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Construction Management - II / Basics of Engineering Economics

Performance:Slide501.doc

Engineering Economics
Principles
§ During our examinations we assume a
consolidated economy. ( Free of extremities,
such as war, hyperinflation, corruption, etc.,
and fundamentally operated by pure market
mechanisms and by stabil legal and
regulations’ systems )
§ Our examinations are aiming at economic
comparisions of functionally equivalent
technical and/or financial options. Figures
resulted by any analysis of any option can
not be evaluated as themselves but as values
to be measured against others.
§ Conclusions of our examinations are at most
supporting decision makers at their work
when elaborating their market policy and/or
strategy, but are not substituting any
decisions to be made by them.

BUTE DCTM / Engineering Programs in English / 2000-

Dr. Zoltán András Vattai

Construction Management - II / Basics of Engineering Economics

Performance:Slide502.doc

Using External Resources
Foreign Capital
Due to the fact that a typical investment in
civil engineering and/or in construction
industry moves huge amount of technical and
financial resources, it is frequently
unavoidable to invoke external („foreign”)
resources and/or capital temporarily.
Liquidity:
Promp available own economic resources.
(„self-financing capability”)
Loan:
External economic resource temporarily let
for use and to be paid back later increased
by some extra fee („foreign capital”, „loan
capital”).
Interest:
„Rent” („price”) of using foreign capital.
Its extent is highly defined by the actual
„demand versus supply” conditions.
BUTE DCTM / Engineering Programs in English / 2000-

Dr. Zoltán András Vattai

Construction Management - II / Basics of Engineering Economics

Performance:Slide503.doc

Using External Resources
Foreign Capital
Term / Pay-Back Period / Lending Period:
A time period in which a foreign capital is let
for use. By the end of it the capital itself and
the interest on it must be entirely paid back.
Simple Interest: ( I )
The extent (volume) of interest is neither
related to the amount of the capital itself nor
to the extent of pay-back period formally.
Present Value: ( P )
A fictive or actual value of capital let for use
( lended or to be lended ) at the beginning of
lending period.
Future Value: ( S = Succeeding Value )
A fictive or actual value of capital let for use
( lended or to be lended and increased by the
interest on it ) at the end of lending period.
S=P+I

BUTE DCTM / Engineering Programs in English / 2000-

Dr. Zoltán András Vattai

Construction Management - II / Basics of Engineering Economics

Performance:Slide504.doc

Using External Resources
Foreign Capital
Rate of Interest: ( i )
The extent (volume) of interest is formally
related to the amount of capital lended.
I=P⋅i



S=P⋅(1+i)

Nominal Period:
A pre-set extent of time ( period ) for which
the periodic amount of interest ( related to the
amount of capital ) is set in advance.
( e.g.: year, „annum” )
Compounding / Capitalization:
The movement ( generally at the end of a
nominal period ) when the due interest on
lasted period(s) is united with the capital itself
and the interest for the next nominal period is
calculated in proportion of this cummulated
value ( … as if the cummulated value was the
lended capital for the next nominal period ).
S1 = P0 ⋅ ( 1 + i ) ⇒ P1 = S1
S2 = P1 ⋅ ( 1 + i )
BUTE DCTM / Engineering Programs in English / 2000-

Dr. Zoltán András Vattai

Construction Management - II / Basics of Engineering Economics

Performance:Slide505.doc

Using External Resources
Foreign Capital
Discount Rate:
Inverted „value” of the Interest Rate used for
„backward-” calculations, typically at Present
Value calculations. („Discounting”)
e.g.

1
i

P=S⋅

Compound Amount Interest:
The extent (volume) of interest is both related
to the...
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