1. Engineering Economic Evaluation
Freshman Engineering Clinic II

2. 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

3. 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)]

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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?