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# ENGR 390 Winter 2007 Section 1

Lecture 1

## ENGR 390 – Sect. 001

• Meetings:
•T, R: 11:00 – 12:20

• Instructor:
•Prof. Sundar V. Atre
•Phone: 737-8272
•E-mail: sundar.atre@oregonstate.edu
•Office Hrs: T,R 1:00 – 3:00 p.m.

• Class website:
BLACKBOARD

Central Idea

## Money has a time value

because it can earn more
money over time (earning
power).
Time value of money is
measured in terms of interest
rate.
Interest is the cost of money—
a cost to the borrower and an
earning to the lender

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Lecture 1

## 1. Be able to perform economic

calculations involving the time value of
money using standard formulas and
tables.

## 2. Be able to compare alternatives using

net present worth, equivalent annual
worth, internal rate-of-return, and
benefit-cost analysis.

## Course Learning Objectives

3. Be able to apply the principles listed in
(1) and (2) above in applications such
as economic life, replacement analysis,
benefit/cost analysis, breakeven
analysis, lease vs. buy and inflation.
4. Be able to apply depreciation and
income tax principles to the
comparison of alternatives using after
tax cash flows.

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Lecture 1

## Other Course Objectives

1. Prepare economic reports
following correct engineering
economy procedures.

## 2. Solve problems in a manner

expected on the Fundamentals
of Engineering exam.

## 3. Evaluate personal finance

choices.

Course Structure

• Weighting:
•Assignments 25%
•Exam 1 25%
•Exam 2 25%
•Final 25%

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Lecture 1

Assignment Structure
• Format for each problem:
•Find (objective)
•Given (starting values)
•Diagram (cash flow)
•Soln. (steps to solve):
•Write equation in Table Factor Form
•Insert values

## • Not graded if illegible!

Policies
• Assignments:
•Due at class (Thursday), all equal wt.
(%)
•No late work

• Exams:
• One 8.5” x 11” Notecard
•Closed text, etc.
• No make-up Midterms
•No make-up Final

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Lecture 1

Typical Decisions
• Cost reduction
(e.g., equipment, tooling, facility
layout)

• Plant expansion
(e.g., to increase capacity, sales)

• Equipment selection
• Equipment replacement

## Engineering Econ Process

Manufacturing Profit

Planning Investment

Marketing

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Lecture 1

## Engineering Econ Process

• Identify alternative uses for limited
resources

## • Analyze data to determine preferred

alternative:

•Screening decisions
(meets minimum acceptable?)

•Preference decisions
(Select from competing alternatives)

## Lets Get Started…

• Paid \$100,000 for a piece of
equipment - 3 years ago
• Don’t need it now
• Option 1 – Sell it for \$50,000
• Option 2 – Lease it for \$15,000
for 3 years. Sell it for
\$10,000 at the end of
the lease.
Note:
Leases typically pay at the beginning of a time period.
Loans typically pay at the end of a time period.

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Lecture 1

## Cash Flow Diagrams

OPTION 1:
\$50 k

N= 0 1 2 3 YRS

F3?
OPTION 2:
\$15 k \$15 k \$15 k
\$10 k

N= 0 1 2 3 YRS

F3?

The Question
• Under what conditions would I be
indifferent between Options 1 & 2?
• Indifferent means:
– Have the same amount of
money at same point in time.
– In this case, 3 years from now.
• Interest Rates…
– Annual
– Compounding annually

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## Future Value in 3 years…

I% Option 1 Option 2
2.5% \$53,844 \$57,288
5.0% \$57,881 \$59,652
7.5% \$62,115 \$62,094
10% \$66,550 \$64,615
At what interest rate, am I indifferent
between the two options?
• At an interest rate just a little less than 7.5%

Questions?
•The \$100 K is irrelevant - it is a sunk cost, and makes no
difference in the decision at this point in time.

## • How do we select between the options?

•We need to know under which conditions we would be
economically indifferent - we have the same amount of
money at the same time - and then if the conditions are
better for one option, we will select that option.

## • Any other factors?

•Since we need to account for the time value of money - we
need to know the interest rate and the compounding period.

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Option 1
50,000 now
i = 10% compounded annually

## F1 = 50,000 + 50,000 (.10) = 55,000

F2 = 55,000 + 55,000 (.10)
= 50,000 (1 + .10)2 = 60,500
F3 = 60,500 + 60,500 (.10)
= 50,000 (1 + .10)3 = 66,550

Generalizing …
P = Present value beginning
of first period.
FN = Future value at end of N
periods in the future.
i = interest rate
FN = P (1 + i)N
= P (F/P,i,N)
(F/P,i,N) = (1+i)N

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## Standard Factors Used to

Solve ECON Problems
( F | P, i, N) Î Find F Given P
( P | F, i, N) Î Find P Given F
( F | A, i, N) Î Find F Given A
( A | F, i, N) Î Find A Given F
( P | A, i, N) Î Find P Given A
( A | P, i, N) Î Find A Given P
( P | G, i, N) Î Find P Given G
( A | G, i, N) Î Find A Given G
( F | G, i, N) Î Find F Given G

Tables…

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Tables…

## Future Given Present

 P is the present value at Time 0
 F is the future value at Time N
 (N periods in the future)
 i is the effective interest rate

F?

0 1 2 3 N

F = P(F/P,i,N)

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Tables…

i=

F3 = 50
50,000(F|P,i,N)
000(F|P,i,N) = 50
50,000(F|P,10%,3)
000(F|P,10%,3) = 50
50,000(1.3310)
000(1.3310) = \$66,550

## Present Given Future

 P is the present value at Time 0
 F is the future value at Time N
 (N periods in the future)
 i is the effective interest rate for each period

0 1 2 3 N

P?

P = F(P/F,i,N)

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## Future Given Annual

 A is the equal annual value over the time period
 (time period: Time 0 to Time N, 1st flow at Time 1)
 F is the future value at Time N
 (N periods in the future)
 i is the effective interest rate for each period

F?

0 1 2 3 N

F = A(F/A,i,N)

## Annual Given Future

 A is the equal annual value over the time period
 (time period: Time 0 to Time N, 1st flow at Time 1)
 F is the future value at Time N
 (N periods in the future)
 i is the effective interest rate for each period

0 1 2 3 N

A?

A = F(A/F,i,N)

##  Note: cash flow A does not have to be annual, just periodic

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## Present Given Annual

 A is an equal annual flow over the time period
 (time period: Time 0 to Time N, 1st flow at Time 1)
 P is the present value at Time 0
 (N periods in the past)
 i is the effective interest rate for each period

P?

0 1 2 3 N

P = A(P/A,i,N)

## Annual Given Present

 A is the equivalent annual flow over the time period
 (time period: Time 0 to Time N, 1st flow at Time 1)
 P is the present value at Time 0
 (N periods in the past)
 i is the effective interest rate for each period

0 1 2 3 N

A?

A = P(A/P,i,N)

##  Note: cash flow A does not have to be annual, just periodic

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(Linear)
 G is the linear gradient over the time period
 (time period: Time 0 to Time N, 1st flow at Time 2)
 P is the present value of the flow at Time 0
 (N periods in the past)
 i is the effective interest rate for each period
P?

0 1 2 3 N

P = G(P/G,i,N)

##  Note: cash flow is periodic, no flow at Time 1, flow of G at Time 2

(Linear)
 G is the linear gradient over the time period
 (time period: Time 0 to Time N, 1st flow at Time 2)
 F is the future value of the flow at Time N
 (N periods in the future)
 i is the effective interest rate for each period
F?

0 1 2 3 N

F = G(F/G,i,N)

##  Note: cash flow is periodic, no flow at Time 1, flow of G at Time 2

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Lecture 1

(Linear)
 G is the linear gradient over the time period
 (time period: Time 0 to Time N, 1st flow at Time 2)
 A is the annual equivalent of the gradient flow
 (annual flow starts at Time 1, goes through Time N)
 i is the effective interest rate for each period

A?
0 1 2 3 N

A = G(A/G,i,N)

## Standard Factors Used to

Solve ECON Problems
( F | P, i, N) Î Find F Given P
( P | F, i, N) Î Find P Given F
( F | A, i, N) Î Find F Given A
( A | F, i, N) Î Find A Given F
( P | A, i, N) Î Find P Given A
( A | P, i, N) Î Find A Given P
( P | G, i, N) Î Find P Given G
( A | G, i, N) Î Find A Given G
( F | G, i, N) Î Find F Given G

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