class recover, rates )or -DS are calculated as
"># declining balance wit+ switc+over to straig+t line.
D. T+e /A.>1,ear propert, class (residential rental propert,) and t+e DB1,ear propert,
class (non1residential real propert,) are allowed straig+t1line depreciation& t+e
recover, )actors are not given in t+e table.
E. 2n, depreciable personal propert, t+at does not )it into one o) t+e de)ined asset
classes is depreciated as being in t+e A1,ear propert, class )or t+e -DS recover,.
S. %epreciation ,etods used for te A%S $ecovery
". T+e straig+t1line met+od is used )or t+e 2DS recover,.
/. T+e 2DS recover, period )or nonresidential propert, is E# ,ears.
D. 2n, tangible personal propert, t+at does not )it into one o) t+e asset classes is
depreciated using a "/1,ear 2DS recover, period.
3. Cost ,etod of %epletion Allo&ances
;ote5 2d9usted cost basis is t+e original cost basis, ad9usted b, allowable increases
due to improvements or decreases due to casualties, t+e)ts and losses.
d e p l e t i o n u n i t
a d < u s t e d t b a s i s
o f u n i t s r e 2 a i n i n g t o b e e d 3 a r v e s t e d

c o s G
H m i n '
6epletion allo4ance - = of units sold x depletion unit
U. Percentage ,etod of %epletion Allo&ances
6epletion allo4ance - t3e allo4ed % x gross inco2e
". Depletion allowance cannot e%ceed ># o) t+e net income ("## )or oil and gas
propert,) be)ore deduction o) t+e depletion allowances.
/. 2llowed percentages are
Sul)ur, uranium, domesticall, mined lead, Iinc, nic7el and asbestos5 //
-old, silver, copper, iron ore, oil s+ale )rom :.S. deposits, geot+ermal wells in
t+e :.S.5 ">
Coal, lignite and sodium c+loride5 "#
Cla,, gravel, sand and stone5 >
". #ncome 3a. Formulas
Effective inco2e tax rate !t& - state rate . federal rate !: / state rate&
!Before/tax (A**&!: / effective inco2e tax rate& - after/tax (A**
Before/tax cas3 flo4 !BTCF& - #ross inco2e !*&
- all expenses except capital invest2ents !E&

Taxable inco2e or et inco2e before taxes !1BT&
- Before/tax cas3 flo4 !BTCF& / 6epreciation !depletion& deductions !d&
1nco2e taxes !T& - Effective inco2e tax rate x Taxable inco2e
et inco2e after taxes !1AT& - Taxable inco2e or 1BT / inco2e taxes
#ain or loss on disposal of an asset - (ar)et value / Boo) value
After/tax cas3 flo4 !ATCF& - BTCF / inco2e taxes !T&
0. Cost Estimation 3ecni4ues
Cost in =ear t5 C C
1 n d e x
1 n d e x
t b a s e
t
b a s e

_
,

Composite inde% )or multiple items (m * ",J, 8), weig+t 0

m
and cost C
m

( )
C o 2 p o s i t e 1 n d e x 1
+ C C
+
1
t
2 t 2 b a s e 2
2
(
2
2
( b a s e

( )
"
"
Power1SiIing Tec+ni@ue (C5 cost, S5 siIe, and K t+e cost1capacit, )actor)
C
C
S
S
A
B
A
B
9

_
,

4earning and 3mprovement

u5 t+e output unit number& L
u
* H o) units o) input needed )or t+e u
t+
output&
M5 H o) units o) input needed )or t+e "
st
output& s5 t+e learning parameter
> ? u 4 3 e r e n
s
u
n
,
l o g
l o g /
Cost (stimating !elations+ip5 y - a . b x
b
n x y x y
n x x
a
y b x
n
o b s e r v e d y p r e d i c t e d y
n
*
x x y y
x x y y
i i
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5. Price Canges and E.cange $ates
3n)lation rate in =ear 75
2verage annual in)lation rate in t+e period =ear b t+roug+ =ear 75
!eal G (!G) and 2ctual G (2G)5
!eal interest rate (i
r
) and t+e combined, or nominal, interest rate (i
c
)5
(note6 te same formula can +e used for #$$ or ,A$$ also1
f
P 1
P 1
)
b
) b

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( ) ( ) ( ) ( ) * A
f
A P F f ) b
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) b
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G G G ' , ,
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P 1 P 1
P 1
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Total price c+ange (e
9
) and relative, or di))erential, price c+ange (e
N
9
)5
Convenience !ate (i
C!
) )or -eometric Se@uence o) Cas+ Flows5
0+en doing 2G anal,sis5
0+en doing !G anal,sis5
Foreign (%c+ange !ate Devaluation ()
e
)5
7. $eplacement Analysis
Be)ore1Ta% Total 8arginal Cost in an, ,ear 7 (TC
7
) *
C+ange in t+e mar7et value o) assets i) sold in ,ear 7 instead o) ,ear 71" (8<
71"
1 8<
7
)
O
Opportunit, cost o) capital tied up b, dela,ing sale o) assets b, one ,ear (i 8<
71"
)
O
Operating e%penses in ,ear 7 ((
7
)
2)ter1Ta% Total 8arginal Cost in an, ,ear 7 (T8C
7
) *
C+ange in t+e mar7et value o) assets i) sold in ,ear 7 instead o) ,ear 71"
("1t)(8<
71"
1 8<
7
)
O
Opportunit, cost o) capital tied up b, dela,ing sale o) assets b, one ,ear
("1t)(i 8<
71"
) O i t (B<)
71"
Or
i P8<
71"
1 t (8<
71"
1 B<
71"
)Q
O
Operating e%penses in ,ear 7
("1t)(
7
(conomic li)e o) an asset * 8inimum e@uivalent uni)orm annual cost ((:2C) period
(For eac+ ,ear, consider t+at ,earNs and prior ,earsN T8Cs and convert into t+e (:2C o)
t+e ,ear and t+en, )ind t+e ,ear w+en (:2C is minimum)
( ) ( ) ) (A** P A < (A** F P T(C EUAC
)
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.ow long s+ould ,ou 7eep using a de)ender, be)ore replacing wit+ a c+allengerR
:se t+e de)ender till its T8C S t+e minimum (:2C o) t+e best c+allenger
0+en s+ould ,ou abandon a pro9ect wit+out an, replacementR
Meep using t+e pro9ect as long as its P0 is not decreasing.
8. Benefit9Cost $atio ,etod
2n, disbene)its (nonmonetar, negative conse@uences) can eit+er be deducted )rom
bene)its in t+e numerator or be added to costs in t+e denominator.
C+oice among independent pro9ects5 c+oose all pro9ect wit+ B'C ".
C+oice among mutuall, e%clusive pro9ects5
Do incremental B'C ratio met+od. C+oose t+e +ig+est P0(costs) pro9ect t+at +as
incremental B'C ". 3) li)e periods are di))erent, compare t+e pro9ects over t+e
same planning period. 3) t+e repeatabilit, assumption +olds, it is relativel, more
convenient to compare t+e incremental B'C ratios calculated )rom 20 o) cas+
)lows in a single use)ul li)e.
C o n v e n t i o n a l B C
P + B
1 P + S P + @ (
o r
A + B
A + 1 A + S A + @ (
'
( )
( ) ( T )
( )
( ) ( ) ( T )

+ +
( o d i f i e d B C
P + B P + @ (
1 P + S
o r
A + B A + @ (
A + 1 A + S
'
( ) ( T )
( )
( ) ( T )
( ) ( )