Engineering Economy Why is Engineering Economy important? Practical everyday questions –Should you finance your car or pay cash? Finance for $6995 –vs-

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Presentation transcript:

Engineering Economy Why is Engineering Economy important? Practical everyday questions –Should you finance your car or pay cash? Finance for $6995 –vs- pay $4000 in cash. At what interest rate would you have to invest the $4000 so either option is equivalent. –Buying a new car: should you take 0% financing for the next 4 years, or a $2000 cash rebate. –Purchasing rental property: I just offered committed to purchase a house near campus for $70,000 with 20% down. What are my month P&I payments if interest rates are 6.25% for a 30 year loan or 5.875% for a 15 year loan. What would I pay over the lifetime of each of these mortgages?

Engineering Economy Why is Engineering Economy important? As an Engineer Engineers tend to work on projects. Projects use capital (money) to improve a process, develop a new product, improve a product, improve the safety of a process, etc… Engineers are typically responsible for “writing the project” which determines the cost of the project and the return on investment. When doing a project study, Engineers compare and contrast alternative options for accomplishing the goals of a project. These alternative are often compared from an economic standpoint. Lease –vs- Buy. Payback period. Rate of Return. Return on Investment.

Engineering Economy Time Value of Money - Fundamental concept of Engineering Economy The change in the amount of money over a given time period is called the time value of money. Money makes money. When borrowing money, over time more is owed than amount borrowed.

Engineering Economy Performing an Engineering Economy Study Purchase rental property – or do nothing. Details: $70K Purchase price with 20% down ($14K) Monthly expenses (utilities, maintenance, insurance, etc..) - $ % Current Money Market Interest Rate Expected rental income $750 Mortgage table:

Engineering Economy Performing an Engineering Economy Study Do Nothing Invest $14K in Money Market at 2.5%. Annual return: $350 Rental Property Invest $14K in Rental Property for 30 years at 6.25%. Annual return: 12* (750 – 345 – 200) = $2460 To 8 * (750 – 345 – 250) = $1240 What about taxes? Depreciation!!