EECE 450 Engineering Economics Formula Sheet

Cost Indexes: Ordinary Geometric Gradient Annuity:

Cost at time A Index value at time A 1 (1 + g ) n (1 + i ) n
= P = A1 ; i g
Cost at time B Index value at time B ig

Power sizing: nA1
x
P= ;i = g
Cost of asset A Size (capacity) of asset A (1 + i )
=
Cost of asset B Size (capacity) of asset B (1 + i ) n (1 + g ) n
F = A1 ; i g
x = power - sizing exponent ig
Learning Curve: F = nA1 (1 + i ) n 1 ; i = g
TN = Tinitial N b A1 = payment in first period (end)
log(learning curve rate) g = periodic rate of growth
b=
log 2 P, F , i, n as above for compound interest
TN = time to make Nth unit
Simple Annuity Due:
Tinitial = time to make first unit 1 (1 + i ) n
N = number of finished units P = A (1 + i )
i
b = learning curve exponent
(1 + i ) n 1
Simple Interest: F = A (1 + i )
Interest earned on amount P : I = Pin i
Maturity value : F = P (1 + in) A = cash amount (beginning of period)
i = interest rate per time period P, F , i, n as above for compound interest
n = number of time periods Nominal, Periodic, Effective Interest Rates:
r
Compound Interest: i=
m
F = P(1 + i ) n
F = future value
(
(1 + ieff ) = 1 + mr )m
P = present value r = nominal interest rate per year
i = periodic interest rate m = number of compounding periods per year
n = number of periods ieff = effective interest rate (compounded annually)
i = periodic interest rate
Ordinary Simple Annuity:
1 (1 + i ) n Equivalent Interest Rates:
P = A (1 + i p ) p = (1 + ic ) c
i
i p = interest rate for payment period
(1 + i ) n 1
F = A p = number of payment periods per year
i
ic = interest rate for compounding period
A = periodic payment (end of period)
c = number of compounding periods per year
P, F , i, n as above for compound interest
Ordinary General Annuity:
Ordinary Arithmetic Gradient Annuity:
1 (1 + i p ) n
1 n P = A
Aeq = G

n ip
i (1 + i ) 1
(1 + i ) n in 1 (1 + i p ) n 1
P = G F = A
2
i (1 + i )
n
ip
Aeq = equivalent periodic payment i p = interest rate for payment period
G = gradient amount (periodic increment) n = number of payment periods
P, i, n as above for compound interest P, F , A as above for annuities

Prepared by Ron Mackinnon, University of British Columbia, 2008. 7-Feb-08

Perpetual Annuities: Sum-of-Years-Digits (SOYD):
A SOYD = N(N+1)/2
Ordinary : P = Annual charge: dt = (B S)(N t + 1)/SOYD
i
Declining balance (DB):
A A D= proportion of start of period BV that is depreciated
Due : P = (1 + i ) = + A
i i Annual charge: dn = BD(1D)n1
A Book value at end of period n: BVn = B(1-D)n
Geometric Growth : P = ;i > g
ig Capital Cost Allowance (CCA):
d= CCA rate
P, A, i, g as above for annuities
UCCn= Undepreciated capital cost at end of period n
Investment Criteria: Annual charge: CCA1 = B(d/2) for n = 1;
CF1 CF2 CFn CCAn = Bd(1d/2)(1d)n2 for n 2
NPV = CF0 + 1
+ 2
+ ... + UCC at end of period n: UCCn = B(1d/2)(1d)n1
(1 + r ) (1 + r ) (1 + r ) n
BdTC 1 + i 2
NPV = net present value PV(CCA tax shields gained) =
i + d 1+ i
NFV = CF0 (1 + r ) n + CF1 (1 + r ) n 1 + ... + CFn
SdTC 1
NFV = net future value PV(CCA tax shields lost) =
i + d (1 + i )N
NPV
EACF = equivalent annual cash flow = TC = firm' s tax rate; i = discount rate
1(1+ r ) n
r
Investment Project Cash Flows:
CF j = cash flow at time j Taxable income = OROCCCAI
n = lifetime of investment Net profit = taxable income (1T)
r = MARR = minimum acceptable rate of return Before-tax cash flow (BTCF) = I+CCA+taxable income
After-tax cash flow (ATCF) = Net profit + CCA + I
CF1 CF2 CFn
0 = CF0 + + + ... + = (Taxable income)(1T) + CCA + I
1 2
(1 + i ) (1 + i ) (1 + i ) n = (BTCF I CCA)(1 T) + CCA + I
i = IRR = internal rate of return = (OR OC)(1 T) + I(T) + CCA(T)
Net cash flow from operations
PV(neg CFs, e fin ) (1 + i ) n = FV(pos CFs, e inv )
= ATCF I DIV
i = MIRR = modified internal rate of return = (OR OC)(1T) + I(T) + CCA(T) I DIV
e fin = financing rate of return = (OR OC I)(1T) + CCA(T) DIV
e inv = reinvestment rate of return = Net profit + CCA DIV
OR= operating revenue; OC= operating cost
PV(positive cash flows) I= interest expense; DIV = dividends; T= tax rate
Benefit - cost ratio, BCR =
PV(negative cash flows) Net cash flow = Net cash flow from operations
Probability: + New equity issued + New debt issued
+ Proceeds from asset disposal Repurchase of equity
w1S1 + L + wk S k
E( X ) = Weighted average = Repayment of debt (principal) Purchase of assets
w1 + L + wk
dT 1 + i 2
wi = weight for Scenario i Net capital investment = B 1 C
i + d 1+ i
Si = value of X for Scenario i
dT 1
E( X ) = X = expected value of X = P( x j ) x j Net salvage value = S 1 C
i + d (1 + i )N
all j

Var ( X ) = variance of X = P( x j )( x j X ) 2 Inflation:

(1+i) = (1+i)(1+f)
all j
P ( x j ) = Probability( X = x j ) i = i + f + (i)(f)
i= market interest rate; i= real interest rate
Depreciation: f= inflation rate
B= initial (purchase) value or cost basis
S= estimated salvage value after depreciable life Weighted Average Cost of Capital (WACC):
D E
dt= depreciation charge in year t WACC = (1 TC )id + ie
N= number of years in depreciable life V V
t V = D+E
Book value at end of period t: BVt = B di D= market value of debt; E= market value of equity
i =1 V= market value of firm
Straight-Line (SL): id= cost of (rate of return on) debt
Annual charge: dt = (B S)/N after-tax cost of debt: idt = id(1T)
Book value at end of period t: BVt = B td ie= cost of equity

Prepared by Ron Mackinnon, University of British Columbia, 2008. 7-Feb-08