1. Economic Comparison Fr Clinic II

2. Overview n Economics and Engineers n Time Value of Money n Different types of Economic Analyses n Comparing our filters – two examples

3. Warning n The field of economic comparison is huge, I’ve left a lot out.

4. Engineers and Economics n Engineers often must estimate the benefits and/or costs of their designs –Buildings, roads, landfills –New products –Communication systems –Refineries, oil platforms

5. Time Value of Money n What would you rather have, $100 now or 5 years from now? –Assuming you don’t need the $100 to meet some immediate need, what is your answer? –Why?

6. Investments n You can take that $100 and invest it in bank accounts, bonds, or stocks and get a return on your investment n At a 10 % annual return, –what will $100 be worth in five years? n $100 (1.1)(1.1)(1.1)(1.1)(1.1) = $100 (1.1) 5 = $161 –getting the $100 five years from now would be the same as getting what amount now? n $100 (1.1) -5 = $62

7. Different types of Economic Analyses n Present Worth –Transform costs and benefits into equivalent present value –Project with largest present worth is best n Annual Cash Flow –Transform costs and benefits into equivalent uniform annual amounts over project lifetime –Project with largest annual net benefit is best

8. Different types (Cont.) n Payback Period –How long will it take for an investment (say a new manufacturing process) to recoup its costs? –Projects with short payback period are good, but direct comparison of projects requires an incremental process n Benefit/Cost Ratio –Determine ratio of benefits to costs, see if its > than 1 –High B/C ratios are good, but direct comparison of projects requires an incremental method n Rate of Return –Determine the rate of return provided by a project (similar to the interest rate for a bank account) –High rate of return is good, but direct comparison of projects requires an incremental process

9. What if all you have are costs? n If its difficult to assign monetary value to benefits, you may be left with only costs n Can still use present worth and annual net benefit methods –Just look for alternative with the smallest present or annual cost –This assumes alternatives provide same benefits

10. Comparing Filters n Without time value of money –Costs are purchase of (a) entire unit and (b) replacement cartridges –Costs can be related to volume of water treated n With time value of money –Must estimate rate at which water will be treated, to estimate cartridge replacement times

11. Without “time value”, example 1 n Filter 1 –Initial cost $40, replacement filter $30, every 100 Liters n Filter 2 –Initial cost $60, replacement filter $20, every 100 Liters n Filter 3 –Initial cost $80, replacement filter $60, every 500 Liters

12. Excel Calculations, example 1 Cumulative Expenditures

13. Figure, Example 1

14. With “time value”, example 2 n Same as first example, but take into account time value of money. n Need to determine when costs occur, then transform to equivalent present costs. –PC = FC (1 + i) -n n PC = present cost n FC = future cost n i = annual interest rate n n = number of years

15. Additional information, example 2 n Lifetime and salvage cost of Filters –10 year lifetime and $0 salvage cost n Interest rate?  8% (i = 0.08 in equation) n When do you buy replacements? –Buy replacements at beginning of year needed (i.e., end of previous year) n How much water do people drink per day of filter use? –2 L/day

16. Additional Information, Example 2 n Lets conduct three different comparisons, for three levels of use. –Low – 12 people-days/year (24 L/yr) n e.g., three 2-people, 2-day outings –Moderate – 48 people-days/year (96 L/yr) n e.g., twelve 2-people, 2-day outings –High – 144 people-days/year (288 L/yr) n e.g., twenty-four 3-people, 2-day outings

17. Calculations, example 2 PC for filter 1, Low use scenario = 40 + 30 (1.08) -4 + 30(1.08) -8 PC for Filter 1, Mod use scenario = 40 + 30(1.08 -1 ) + 30(1.08 -2 ) +…+ 30(1.08 -8 ) + 30(1.08 -9 )

18. Present Worth Figure

19. Conclusion n Conduct an economic comparison of the filters using both methods outlined here!