Construction Management - II / Basics of …

1 Construction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiEngineering EconomicsPrinciples During our examinations we assume aconsolidated economy. ( Free of extremities,such as war, hyperinflation, corruption, etc.,and fundamentally operated by pure marketmechanisms and by stabil legal andregulations systems ) Our examinations are aiming at economiccomparisions of functionally equivalenttechnical and/or financial options. Figuresresulted by any analysis of any option cannot be evaluated as themselves but as valuesto be measured against others.

2 Conclusions of our examinations are at mostsupporting decision makers at their workwhen elaborating their market policy and/orstrategy, but are not substituting anydecisions to be made by Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiUsing External ResourcesForeign CapitalDue to the fact that a typical investment incivil engineering and/or in constructionindustry moves huge amount of technical andfinancial resources, it is frequentlyunavoidable to invoke external ( foreign )resources and/or capital :Promp available own economic resources.

3 ( self-financing capability )Loan:External economic resource temporarily letfor use and to be paid back later increasedby some extra fee ( foreign capital , loancapital ).Interest: Rent ( price ) of using foreign extent is highly defined by the actual demand versus supply Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiUsing External ResourcesForeign CapitalTerm / Pay-Back Period / Lending Period:A time period in which a foreign capital is letfor use. By the end of it the capital itself andthe interest on it must be entirely paid Interest: ( I )The extent (volume) of interest is neitherrelated to the amount of the capital itself norto the extent of pay-back period Value: ( P )A fictive or actual value of capital let for use( lended or to be lended ) at the beginning oflending Value.

4 ( S = Succeeding Value )A fictive or actual value of capital let for use( lended or to be lended and increased by theinterest on it ) at the end of lending = P + IConstruction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiUsing External ResourcesForeign CapitalRate of Interest: ( i )The extent (volume) of interest is formallyrelated to the amount of capital = P i S = P ( 1 + i )Nominal Period:A pre-set extent of time ( period ) for whichthe periodic amount of interest ( related to theamount of capital ) is set in advance.

5 ( : year, annum )Compounding / Capitalization:The movement ( generally at the end of anominal period ) when the due interest onlasted period(s) is united with the capital itselfand the interest for the next nominal period iscalculated in proportion of this cummulatedvalue ( .. as if the cummulated value was thelended capital for the next nominal period ).S1 = P0 ( 1 + i ) P1 = S1S2 = P1 ( 1 + i ) Construction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiUsing External ResourcesForeign CapitalDiscount Rate:Inverted value of the Interest Rate used for backward- calculations, typically at PresentValue calculations.

6 ( Discounting )Compound Amount Interest:The extent (volume) of interest is both relatedto the amount of the capital itself and to theextent* of lending period formally.( * set as number of nominal periods: n )Sn = P ( 1+ i )nP = Sn 1( 1 + i )ni = - 1 SnnPn =lnln ( 1 + i ) P = S 1iConstruction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiFurther Terms in Relation with Time-Value of Money Effective Rate of Interest:To satisfy arising needs for shorter capitalrecovery cycles, and for lessening loss ininterest in case of capital withdrawal beforethe end of a nominal period, banks offered aspecial way of interest calculation.

7 ( t = compoundings in a nominal period; t = 4/12/365; in = nominal interest )ie = ( 1 + )t 1 Euler : e intDaily Access Rate of Interest: ( id )Regarding the limited manner of EffectiveRate of Interest, and for to substitute the dailycompounded (t=365) interest calculations ..( d = number of passed days within a nominalperiod (typically a year); number of dayswithin a fiscal year 365 (360) )id = in d365 Construction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiFurther Terms in Relation with Time-Value of Money Substituting Mean Interest: ( im )An indicatrix characterizing a loan affair incase of rate of interest changing in time.

8 ( k = running index of compoundings )Inflation: ( f )Specific loss in purchasing power of acurrency within a period.( There can be numerous reasons of it, not allof them negative phenomenon behind )ir = 11 + i1 + fim = ( 1 + ik ) 1 k=1nnNet/Real Rate of Interest: ( ir )Rate of Interest calculated taking inflation intoaccount ( indicatrix ).( Infaltion works on the interest itself too ! ) Construction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s VattaiCash-FlowCash-Flow AnalysisThe Cash-Flow DiagramA typical cash-flow of an investmentIncomes (+) Expences (-)Timen-2n-1n12340 PSnTimekn-1n1230 CashConstruction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr.

9 Zolt n Andr s Vattai ., S = R [ (1+i)n-1 + (1+i)n-2 + (1+i)n-3 + .. + (1+i)2 + (1+i) + 1 ] Multiplying equation by (1+i) we get equation .., S (1+i) = R [ (1+i)n + (1+i)n-1 + (1+i)n-2 + .. + (1+i)3 + (1+i)2 + (1+i) ].. Equation less equation we get equation .., S i = R [ (1+i)n -1 ].. Rearranging equation we get ..S = R (1+i)n -1i lim R = lim P (i + ) = P i(1+i)n -1in n R = ( P - V ) + V i(1+i)n -1i (1+i)n RR-P ilog( )n =log(1+i)Cash-FlowCash-Flow AnalysisAnnuity ( uniform series payment ) : pention, rent, pay-back of a loan.

10 Timen-2n-1n12340 PSnR1= R2 = R3= R4 = ..Rn-2 =Rn-1 =Rn =Ri = Assets, Capitalized Cost Taking resale value (V) into account Sinking Fund Construction Management - II / Basics of engineering DCTM / engineering Programs in English / 2000-Dr. Zolt n Andr s Vattai S = g ( + + + .. + + ) (1+i)n-1 -1 (1+i)n-2 -1 (1+i)n-3 -1 (1+i)2 -1 (1+i) -1 i i i i i S = ((1+i)n-1 + (1+i)n-2 + (1+i)n-3 +.)