Bài giảng nhập môn quản lý xây dựng

PUBLIC WORKS ECONOMICS

Department of Construction Management - Faculty of
Economic and Management


A bottling company installed a conveyor system 10
years ago at the cost of $20,000. The company is
considering replacing the system because maintenance
costs have been increasing and new technology is
available that will be less costly to
operate and provide greater
performance.
You have been assigned to
analyze both systems and
recommend the most
economical decision – retain
the old system or replace it
with the new system.


A petroleum company needs to paint the vessels and
pipes in its refinery periodically to prevent rust
“

• Tuff-Coat, a durable paint, can be purchased for $8.05 a gallon
• Quick-Cover, a less durable paint, costs $3.25 a gallon
Both paints are equally easy to apply and will cover the same area per
gallon. Quick-Cover is expected to last 5 years.

How long must TuffCoat last to justify

its use?


You are the city engineer for a small but
growing community and are applying for a
grant to help fund an upgrade to the
wastewater treatment plant. The new design is
based on population growth over the next 20
years.
The grant requires
• Multiple design
alternatives be
evaluated
• An economic
justification
• A 7% “discount rate”


You and your spouse have just had a beautiful
baby boy.
You want to start saving for his college
education now.
Given the rising costs of
college, how much should you
save each month to ensure you
will have enough to fund his
education in 18 years?


You have found your dream home, but you

need to decide how to finance the purchase.
Should you obtain a
• 30-year fixed rate mortgage?
• 15-year fixed rate mortgage?
• A creative financing option that your uncle is
offering that requires you pay no interest for the first
5 years of the loan?
You have saved $20,000 in your
401K. Should you withdraw that
money and use it as a down
payment or keep it invested?


Course Objectives
• Be able to prepare economic justifications
for engineering proposals
• Be able to manage personal finances and
make wise investment decisions


Course Objectives (cont.)
• Be able to evaluate economic justifications
performed by others
• Be comfortable using financial language
• Be aware of tradeoffs involving expenses
and capital costs under tax and inflation
conditions
• Be familiar with advanced techniques of
modeling decision problems under risk and
uncertainty conditions

What is Engineering Economic
Analysis?
• Definition: applying economic analysis
techniques to compare alternative engineering
projects
• Other names
– Engineering economy
– Economic decision analysis
– Capital investment analysis

• Cash flow analysis
$

$

+$
-$


Engineering Economic Analysis
• Engineers must
– understand how money works in order to make
informed design decisions
– make decisions over the entire product life cycle
(cradle to)
– consider the economics of the design in order to
“sell” it to management / public

• Determine if a project is “economically
viable” grave
• Choose the “best” project between multiple
alternatives


What makes Engineering
Economic Decisions hard?
• Uncertainty/risk
• Multiple, conflicting objectives
–
–
–
–

Maximize quality while minimizing cost
Environmental impacts
Safety
How do you quantify these things?


Why is time an important factor
in economic analysis?
• Many investment decisions have a life cycle
of several (or many) years
• Would you rather choose a project that has a
large up-front cost and low annual cost, or a
project with low up-front costs and higher
annual costs?
– Answer: It depends

• It is useful to compare alternative projects at
a common point in time, therefore we must
consider the time value of money


Time Value of Money
• Would you rather receive $1000 today or
$1000 a year from today?
• Would you rather receive $1000 today or
$1050 a year from today?
• Would you rather receive $1000 today or
$1500 a year from today?
• Would you rather receive $1000 today or
$2000 a year from today?


Time Value of Money
• The value of a sum of money is dependent
not only on the amount, but also on the time
at which the money is received
• This is because money has “earning power,”
or opportunity cost

Time Value of Money is represented with interest rates


Opportunity Cost
• Receiving cash now, rather than in the
future, allows you to earn interest on that

money until that point in the future
– Alternatively, you need to be compensated for
waiting by receiving a larger sum (with interest)


Time Value of Money
• When would the time value of money not be
important to your decision?
– All costs and benefits occur within a brief period
of time (within 1 year)
– No investment of capital is required, or
differences are only in annual costs/revenues
– Long-term costs of the alternatives are the same


Economic Justification
Seven Questions to Answer
1. What investment alternatives are available?
2. What is the length of time over which the
decision is to be made?
3. What TVOM will be used to move monies
forward and/or backward in time?
4. What are the best estimates of the cash
flows for each alternative?
5. Which investment alternative seems best,
based on the economic criterion chosen?
6. How sensitive is the decision to changes or
errors in the estimates used in the analysis?
7. Which investment is recommended?

SEAT
Systematic Economic Analysis Technique
A Seven-Step Procedure
1.
2.
3.
4.
5.
6.
7.

Identify the investment alternatives
Define the planning horizon
Specify the discount rate
Estimate the cash flows
Compare the alternatives
Perform supplementary analyses
Select the preferred alternative
In this class, we will most often be comparing
mutually exclusive alternatives


Chapter 1
Basic Concepts
• Interest
– Simple Interest
– Compound Interest

• Interest Rates

• Time Value of Money
• Cash Flow


•INTEREST
•Interest is a fee that is charged for the use of
someone else's money. The size of the fee will
depend upon the total amount of money borrowed
and the length of time over which it is borrowed.
•Example 1.1 An engineer wishes to borrow $20
000 in order to start his own business. A bank will
lend him the money provided he agrees to repay
$920 per month for two years. How much interest
is he being charged?


The total amount of money that will be paid to the bank is 24 x $920 =
$22 080. Since the original loan is only $20 000, the amount of interest is
$22 080 - $20 000 = $2080.

•Whenever money is borrowed or invested, one
party acts as the lender and another party as the
borrower. The lender is the owner of the money,
and the borrower pays interest to the lender for the
use of the lender's money.
•For example, when money is deposited in a
savings account, the depositor is the lender and
the bank is the borrower. The bank therefore pays
interest for the use of the depositor's money.
•(The bank will then assume the role of the lender,

by loaning this money to another borrower, at a
higher interest rate.)


INTEREST RATE
If a given amount of money is borrowed for a
specified period of time (typically, one year), a
certain percentage of the money is charged as
interest. This percentage is called the interest
rate.
Example 1.2 (a) A student deposits $1000 in a
savings account that pays interest at the rate of
6% per year. How much money will the student
have after one year?
(b) An investor makes a loan of $5000, to be repaid
in one lump sum at the end of one year. What
annual interest rate corresponds to a lump-sum
payment of $5425?


The student will have his original $1000, plus an
interest payment of 0.06 x $1000 = $60. Thus, the
student will have accumulated a total of $1060
after one year. (Notice that the interest rate is
expressed as a decimal when carrying out the
calculation.)
The total amount of interest paid is $5425 - $5000 =
$425. Hence the annual interest rate is
(425/5000)%=8.5%

SIMPLE INTEREST
Simple interest is defined as a fixed percentage of the principal (the
amount of money borrowed), multiplied by the life of the loan. Thus,

I = niP

(1.1)

where
I = total amount of simple interest
n = life of the loan
i = interest rate (expressed as a decimal)
P = principal
It is understood that n and I refer to the same unit of time (e.g., the
year).
Normally, when a simple interest loan is made, nothing is repaid until
the end of the loan period; then, both the principal and the
accumulated interest are repaid. The total amount due can be
expressed as

F = P +I = P(1 + ni)

(1.2)


Example A student borrows $3000 from his uncle in order to
finish school. His uncle agrees to charge him simple interest
at the rate of 5.5% per year. Suppose the student waits two
years and then repays the entire loan. How much will he have

to repay?
By (1.2)

F = $3000[1 + (2)(0.055)] = $3330.