Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ENGR 155 – Engineering economics Jan 17: Introduction Chapter 1: Engineering economics overview Fundamental principles of engineering economics Time value of money Simple & compound interest Engineering is the profession in which knowledge of the mathematical & natural sciences gained by study, experience & practice is applied w/ judgment to develop ways to use, economically, the forces of nature for the benefit of humankind. (ABET) Engineering economics overview Topics dealt with in chapter 1 1. Rational decision-making process 2. Economic decisions 3. Predicting future 4. Role of engineers in business 5. Large-scale engineering projects 6. Types of strategic engineering economic decisions T1. Rational decision-making process (what engineers do) – – – – – – Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative Text example: which car to lease? Saturn vs. Honda – – – – – – Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative Need a car Want mechanical security Gather technical as well as financial data Choose between Saturn and Honda Want minimum total cash outlay Select Honda Financial data required to make an economic decision T2. Engineering economic decisions Manufacturing Planning Profit Investment Marketing T3. Predicting the future - Estimating a required investment - Forecasting a product demand - Estimating a selling price - Estimating a manufacturing cost - Estimating a product life T4. Role of engineers in business Create & design engineering projects Analyze Evaluate Evaluate production methods expected profitability impact on financial statements timing of cash flows firm’s market value engineering safety environmental impacts market assessment degree of financial risk stock price Accounting vs. engineering economics Evaluating past performance Accounting Evaluating & predicting future events Engineering economy past present future Time & uncertainty are the defining aspects of any engineering economic decision T5. A large-scale engineering project – Requires a large sum of investment – Takes a long time to see the financial outcomes – Has uncertainty in predicting the revenue & cost streams T6. Types of strategic engineering economic decisions in manufacturing sector – Service improvement – Equipment & process selection – Equipment replacement – New product & product expansion – Cost reduction Fundamental principles of engineering economics 1. A nearby dollar is worth more than a distant dollar 2. All that counts are the differences among alternatives 3. Marginal revenue must exceed marginal cost 4. Additional risk is not taken without the expected additional return Principle 1: A nearby dollar is worth more than a distant dollar today 6-month later Principle 2: All that counts are the differences among alternatives Monthly Salvage fuel cost mainten- outlay at payment value at end of signing ance year 3 Option Monthly Monthly Cash Buy $960 $550 $6,500 $350 $9,000 Lease $960 $550 $2,400 $550 0 Irrelevant items in decision making Principle 3: Marginal revenue must exceed marginal cost Marginal cost Manufacturing cost Sales revenue Ignore sunk costs 1 unit 1 unit Marginal revenue Principle 4: Additional risk is not taken without expected additional return Investment class Potential risk Expected return Savings account (cash) Low/none 1.5% Bond (debt) Moderate 4.8% Stock (equity) High 11.5% Summary of chapter 1 – Engineering economic decision refers to all investment decisions relating to engineering projects – Five main types of engineering economic decisions: service improvement, equipment & process selection, equipment replacement, new product & product expansion, cost reduction – The factors of time & uncertainty are the defining aspects of any investment project Time value of money – Money has a time value because it can earn more money over time (earning power). – Money has a time value because its purchasing power changes over time (inflation). – Time value of money is measured in terms of interest rate. – Interest is the cost of money—a cost to the borrower & an earning to the lender What determines interest rate? – – – – – Time value of money Risk Overhead costs Inflation Supply of & demand for funds Money supply & demand Methods of calculating interest Simple interest: the practice of charging an interest rate only to an initial sum (principal amount). Compound interest: the practice of charging an interest rate to an initial sum & to any previously accumulated interest that has not been withdrawn. Simple interest P = Principal amount i = Interest rate N = Number of interest periods Example: P = $1,000 i = 8% N = 3 years End of year Beginning balance Interest earned 0 Ending balance $1,000 1 $1,000 $80 $1,080 2 $1,080 $80 $1,160 3 $1,160 $80 $1,240 Simple interest formula F = P + (iP)N where P = Principal amount i = simple interest rate N = number of interest periods F = total amount accumulated at the end of period N F = $1, 000 + (0.08)($1, 000)(3) = $1, 240 Compound interest Compound interest: the practice of charging an interest rate to an initial sum & to any previously accumulated interest that has not been withdrawn. Compound interest P = Principal amount i = Interest rate N = Number of interest periods Example: P = $1,000 i = 8% N = 3 years End of year Beginning Interest balance earned 0 Ending balance $1,000 1 $1,000 $80 $1,080 2 $1,080 $86.40 $1,166.40 3 $1,166.40 $93.31 $1,259.71 Become rich by the age of 65 • • • • Your current age: 20 years old Amount of savings desired: $2 million Interest earned on your savings: 10% Required monthly savings: Upper 5% of U.S. income bracket Monthly savings required to save $2M at age 65 Starting Age Required Monthly Savings at Varying Interest Rates 5% 7% $987 $527 $190 $93 $31 30 $1,760 $1,110 $527 $311 $136 40 $3,358 $2,469 $1,507 $1,064 $617 50 $7,483 $6,310 $4,825 $4,003 $2,998 20 10% 12% 15% Returns from various investment classes Average Annual Return 19701997 Best Year Worst year U.S. stocks 13.0% 37.6% (1995) -26.5% (1974) International stocks 12.7% 39.4% (1993) -26.2% (1974) Real estate 8.8% 20.5% (1979) -5.6% (1991) U.S. bonds 9.3% 33.5% (1982) -5.6% (1994) What’s an engineering degree worth? Source: CNN Money, April 19, 2005 Majors Chemical engineering Electrical engineering Computer engineering Mechanical engineering Industrial engineering Information science Civil engineering Business administration Average starting salary $54,256 $52,009 $51,496 $51,046 $49,541 $43,732 $43,462 $39,448 For most engineering graduates, it is not difficult to set aside $100 each month for savings. Conclusion? Start saving Early!