# PDB 41103 Advanced Product Design (PDE7

)

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Purpose of Course

To study how Computer Aided Engineering is used as a tool for engineering design and analysis. To study the business and social/ethics context for developing products

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Assessment
Test Assignments Project Final Exam (Theory) 20% 20% 30% 30% 100%

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Individual Project
Design a virtual model of a Mechanism which will perform a specified task. Consider manufacturability and Value Engineering early in the design phase. The model is assessed for economy of costs, simplicity of manufacture and reliability.

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Economics in Design

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Profit

  

The purpose of Product Development is to produce a good or service that a customer will pay a sufficient price for to assure a profit. Gross Profit=Price - Direct Cost Net Profit= Gross profit - allocated expenses To assure a profit, companies act to produce products that can command the highest prices and cost the least to make

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What other product issues drive companies besides profits?
Cash Flow  Required for business continuity  To pay expenses, debt & dividends  To grow business  To invest in new programs, technologies  Acquisitions etc. Valuation  Future earnings  Measure of financial performance

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Some Definitions

Cash Flow: The amount of cash a company generates and uses during a period, calculated by adding noncash charges (such as depreciation) to the net income after taxes. Cash Flow can be used as an indication of a company's financial strength. It is also sometimes referred to as the "money value" of trades in a stock during a trading day. Present Value: The amount today that a sum of money in the future is worth, given a specified rate of return. Future Value: The value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today.

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Design Economics

It is used to answer many different questions  Which engineering projects are worthwhile?  Which engineering projects should have a higher priority? Has the industrial engineer shown which factory improvement projects should be funded with the available dollars?

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Basic Concepts
 

Cash flow Interest Rate and Time value of money

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Cash Flow

Engineering projects generally have economic consequences that occur over an extended period of time  For example, if an expensive piece of machinery is installed in a plant were brought on credit, the simple process of paying for it may take several years  The resulting favorable consequences may last as long as the equipment performs its useful function Each project is described as cash receipts or disbursements (expenses) at different points in time

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Cash Flow diagrams

The costs and benefits of engineering projects over time are summarized on a cash flow diagram (CFD). Specifically, CFD illustrates the size, sign, and timing of individual cash flows, and forms the basis for engineering economic analysis A CFD is created by first drawing a segmented time-based horizontal line, divided into appropriate time unit. Each time when there is a cash flow, a vertical arrow is added − pointing down for costs and up for revenues or benefits. The cost flows are drawn to relative scale
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Drawing a Cash Flow Diagram

Beginning of period cash flows are: rent, lease, and insurance payments End-of-period cash flows are: O&M, revenues, overhauls The choice of time 0 is arbitrary. It can be when a project is analyzed, when funding is approved, or when construction begins One person’s cash outflow (represented as a negative value) is another person’s inflow (represented as a positive value) It is better to show two or more cash flows occurring in the same year individually so that there is a clear connection from the problem statement to each cash flow in the diagram
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An Example of Cash Flow Diagram

A man borrowed \$1,000 from a bank at 8% interest. Two end-of-year payments: at the end of the first year, he will repay half of the \$1000 principal plus the interest that is due. At the end of the second year, he will repay the remaining half plus the interest for the second year. Cash flow for this problem is: End of year Cash flow 0 +\$1000 1 -\$580 (-\$500 - \$80) 2 -\$540 (-\$500 - \$40)

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Cash Flow Diagram
\$1,000

1 0

2

\$580

\$540

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Time Value of Money

Money has value  Money can be leased or rented  The payment is called interest  If you put \$100 in a bank at 9% interest for one time period you will receive back your original \$100 plus \$9
Original amount to be returned = \$100 Interest to be returned = \$100 x .09 = \$9
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Compound Interest
 

Interest that is computed on the original unpaid debt and the unpaid interest Compound interest is most commonly used in practice Total interest earned = In = P (1+i)n - P
 Where, P

– present sum of money  i – interest rate  n – number of periods (years)
I2 = \$100 x (1+.09)2 - \$100 = \$18.81
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Economic Equivalence
Which one would you prefer? •RM 20,000 today •RM50,000 ten years from now •RM 5,000 each year for the next ten years We need to compare their economic worth! Economic equivalence exists between cash flows if they have the same economic effect.
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Future Value of a Loan With Compound Interest

Amount of money due at the end of a loan  F = P(1+i) (1+i) …..(1+i) or F = P (1 + i)n 1 2 n
 Where, F

= future value and P = present value  Referring to slide #10, i = 9%, P = \$100 and say n= 2. Determine the value of F.
F = \$100 (1 + .09)2 = \$118.81

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Notation for Calculating a Future Value
Formula: F=P(1+i)n is the single payment compound amount factor. a future sum F, given a present sum, P, n interest periods hence at an interest rate i per interest period

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An Example of Future Value

 

Example: If \$500 were deposited in a bank savings account, how much would be in the account three years hence if the bank paid 6% interest compounded annually? Given P = 500, i = 6%, n = 3, use F=P(1+i)n

F=500(1+0.3)3 =595.91

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Notation for Calculating a Present Value
P=F(1/(1+i))n=F(1+i)-n is the single payment present worth factor. a present sum P, given a future sum, F, n interest periods hence at an interest rate i per interest period

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An Example of Present Value

Example 3-5: If you wished to have \$800 in a savings account at the end of four years, and 5% interest we paid annually, how much should you put into the savings account? n = 4, F = \$800, i = 5%, P = ?

P=F(1/(1+i))n=F(1+i)-n

P=800(1+0.3) -4 P = \$658.16

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Net Present Value of an Investment
 

Holds for all investments Takes into account inflation, cost of capital, expectations of return Reduces all times to a common point

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Net Present Value (NPV)

  

Cashflows are discounted to time zero using an interest rate representing the minimum acceptable return on capital Time value of money is integral Positive NPV means worth investing Project comparison  Higher NPV is usually best  Compare over similar project life What value of interest rate????

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Calculation of Net Present Value

At NPV = ∑+ )t 1 k t= ( 0
Where k is the expected rate of return A sub t is the cash flow in the period t Choose the projects whose NPV is highest consistent with strategy, risk, resource, etc.
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Profitability Assessment
    

Rate of Return (ROR) Payback Period Net Present Value Discounted Cashflow Break-even Analysis

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Rate of Return
    

Simplest approach Ignore time value of money Simple ratio of profit to initial investment Different types e.g Capital investment of RM 360k, working capital of RM 40k, total profit over 6 years is RM168k Annual profit = RM168k/6 =RK 28k ROR = RM28k/(RM360k + RM40k) = 0.07 = 7%
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Payback Period

The payback period is the length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates. When the net annual cash inflow is the same each year, this formula can be used to compute the payback period: Investment required
Payback period =
Net annual cash inflow

Advantages:  easy to use  emphasizes liquidity Disadvantages:  ignores inflows after the cutoff period and fails to consider the time value of money

Pay Back Example:
You are deciding between two projects, A and B.  Project A costs RM 10,000 and will last four years. Project A will have cash flows of RM 3,500 per year.

Project B will also cost RM 10,000, but will have cash flows of RM 500 in the first two years, RM 4,600 in the third year, and RM 10,000 in the fourth year.  Which project should you take?

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Payback Period

Number of years needed to recover your initial outlay.
Time 0 1 2 3 4
0

P R O J E C T A B (10,000.) (10,000.) 3,500 500 3,500 500 3,500 4,600 3,500 10,000
1 2 3

-10,000+3,500= -6,500+3,500= -3,000+3,500= 4

(10,000) 3,500 Cumulative CF -6,500

3,500 -3,000

3,500 +500

3,500

Initial Investment = 10,000 31 So, payback within 3 years

Payback Period

Number of years needed to recover your initial outlay. Evaluation:
Time 0 1 2 3 4 P R O J E C T A B (10,000.) (10,000.) 3,500 500 3,500 500 3,500 4,600 3,500 10,000

Company sets maximum acceptable payback. If Max PB = 3 years, accept project A and reject project B

0

1

2

3

4

500 (10,000) Cumulative CF -9,500

500 -9,000

4,600 -4,400

10,000 +5,600

32 Payback within 4 years

Drawbacks of Payback Period:
Firm cutoffs are subjective.  Does not consider time value of money.  Does not consider any required rate of return.  Does not consider all of the project’s cash flows.

Costs in Break-Even Analysis

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Break-Even Analysis
Given a fixed cost, how many do we have to make to break even?  A: buy units @ \$200  B: Make on lathe: \$80,000 + \$75 each  C: Machining Center: \$200,000 + \$15 each Which is the cheapest way?

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Break-Even Analysis
 If we only sell 1, which is cheapest?  If we sell a million, which is cheapest?

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Break-Even

Total Costs

Outsource

Draw Lowest Fixed Cost Line

Volume
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Break-Even

Total Costs

Volume
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Break-Even

Total Costs

Outsource Lathe Machining Center

Volume
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BreakEven

Total Costs

Outsource

Lathe

Outsource Lathe Machining Center Machining Center Volume
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Break-Even Analysis

   

When does Lathe become cheaper? 80,000 + 75*x = 200*x 80,000 = 125*x x = 640

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Break-Even

Total Costs

Outsource

Lathe

Outsource Lathe Machining Center Machining Center

640

Volume
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Break-Even Analysis
    When does Machining Center become cheaper? 80,000 + 75*x = 200,000 + 15*x 120,000 = 60*x x = 2,000

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Break-Even
Total Costs Outsource Lathe Machining Center Machining Center 640 2,000 Volume
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Outsource

Lathe

Break-Even Analysis

    

How much do sales have to grow to make an investment pay off? Fixed costs = \$10,000 Direct labor = \$1.50 / unit Material = \$0.75 / unit Sales price = \$4.00 How many units must sell to break even?

Calculating BreakEven Point

We can calculate BEP in dollars or in units.

Total Fixed Costs BEP(\$) = Pr ice − VariableCost Total Fixed Cost BEP( x) = Variable Cost 1− Selling Pr ice

Making a Cost Estimate

A responsibility of the design team (each should be aware of manufacturing costs) First estimates should be made early in the design phase  part of the concept/product evaluation processes Depends on source of components  in-house, purchased , contracted

Determining the Cost
Discount
Indirect costs

Profit Selling expenses
List price

Labor Purchased parts Material

Direct costs

Variable costs

Mfg costs

Tooling

Total costs

Selling price

Fixed costs

List price

Profit

Labor

Tooling

Determining the Cost

Material
Direct costs Indirect costs Variable costs Fixed costs Manufacturing costs Total costs Selling price

Discount

Purchased parts

Selling expenses

Determining the Cost
Discount Profit Selling expenses
List price
Indirect costs

Labor Purchased parts Material

Direct costs

Variable costs

Mfg costs

Total costs

Tooling

Selling price

Fixed costs

List price

Profit

Labor

Tooling

Determining the Cost

Material
Direct costs Indirect costs Variable costs Fixed costs Manufacturing costs Total costs Selling price

Discount

Purchased parts

Selling expenses

List price

Profit

Labor

Tooling

Determining the Cost

Material
Direct costs Indirect costs Variable costs Fixed costs Manufacturing costs Total costs Selling price

Discount

Purchased parts

Selling expenses

Cost of Machined Components

Seven significant control factors  what material?  what machine tool?  major dimensions  number of machined surfaces, how much?  how many components (volume)?  what tolerances, surface finishes?  labor rate

Cost of Injection-Molded Parts

 

Many of the same cost issues as with machined parts Mold making cost is high Changes to mold design can be difficult and expensive Prototyping injection-molded parts can be difficult, expensive, and time consuming

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Cost Evaluation

   

Estimation of manufacturing cost of a component Provide information for product pricing Determine most economical method or process To assist with cost reduction To provide input for profitability assessment

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Cost Evaluation
   

Fixed v Variable costs Direct v Indirect costs Cost estimation Life Cycle costing

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Fixed v Variable Costs

Fixed costs  Independent of rate of production  e.g. Management, Sales force, Technical services, Administrative staff Variable costs  Change with rate of production  e.g. Materials, Direct labour, Power, Maintenance, Packaging
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Direct v Indirect Costs

Direct costs  Easily assigned to a particular cost centre/product  e.g. Materials, Production labour, Power Indirect costs  Must be shared around the factory or company  Overheads  e.g. Depreciation, Interest, Tax, Insurance
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Cost Estimation Techniques

Direct Costing  Individual unit costs  Material  Labour  Overheads Analogy  Base on past design  Allowances for cost escalation and size differences  Beware technological changes Statistical Analysis  Based on historical data
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Cost Estimation Techniques

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Conclusions

What are the key elements of economics in design? How do we assess projects from an economic viewpoint? How can we estimate costs for a project?

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