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 Interest rate should be reflective of the compounding period applied A= P*[(i(1 + i)n)/((1 + i)n – 1)]

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? 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, $ -35,000 1 7,500 2 3 4 5 6 7 8 11,000

Project Comparisons Two methods: Present Worth Analysis Simple Payback Period Analysis 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 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?