You are on page 1of 10

ISE 2014 – ELECTRONIC RESERVE FILES

This and other files contain most of the overheads used in


ISE 2014 - Engineering Economy. The files are organized to
correspond to the chapters of the textbook. Some files may
contain overheads that are not used in class.

These materials are provided as a convenience to help with


notetaking. They are a “work in progress” and represent the
cumulative efforts of several individuals.

Please do not assume that reviewing these notes is the


same as attending the lecture. Material will be covered in
class that does not appear in these overheads.

1
ISE 2014 – ENGINEERING ECONOMY

Our aim is to think about and understand the power of


money:

- how to make it
- how to save it
- how to spend it

We’ll do this in the context of (a) engineering, (b) personal


finances, and (c) the EF portion of the professional
engineering exam. In this course, we’ll learn about making
money turn into wealth.

2
An important objective in ISE 2014 is to create a learning environment in which every student can earn a
“B” or better.

How to Make an “A” in ISE 2014

A few tips for your consideration:

#1 Read your textbook early (and bring it to class with you).

#2 Avoid absences - come to class.

#3 Do all extra credit assignments.

#4 Pre-test yourself (on lots of problems).

#5 Do #4 sooner than the night before the exam.

#6 Take worthwhile notes in class.

#7 Don’t read the book during tests (test are open book, open notes).

#8 College is big business.* Take it seriously.

#9 Write your name in your textbook.

______________
*A College education adds at least $500,000 to your lifetime earnings. Source: New York Times, July 4,
1990.

3
ISE 2014 – CALCULATION OF YOUR
OVERALL SCORE

25% 25% 30% 20% BONUS OVERALL GRADE


TEST #1 TEST #2 FINAL HW/QUIZ SCORE
100 100 100 0 0 80.00 B
75 61 77.5 21 0 61.45 D
91 70 70.5 40 1 70.40 C
80 61 60.5 90 2 73.40 C
85 90 85 95 1 89.25 Probably
an A

91 89 90 90 1 91.00 A

4
ISE 2014 – “WE LIVE IN A SEA OF
ECONOMIC DECISIONS”

Examples of economic decisions that you will face:

- Paper or plastic?

- 87-octane or 91-octane?

- You have decided to purchase a new automobile, and the


negotiated price is $20,000. You make a down payment of
$2,000 and finance the remaining $18,000. At this point the
loan officer of the dealership asks you “Would you rather go
with a 3% APR and no manufacturer's rebate, or select a
9% APR which includes a $1,500 manufacturer’s rebate?
What else do you need to know to choose the better deal?
What choice would you make?

5
ENGINEERING ECONOMIC ANALYSIS
PROCEDURE (FROM Table 1-1)

1. Problem recognition, formulation, and evaluation


2. Development of the feasible alternatives
3. Development of the net cash flow for each alternative
4. Selection of a criterion (or criteria)
5. Analysis and comparison of the alternatives
6. Selection of the preferred alternative
7. Performance monitoring and post evaluation of results

6
ISE 2014 – AN EXAMPLE PROBLEM TAKEN FROM AN OLD EXAM

While studying for the Engineering Economy final exam, you and two friends find yourselves
craving for a fresh pizza. You can’t spare the time to pick up the pizza and must have it
delivered. “Pick-Up-Sticks” offers a 1” thick (including toppings), 20” square pizza with your
choice of two toppings for $15 plus 5% sales tax and a $1.50 delivery charge (no sales tax on
delivery charge). “Fred’s” offers the round, deep-dish Sasquatch which is 20 inches in
diameter. It is 1-3/4” thick, which includes two toppings, and costs $17.25 plus 5% sales tax
and free delivery.

(a) What is the problem in this situation? Please state it in a lucid manner.

(b) Systematically apply the seven principles of engineering economy (pp. 4-7) to the
problem you have defined in part (a).

(c) Assuming that your common unit of measure is $ (i.e., cost), what is the better value for
getting a pizza based on the criterion of minimizing cost per unit of volume?

(d) What other criteria might be used to select which pizza to purchase?

ISE 2014 – A TYPICAL DISSCUSSION/SOLUTION

(a) One problem involves how to satisfy the hunger of three students--assume a piping hot,
delicious pizza will satisfy this need. (Another problem is to learn enough about
Engineering Economy to pass--or better yet earn an “A” or a “B”--on the final
examination and ace the course. Maybe a pizza will help solve this problem too?)
Let’s use “hunger satisfaction with a pizza” as the problem/need definition.

(b) Principle 1 - Develop the Alternatives


i) Alternative A is to order a pizza from “Pick-Up-Sticks.”
ii) Alternative B is to order a pizza from “Fred’s.”
Other options probably exist but we’ll stick to these two alternatives.

Principle 2 - Focus on the Differences


Difference in delivery time could be an issue. A perceived difference in the quality of
the ingredients used to make the pizza could be another factor to consider. We’ll
concentrate our attention on cost differences in part (c) to follow.

Principle 3 - Use a Consistent Viewpoint


Consider your problem from the perspective of three customers wanting to get a good
deal. Does it make sense to buy a pizza having a crust that your dog enjoys, or
ordering a pizza from a shop that employs only college students? Use the customers’
point of view in this situation rather than that of the owner of the pizza shop or the
driver of the delivery vehicle.

7
Principle 4 - Use a Common Unit of Measure
Most people use “dollars” as one of the most important measures for examining
differences between alternatives. In deciding which pizza to order, we’ll use a cost-
based metric in part (c).

Principle 5 - Consider All Relevant Criteria


Factors other than cost may affect the decision about which pizza to order. For
example, variety and quality of toppings and delivery time may be extremely important
to your choice. Dynamics of group decision making may also introduce various
“political” considerations into the final selection (can you name a couple?).

Principle 6 - Make Uncertainty Explicit


The variability in quality of the pizza, its delivery time and even its price should be
carefully examined in making your selection. (Advertised prices are often valid under
special conditions--call first to check on this!)

Principle 7 - Revisit Your Decision


After you’ve consumed your pizza and returned to studying for the final exam, were you
pleased with the taste of the toppings? On the downside, was the crust like cardboard?
You’ll keep these sorts of things in mind (good and bad) when you order your next
pizza!

(c) Finally some numbers to crunch--don’t forget to list any key assumptions that underpin
your analysis to minimize the cost per unit of volume (Principles 1, 3, 3, 4 and 6 are
integral to this comparison).

Assumptions: (i) weight is directly proportional to volume (to avoid a “meringue” pizza
with lots of fluff but meager substance), (ii) you and your study companions will eat the
entire pizza (avoids variable amounts of discarded left-overs and hence difficult-to-
predict cost of cubic inch consumed) and (iii) data provided in the Example Problem are
accurate (the numbers have been confirmed by phone calls).

Analysis:

Alternative A “Pick-Up-Sticks” Alternative B “Fred’s”


Volume = 20” x 20” x 1” = 400 in.3 Volume = (3.1416) (10”)2 (1.75”) = 550 in.3
Total Cost = $15 (1.05) + $1.50 = $17.25 Total Cost = $17.25 (1.05) = $18.11
Cost per in.3 = $0.043 Cost per in.3 = $0.033

Therefore, order the pizza from “Fred’s” to minimize total cost per cubic inch.

(d) Typical other criteria you and your friends could consider are: (i) cost per square inch
of pizza (select “Pick-Up-Sticks”), (ii) minimize total cost regardless of area or volume
(select “Pick-Up-Sticks”), and (iii) “Fred’s” can deliver in 30 minutes but “Pick-Up-
Sticks” cannot deliver for one hour because one of their ovens is not working properly
(select “Fred’s”).

8
ISE 2014 – THE WEEKLY SCAM:
CREDIT CARDS

“Too much credit card debt makes you lose control of your
own destiny.” Anon

Suppose you owe $1,100 on your credit card. The annual


percentage rate (APR) is 18%. The credit card company says
your minimum monthly payment is $19.80.

q If you make only this minimum payment, it will take ten


years for you to repay the $1,100 loan. The total amount of
interest is

($19.80/month) (120 months) - $1,100 = $1,276,

which exceeds the amount you initially borrowed!

q If you make the minimum payment, plus $10 extra each


month, it will take you 54 months (4.5 years) to repay this
loan. You’ll pay only $509.20 in interest.

Moral: Avoid carrying a credit card balance for more than a


couple of months. Pay in full as soon as you can. Always pay
more than the minimum amount specified if you cannot pay
the account in full.

9
ISE 2014 – SUPPLEMENTAL HOMEWORK #1

Based on your reading of Chapter 1 (and especially Example 1-2), use each of the seven
principles of engineering economy to resolve the following dilemma.

Your brother attends the University of Virginia and expects to graduate this coming December.
He has a job in California that pays $40,000 per year waiting for him, and he must report to
work on January 15, 1999. He has no other job offers available to him.

A potentially tricky decision faces your brother because he owns a small $40,000 house in
Charlottesville, and the housing market is in the doldrums. Two years ago when he
purchased the house, he made a $4,000 cash payment on it. He continues to make $310 per
month mortgage payments. Your brother prefers not to rent the house because of all the
headaches involved. His realtor in Charlottesville says the house can be sold for $34,000
immediately. If your brother wants at least $40,000 for the house, the realtor says it probably
won’t sell for another 15-18 months. The cost of moving to California is estimated to be
$5,000 if your brother uses professional movers. However, he can pack and move himself for
$2,000. Also he plans to rent an apartment in California for $600 per month. He has a pet cat
that is named “Blue,” and your brother will take his cat to California in January.

What should your brother do? Give him advice by using each of the seven principles
discussed in Chapter 1.

Principle 1 – Develop the alternatives


Principle 2 – Focus on the differences
Principle3 – Use a consistent viewpoint
Principle 4 – Use a common unit of measure
Principle 5 – Consider all relevant criteria
Principle 6 – Make uncertainty explicit
Principle 7 – Revisit your decisions

10