1. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 1 of 8 Drypressing Cost Model (developed by MIT Materials Systems Lab) l A useful example of a Spreadsheet Model l Brief Explanation and Exploration l Used in Optimal Plant Exercises l Available at: ardent.mit.edu/real_options/ MIT/Course Materials/Spreadsheets

2. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 2 of 8 Inputs to Model l Blue entries “unprotected” (you can change) l For Exercises, deal with Capacity, Volume

3. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 3 of 8 Model internal features l Illustrate innards of a Technical Cost Model l Not needed for Exercise

4. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 4 of 8 Model Results l Cost / part l A function of  Plant size  Demand l Why?

5. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 5 of 8 Cost/part variations l Use Two – Way Data Tables l Economies of Scale – bigger plants produce cheaper -- Use Two – Way Data Tables

6. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 6 of 8 Economies of Scale l Larger Plants produce cheaper parts l When operating at or near capacity!

7. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 7 of 8 CAUTION: possible inefficiency! l Despite economies of scale when operating at capacity, big plants may be inefficient! l … When fixed costs spread over few parts

8. Engineering Systems Analysis for Design Richard de Neufville © Massachusetts Institute of Technology Drypressing Cost Model Slide 8 of 8 Summary l Drypressing Model is a good example of a spreadsheet model l Realistic picture of important features technical production functions, cost models (better than economist models) l Models may also incorporate optimization (see Satellite model, using MatLab -- later)