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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ENGR 390 Winter 2007 Section 1 Lecture 1

Course Learning Objectives
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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ENGR 390 Winter 2007 Section 1 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
• Grading: • Weighting: •Assignments •Exam 1 •Exam 2 •Final Percentage

25% 25% 25% 25%

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ENGR 390 Winter 2007 Section 1 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 •Double underline answer and units

• 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
•Add extra weight to Final

•No make-up Final

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ENGR 390 Winter 2007 Section 1 Lecture 1

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

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

• Equipment selection • Lease or buy decisions • Make or buy decisions • Equipment replacement

Engineering Econ Process
Manufacturing Profit

Planning

Investment Marketing

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ENGR 390 Winter 2007 Section 1 Lecture 1

Engineering Econ Process
• • • Identify alternative uses for limited resources Obtain needed data (not this class)

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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ENGR 390 Winter 2007 Section 1 Lecture 1

Cash Flow Diagrams
OPTION 1: $50 k

N=

0

1

2

3 YRS F3?

OPTION 2: $15 k N= 0 $15 k 1 $15 k 2 $10 k 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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ENGR 390 Winter 2007 Section 1 Lecture 1

Future Value in 3 years…
I% 2.5% 5.0% 7.5% 10% Option 1 $53,844 $57,881 $62,115 $66,550 Option 2 $57,288 $59,652 $62,094 $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?
• What about the $100,000?
•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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ENGR 390 Winter 2007 Section 1 Lecture 1

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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ENGR 390 Winter 2007 Section 1 Lecture 1

Standard Factors Used to Solve ECON Problems
( F | P, i, N) ( P | F, i, N) ( F | A, i, N) ( A | F, i, N) ( P | A, i, N) ( A | P, i, N) ( P | G, i, N) ( A | G, i, N) ( F | G, i, N) Find F Given P Find P Given F Find F Given A Find A Given F Find P Given A Find A Given P Find P Given G Find A Given G Find F Given G

Tables…

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ENGR 390 Winter 2007 Section 1 Lecture 1

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 P F = P(F/P,i,N) 1 2 3 N

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ENGR 390 Winter 2007 Section 1 Lecture 1

Tables…
i=

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

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
F 0 P? P = F(P/F,i,N) 1 2 3 N

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ENGR 390 Winter 2007 Section 1 Lecture 1

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 A F = A(F/A,i,N) Note: cash flow A does not have to be annual, just periodic

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
F 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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ENGR 390 Winter 2007 Section 1 Lecture 1

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 A P = A(P/A,i,N) Note: cash flow A does not have to be annual, just periodic

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
P 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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ENGR 390 Winter 2007 Section 1 Lecture 1

Present Given Gradient (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 G P = G(P/G,i,N) 3 N

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

Future Given Gradient (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 G F = G(F/G,i,N) 3 N

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

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ENGR 390 Winter 2007 Section 1 Lecture 1

Annual Given Gradient (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 G A = G(A/G,i,N) Note: cash flow of G starts at Time 2, flow of A starts at Time 1 2 3 N

Standard Factors Used to Solve ECON Problems
( F | P, i, N) ( P | F, i, N) ( F | A, i, N) ( A | F, i, N) ( P | A, i, N) ( A | P, i, N) ( P | G, i, N) ( A | G, i, N) ( F | G, i, N) Find F Given P Find P Given F Find F Given A Find A Given F Find P Given A Find A Given P Find P Given G Find A Given G Find F Given G

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