Engineering Economics Bo Hu John Nieber

Basics Financial reporting Journals, ledgers Balance sheets Income statements Financial ratios Costing of products & process equipment Cost estimation Financial analysis (Profitability) Capital investment Return on Investment (ROI) Payback period Venture Profit Annualized Cost Net present value Investor’s rate of return (Discounted Cash Flow) Cash flow diagram Depreciation Topics Menu

Interest Fee charged for borrowing someone else’s money Interest rate Percentage of money borrowed charged by lender. Simple Interest Fixed interest of the principal ($ borrowed) Compound Interest Percentage interest applied to principal + previously accumulated interest. Time Value of Money Money increases in value with time due to interest. Inflation National economies experience increased cost of goods with time which is termed inflation. Taxes Interest gained in an investment is taxed by the govt. Cash Flows Difference between total cash receipts (inflow) and total cash disbursements (outflow) in a period of time (usually, one year). Basics

Financial Statements, Records, and Reports Journal – Debit and Credit Transactions Ledger – Transactions for a particular account category Balance Sheet – Assets and Liabilities Income statement (Profit/Loss) – Record of profits and losses Cash flow statement – Summary of cash flows in a given period.

Ledger JOURNAL Page Debit ($) Credit ($) June 3 Heat Exchanger Cash Purchase of a HEX for ammonia plant 4 Cash Ammonia product Sales of product from ammonia plant ABC 6 Land Cash Purchase of land in Iowa from XYZ BANK ACCOUNT, LEDGER 11Page Debit ($) 2002 Credit ($) June 1 Balance forward June 4 Sales Purchase Purchase Source : SSL p. 473 Source : SSL p. 474 Journal

Balance Sheet Source : SSL p. 475

Balance Sheet (cont.) Source : SSL p. 476

Income Statement Source : SSL p. 478

Cash Flow Statement Source : SSL p. 479

Prepare for the class discussion Choose one of your favorite companies and search their balance sheet, income statement, and cash flow statement in the year During the class, we are going to analyze their financial ratio and see whether these companies are considered healthy.

Financial Ratios Financial Ratios (to measure the profitability of company) Current ratio : (current assets)/(current liabilities) =2 Acid-Test (Quick) Ratio : (current assets minus inventory)/(current liabilities) =1-2 Equity Ratio : (stock holders’ equity)/(total assets) =0.5 Return on Total Assets (ROA) : (income before interest and taxes) / (total assets) Return on Equity (ROE) : (income before interest and taxes)/(common stockholders’ equity) Operating Margin : (income from operations)/(net sales) Profit Margin (net income after taxes)/(net sales)

Cost estimate

Product cost breakdown (simple case) Total cost = MC + LC + IC MC = Material cost LC = Labor cost IC = Indirect cost (overhead) MC = $ per kg of materials x mass utilized LC = $ per hour rate x hours worked IC = $freight + $overhead + $contractor expenses…etc Product Cost

Direct module expenses Equipment purchase price Installation materials cost Total $A Direct field labor Material for construction Equipment setting Total $B Indirect module expenses Freight, Construction overhead, Contractor engineering expenses Total $C BARE MODULE COST = $A+$B+$C Capital Investment Installation Cost

Capacity Cost Estimation from R. Smith (2005)

Capital costing from R. Smith (2005)

Equipment cost From R. Smith (2005)

Sources of Financial Data Seider et al. (2004) Product and Process Design Principles. Smith, Robin, (2005) Chemical Process : Design and Integration The Chemical Engineering (CE) Plant Cost Index The Marshall & Swift (MS) Equipment Cost Index The Nelson-Farrar (NF) Refinery Construction Cost Index The Engineering News-Record (ENR) Construction Cost Index

Financial Analysis Return on Investment Payback period Venture Profit Annualized Cost Net present value Investor’s rate of return Cash Flows Depreciation

Financial Analysis Return on investment (ROI)

Financial Analysis Payback Period

Financial Analysis Venture Profit (VP)

Financial Analysis Annualized Cost

Financial Analysis Present Value of an Annuity (PV)

Financial Analysis Net Present Value (NPV)

Financial Analysis Investor’s Rate of Return

Financial Analysis Cash Flow and Depreciation Cash Flow – see Cash flow diagrams. Depreciation – decrease in value of something over time. Investment $ Payments Equipment Value $ Depreciation Time

References Seider,Seader, Lewin, (2004) Product and Process Design Principles, Wiley. Blank et al. (1989) Engineering Economy, 3 rd Edition, McGraw-Hill. Smith, Robin (2005) Chemical Process : Design and Integration, Wiley.