Engineering Economic Evaluation
Freshman Engineering Clinic II
Course Reminders & Deadlines
• PathFinder
▫ Engineering Graphics “Before” Questions due by
Wednesday April 5th at 10:30 am
• 3D Game Lab
▫ last deadline of 1,050 XP midnight Fri. April 14th
▫ To get an “A” or 100% in GameLab you need to reach
1,250 XP but no penalty after reaching 1,050 XP
• HL Machine
▫ Mass Transfer Lab Questions due by Monday April 3rd at
9:30 am
Review of Last Class – Key Concepts
•
Time value of money
▫
Based on interest rates, money will have a different value in
the future than the present depending on the interest rate
▫
PV = FV/(1+i)n
▫
Interest rate should be reflective of the compounding period
applied i.e. if n is in years than i = yearly interest rate
•
Payments over time
▫
Allows you to determine how much to pay per interest period
to re-pay an amount that has been borrowed
A= P*[(i(1 + i)n)/((1 + i)n – 1)]
▫ Interest rate should be reflective of the compounding period
applied
Review of Last Class – Example Problem
Your grandfather passes away and you are told that you will be
getting an inheritance of $5,000. The lawyer says you could
get the money today or you could get $8,500 at the end of 5
years if the funds are invested in a bond with a monthly
interest rate of 0.67%. Which is the better choice taking the
money now or investing it?
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PV = FV/(1+i)n
i = 0.67%/month * 12 months/year = 8%/year = 0.08/year
PV= $8,500/(1+0.08)5
PV=$5,784
Money made = $5,784-$5,000 = $784
▫ Based on this analysis you should ask for the inheritance to be
invested
Project Summary and Cash Flow Tables
•
Capital costs: money invested to
start project (occur at time zero)
Cash flow per period:
•
▫
•
•
Revenue/year – Operation &
Maintenance Costs (O&M)/year
Salvage value: Additional positive
cash flow in last year of project
(occur at time n)
Lifetime – project length (n)
Example
Determine the Cash Flow Table and Cash Flow
Diagram that represents the following project
Description
Project
Capital Costs $
35,000
Revenue ($/yr)
15,000
Operation & Maintenance Costs ($/yr)
7,500
Salvage Value ($)
3,500
Lifetime (yr)
8
Example – Solution
• Yearly cash flow = Revenue – O&M
= $15,000 – $7,500
= $7,500
End of
Period, yr
Project, $
0
-35,000
1
7,500
2
7,500
3
7,500
4
7,500
5
7,500
6
7,500
7
7,500
8
11,000
Project Comparisons
•
Two methods:
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•
Present Worth Analysis
Simple Payback Period Analysis
Present Worth Analysis
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Take into account different project lifetimes
Create a cash flow diagram or table
Use Minimum Acceptable Rate of Return (MARR) to
get net present worth benefit (NPWB)
If NPWB is positive than return is better than
minimum acceptable rate of return (MARR)
Select project with higher NPWB
Project Comparisons
•
Simple Payback Period
▫
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▫
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Create a cash flow diagram or table
Determine cumulative cash flow for each period (Total
cash flow from previous year + net cash flow for
current year)
Identify the
period when cash
flow becomes positive
Works best for total
project lifetimes 1 to
2 years
You’re the Engineer….
• Form groups of 4-6 and review the two projects provided
to you:
▫ Based on your review determine which project you think you
should recommend to the company (no calculations allowed)
▫ Provide your rationale for why you would recommend that
project
• Split into groups of 2-3 (each taking one of the projects).
Calculate the following for your project if MARR = 0.05:
▫ Cash flow table
▫ Cash flow diagram
▫ Net Present Worth Benefit (NPWB)
You’re the Engineer….
• Compare your results to the other team you started
working with
• Which project do you recommend your company to
move forward with now and why?
• Was your final decision different than your initial
suggestion based on just reading the project
description? Yes, No and why?