This document discusses key concepts in engineering economics and financial accounting. It defines opportunity cost as the cost of an alternative that must be forgone to pursue a certain action. The incremental concept refers to changes in output, costs, or incomes. Discounting principles involve converting future cash flows to present value based on a discount factor. The concept of time perspective acknowledges that money received in the future is not worth as much as money received today due to interest earned over time.

2. Prepared by :
Dr. K. BARANIDHARAN
PROF.MBA
SRI SAIRAM INSTITUTE OF TECHNOLOGY
CHENNAI
ENGINEERING ECONOMICS
AND
FINANCIAL ACCOUNTING
Sri Sairam Institute of Technology 2

3. Engineering
Economics& Financial
Accounting
Ee&fa
310 August 2014

4. Basic concept of decision
making

5. Opportunity Cost concept
• 1. The cost of an alternative that must be forgone in order
to pursue a certain action. Put another way, the benefits
you could have received by taking an alternative action.
• Here's example: if a gardener decides to grow carrots, his
or her opportunity cost is the alternative crop that might
have been grown instead (potatoes, tomatoes, pumpkins,
etc.).
• Say you invest in a stock and it returns a paltry 2% over the
year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free
government bond yielding 6%. In this situation, your
opportunity costs are 4% (6% - 2%).

6. Incremental concept
• When we changes in the level of output
or costs or incomes, incremental concept
is referred to.
• How much is the additional cost incurred
for an additional volume of 10,000 units?
• If I have to earn an additional income of
say Rs.200000, how much more should I
produce? These are the cases where
incremental concept is made use of.

7. Discounting principles
• The process of converting the future cash
flows into their present value is called
discounting.
• Suppose a firm will rs.10000 at the end of
one year from now what is its present
value?
• The present value of rs.10000 received at
the end of one year from now is determined
based on discount factor (also called present
worth factor).

8. Concept of Time perspective
• Money can earn a certain interest rate
trough its investment for a period of time,
usually one year.
• This implies that a rupee received at some
future date is not worth as much as a
rupee in hand at present.
• It is relationship between interest and time
that leads to the concept of the time value
money and this is based on the time
perspective