1 IENG 301/302 – Fall 2013 Instructor: Paula Jensen Phone: 394 – Office Hrs: MW IER 307 T/TH 8:50-9:10 CB 307 T/TH 10:40-11:30 IER 307 Class website:

2 Course Objectives 1. Solve problems in a manner expected on the Fundamentals of Engineering exam. 2. Evaluate personal finance choices.

3 Required Materials  Eshenbach, T. (2011). Engineering Economy (3 rd ed.). New York NY: Oxford University Press. 591pp. ISBN  Engineering Notebook – 9-3/4" x 7-1/2", 5x5 quad-ruled, pp. (approx.).  Engineering Problems Paper – 8-1/2" x 11", three hole drilled, ruled five squares/division, 50 pp. (approx.).  FE Supplied-Reference Tables for Eng. Econ.

4 Engineering Notebook  Anything you can copy, cut, staple, paste, glue, or otherwise persuade to live permanently within the covers of your engineering notebook may be used on the exams … EXCEPT old exams and other’s notebook pages.  MUST HAVE in your notebook by next class: FE Supplied-Reference Tables for Eng. Econ.

5 FE Supplied-Reference Tables  Go to  Exams  Study Materials  Fundamentals of Engineering  FE Supplied-Reference  Free Preview  Read & Accept Terms  FE Supplied-Reference Handbook as multiple PDF files  Engineering Economics  Save the file to your computer  Print these out, cut & paste into your Eng. Notebook

6 Course Structure Grading:Percentage Weighting: Assignments15%20% Interaction 5% 5% Exam I20%25% Exam II20%25% Exam III20%25% Exam IV20% --

7 Policies Out of Class Assignments: Due at class (or earlier) No late work – drop lowest scoring HW Interaction Assignments Due in class Schedule to makeup if gone for sponsored activities ahead of time.

8 Assignment Structure Format for most problems: Find (objective) Given (organize relevant data, only) Cash Flow Diagram (rarely dropped) Soln. (steps to solve): Write equation in Table Factor Form Convert to values (or equation forms) Double underline answer to question Turn in on EP Paper Stapled w/ name! Not graded if illegible!

9 Exams: Open engineering notebook Closed text, etc. Put FE reference tables in notebook Make-up Exams Sponsored activities schedule ahead of time Otherwise, add extra weight to next midterm No make-up Final

Policy:  If you are writing about issues relating to the class, make sure the subject line reads IENG 301 or 302: (subject info) so I can sort my s and answer accordingly.  Please be professional in your s. (no texting lingo!)

Academic Honesty  Cheating: use or attempted use of unauthorized materials, information or study aids  Tampering: altering or interfering with evaluation instruments and documents  Fabrication: falsification or invention of any information  Assisting: helping another commit an act of academic dishonesty  Plagiarism: representing the words or ideas of another as one's own

12 Assignment #0 NameCourse ID Preferred nameTerm / Year Your SDSM&T address Your major and anticipated graduation date Your hometown Anything else the instructor should know about you

ADA Students with special needs or requiring special accommodations should contact the instructor and/or the campus ADA coordinator, Jolie McCoy, at at the earliest opportunity.

What is Engineering Econ?  It evaluate the money side of engineering problems.  It answers questions like:  When should I buy this?  How many payments should I make?  Does this take into account all the stakeholders in the change?  When does the cost benefit take place?  Which project should we do? 14

15 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)

16 Typical Decisions Cost reduction (e.g., equipment, tooling, facility layout) Capacity expansion (e.g., to increase production, sales) Equipment / Project selection Lease or buy decisions Make or buy decisions Equipment replacement

17 Lets Get Started… Would you rather have $ today or $ five years from now? If you don’t need it right now, what could you do with it? Would it be worth the same in five years? Money changes value with time!

18 Rate of Return (ROR) is the rate of change in value earned over a specific period of time – expressed as a percentage of the original amount Period Ending Amount – Period Starting Amount Period Starting Amount The Rate of Return is a measure of how much risk there is in an investment Higher Risk  Higher ROR x 100% ROR =

19 Rate of Return and Interest The Interest Rate (i) is the percentage change in value earned over a specific period of time. For simple interest, a return is earned only on the original amount (principal, p) each period. If the principal is invested for n periods: Total Money Returned = p + (p)(n)(i) Total Interest Earned = (p)(n)(i)

20 Compound vs Simple Interest For simple interest, a return is earned only on the original principal each period. For compound interest, a return is earned on the entire amount (principal + total interest already earned) invested at the beginning of the current period. Effectively, you are also earning interest on your interest (and on your investment principal)! Unless explicitly stated otherwise, this course uses compound interest. (And so does the rest of the world!)

21 Using Compound Interest to Make Economic Decisions … Paid $100,000 for it - 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.

22 Questions?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 (equivalent) - 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.

23 Cash Flow Diagrams $15 k 0n = $15 k 1 2 $10 k 3YRS OPTION 2: $50 k 0n =YRS OPTION 1: 312 F3?F3? F3?F3?

24 The Question Under what conditions would I be indifferent between Options 1 & 2? Indifferent means Economically Equivalent: – Have the same amount of money at same point in time, after accounting for all of the cash flows. – In this case, 3 years from now. Interest Rates… – Percentage – Compounding annually

25 Future Value in 3 years… I%Option 1Option 2 2.5%$53,844$57, %$57,881$59, %$62,115$62,094 10%$66,550$64,615 At what interest rate, am I indifferent between the two options? They are economically equivalent at an interest rate just a little less than 7.5%

26 Option 1 50,000 now i = 10% compounded annually F 1 = 50, ,000 (.10) = 55,000 F 2 = 55, ,000 (.10) = 50,000 (1 +.10) 2 = 60,500 F 3 = 60, ,500 (.10) = 50,000 (1 +.10) 3 = 66,550

27 Generalizing … P = Present value at the beginning of first period. F n = Future value at end of n periods in the future. F n = P (1 + i) n = P (F/P,i,n) so … (F/P,i,n) = (1+i) n

28 Standard Factors Used to Solve ECON Problems ( F / P, i, n)  Find F Given P ( P / F, i, n)  Find P Given F ( F / A, i, n)  Find F Given A ( A / F, i, n)  Find A Given F ( P / A, i, n)  Find P Given A ( A / P, i, n)  Find A Given P ( P / G, i, n)  Find P Given G ( A / G, i, n)  Find A Given G ( F / G, i, n)  Find F Given G

29 Tables…Tables…

30 Tables…Tables…

31 … or Formulas …

32 … or Formulas …

33 Future Given Present  P is the present value at Time 0  F is the future value at Time n  (n compounding periods in the future)  i is the effective interest rate 0n P F ? 123 F = P(F/P,i,n) i=?

34 Tables…Tables… = i F 3 = (F/P,10%,3)F 3 = (F/P,10%,3) = (1.3310)F 3 = (F/P,10%,3) = (1.3310) = $66 550

35 Formulas…Formulas… F 3 = (F/P, 10%,3)F 3 = (F/P, 10%,3) = (1+.10) 3 F 3 = (F/P, 10%,3) = (1+.10) 3 = (1.3310) F 3 = (F/P, 10%,3) = (1+.10) 3 = (1.3310) = $66 550