Operation Analysis 2
• Engineering Economy
Engineering Economy
Lecture Notes
(Some of the materials are taken from
Prof. Vate’s lecture notes)
Outline
Accounting
Terminologies
Engineering Economy
3
Accounting
Basis of decision making
“The language of business”
Balance Sheet:
Asset versus Liability
Net Worth = Assets – Liabilities
“How well am I doing?”
Income Statement:
Profit/Loss = Revenues - Expenses
4
Accounting: Balance Sheet
Assets
Current assets
Cash, account receivable, inventories
Fixed assets
Takes time to convert them to cash
Depreciation: convert fixed assets into expenses
Liabilities and stockholders’ equity
Current liabilities
Other liabilities
Stockholders’ equity = net worth
Common stock , Preferred stock, Treasury stock (buyback), and Outstanding stock (#
shares in public)
Retained earnings
Paid-in capital (capital surplus): sale of stock more than the par value of the stock
5
Accounting: Income Statement
Making or losing money?
Revenue
Net sales
COGS
Gross margin
Operating income
Net income
EPS (Earning per Share)
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Business’ Performance
Debt Management Analysis
Ability to pay long-term liabilities?
– Debt Ratio
– Times-Interest-Earned Ratio (EBIT/interest expense)
• Liquidity Analysis
Focus on working capitals
– Current Ratio
– Quick (Acid Test) Ratio (subtract inventory)
• Asset Management Analysis
Ability to manage the assets
Inventory Turnover (Sales/Average Inventory)
Total Assets Turnover (Sales/Total Asset)
7
Business’ Performance (Cont’d)
Profitability Analysis
Market Value Analysis
P/E Ratio
Book value per share (equity – preferred
stock)/outstanding shares
8
Cost Concepts
Determine COGS and COGM
Direct Material
Direct Labor
Overhead (Indirect Material/Labor)
Charge OH to production by:
• % of direct labor cost
• % direct material cost
• Rate per direct labor hour
COGM = DM + DL + OH
COGS = COGM + BegInv – EndInv
9
Cost Behaviors
Fixed Cost
Variable Cost
Mixed Cost (semi-variable cost, i.e. depreciation)
Average Unit Cost, for…
Fixed Cost?
Variable Cost?
Mixed Cost?
Opportunity Cost
Sunk Cost
Marginal Cost, Marginal Revenue
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Engineering Economy
F = P(1 + i)
n
 1
i
1 
P  A


n 1
1 i
(1

i
)
(1

i
)


Notation:
i = annual interest rate
n = annual interest periods
P = present principal sum
A = single payment in a series of n equal payments made at the
end of each annual interest period
F = future sum
P|F, i, n = Find P given F, i, n
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A Piece of Cake Exercises
How much will $150 be worth 20 years from now at annual interest
rate of 12%?
If $100 is set aside at the end of each year for 10 years at an annual
interest rate of 12%, what would it be worth at the end of the 8th
year?
How much would be required at the end of each year for 10 years to
accumulate $5,000 at the end of the 10th year if the annual interest
rate is 12%?
How much can be borrowed now if it can be repaid by 10 equal endof-year payments of $100 each? Annual interest rate is 12%.
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Present Worth Calculation
PV =?
$ 3,000 $ 3,000
$ 4,000
$ 2,000
$ 4,000
$ 10,000
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Financial Education Game
With interest rate i = 12%, what will you
choose?
• Start investing $12/year now (your age)
• Start investing $12/year at age 30
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