Operation Analysis 2

1. Operation Analysis 2 Engineering Economy

2. Engineering Economy Lecture Notes (Some of the materials are taken from Prof. Vate’s lecture notes)

3. Outline • Accounting • Terminologies • Engineering Economy

4. 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

5. 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

6. Accounting: Income Statement • Making or losing money? • Revenue • Net sales • COGS • Gross margin • Operating income • Net income • EPS (Earning per Share)

7. 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)

8. Business’ Performance (Cont’d) • Profitability Analysis • Market Value Analysis • P/E Ratio • Book value per share (equity – preferred stock)/outstanding shares

9. 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

10. 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

11. Engineering Economy • 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

12. 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 end-of-year payments of $100 each? Annual interest rate is 12%.

13. PV =? $ 3,000 $ 3,000 $ 4,000 $ 4,000 $ 10,000 $ 2,000 Present Worth Calculation

14. 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