1. What is this course about?
Time value of money
Importance of interest, inflation, etc.
Cash flow comparisons
Project and Investment Analysis
Making good economic decisions

2. Some interesting questions
Buy or lease?
Buy car or land for an investment?
Buy a bond, stock, keep money in bed?
Which investment to make?

3. Cash flow comparisons Needed for all kinds of decision making
Example: Buying a car
Alternatives:
$18,000 now, or
$600 per month for 3 years(= $21,600 total)
Which is better?

4. Cash flow comparisons Needed for all kinds of decision making
Example: Buying a car
Alternatives:
$18,000 now, or
$600 per month for 3 years (= $21,600 total)
Which is better?
It depends!
Issue: how much is money now worth compared to money in the future?
Leads to idea of Time value of money!

5. Time value of money Would you rather have: $100 today, or
$100 a year from now?

6. Time value of money Would you rather have: Basic assumption:
$100 today, or
$100 a year from now?
Basic assumption:
Given a fixed amount of money, and a choice of having it now or in the future,
Most people would prefer to have it sooner rather than later

7. Time value of money Basic assumption: Reasons:
Given a fixed amount of money, and a choice of
having it now or in the future, most people would
prefer to have it sooner
Reasons:
Security ?
Interests ?
Currency strength ?
Uncertainty ?

8. Time value of money A consequence:
Suppose you are willing to exchange a certain
amount now for some other amount later
Then the later amount has to be _______ ?
A bird at hand is better than two birds in the bush.

9. What this means for us In this course, we will learn methods to:
Compare different cash flows over time
Using the interest rate or discount rate:
How much more a dollar today is worth, compared to a dollar in the future
For example, if the interest rate is 5% per year:
Then $1 today is worth as much as $1.05 next year

10. Chapter 1 Engineering Economic Decisions
Rational Decision-Making Process
Economic Decisions
Predicting Future
Role of Engineers in Business
Large-scale engineering projects
Types of strategic engineering economic decisions

11. Engineering Economic Decisions
Manufacturing
Profit
Planning
Investment
Marketing

12. Predicting the Future Required investment Forecasting product demand
Estimating selling price
Estimating manufacturing cost
Estimating product life

13. Role of Engineers in Business
Participate in a variety of decision-making processes, ranging from manufacturing, through marketing, to financing decisions
Plan for the acquisition of equipment
Design products from the concept to shipping

14. Role of Engineers in Business
Create & Design
Engineering Projects
Evaluate
Expected
Profitability
Timing of
Cash Flows
Degree of
Financial Risk
Evaluate
Impact on
Financial Statements
Firm’s Market Value
Stock Price
Analyze
Production Methods
Engineering Safety
Environmental Impacts
Market Assessment

15. Accounting Vs. Engineering Economy
Evaluating past performance
Evaluating and predicting future events
Accounting
Engineering Economy
Past
Future
Present

16. A Large-Scale Engineering Project
Requires a large sum of investment
Takes a long time to see the financial outcomes
Difficult to predict the revenue and cost streams

17. A Large-Scale Engineering Project

18. Types of Strategic Engineering Economic Decisions
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
Service Improvement

19. Equipment & Process Selection
How do you choose between Plastic Sheet Molding Compound (glass fiber reinforced polymer) and Steel sheet stock for the auto body panel?
The choice of material will dictate the manufacturing process for the body panel as well as manufacturing costs.

20. Which Material to Choose?

21. Equipment Replacement
Now is the time to replace the old machine?
If not, when is the right time to replace the old equipment?

22. New Product and Product Expansion
Shall we build or acquire a new facility to meet the increased demand?
Is it worth spending money to market a new product?

23. Example - MACH 3 Project Gillette’s MACH3 Project
R&D investment: $750 million
Product promotion through advertising: $300 million
Priced to sell at 35% higher than Sensor Excel (about $1.50 extra per shave).
Question 1: Would consumers pay $1.50 extra for a shave with greater smoothness and less irritation?
Question 2: What would happen if the blade consumption dropped more than 10% due to the longer blade life of the new razor?

24. Cost Reduction
Should a company buy equipment to perform an operation now done manually?
Should spend money now in order to save more money later?

25. Service/Quality Improvement
Make-to-order Levi’s for women
How many more jeans would Levi’s need to sell to justify the cost of additional robotic tailors?

26. Principle 1: A nearby dollar is worth more than a distant dollar
Fundamental Principles in Engineering Economics
Principle 1: A nearby dollar is worth more than a distant dollar
Today
6-month later

27. Principle 2: All it counts is the differences among alternatives
Fundamental Principles in Engineering Economics
Principle 2: All it counts is the differences among alternatives
Option
Monthly Fuel Cost
Monthly Maintenance
Cash outlay at signing
Monthly payment
Salvage Value at end of year 3
Buy
$960
$550
$6,500
$350
$9,000
Lease
$2,400
Irrelevant items in decision making

28. Principle 3: Marginal revenue must exceed marginal cost
Fundamental Principles in Engineering Economics
Principle 3: Marginal revenue must exceed marginal cost
Manufacturing cost
Sales revenue
Marginal
revenue
cost
1 unit

29. Fundamental Principles in Engineering Economics
Principle 4: Additional risk is not taken without the expected additional return
Investment Class
Potential
Risk
Expected
Return
Savings account (cash)
Low/None
1.5%
Bond (debt)
Moderate
4.8%
Stock (equity)
High
11.5%