IENG 302 – SUM 2013

1. IENG 302 – SUM 2013 • Meetings: • M, Tu, W: 1:00 – 3:00 PM • Instructor:Dr. Dean Jensen • Phone: 394 – 1278 • E-mail: dean.jensen@sdsmt.edu • Office Hours: (held in IER 308) • M, Tu, W: 3:00 – 4:00 PM • Class website: • http://webpages.sdsmt.edu/~djensen/IENG302

2. Other Course Objectives • Solve problems in a manner expected on the Fundamentals of Engineering exam. • Evaluate personal finance choices. • Become an Engineering Economics NINJA!

3. Suggested / Required Materials • Blank, L. & Tarquin, A. (2005). Engineering Economy (6th ed.). New York NY: McGraw – Hill. 759pp. ISBN 0-07-320382-3. (or similar) • Engineering Notebook – 9-3/4" x 7-1/2", 5x5 quad-ruled, 80-100 pp. (approx.). REQUIRED • 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 assignments. • MUST HAVE in your notebook by next class: FE Supplied-Reference Tables for Eng. Econ.

5. FE Supplied-Reference Tables • Go to www.ncees.org • Exams • Study Materials • Download FE Supplied-Reference Handbook • Enter e-mail address to receive a password • Submit e-mail • Enter a valid password to download … • Submit password • Click the click here to download … save to your desktop • Open the Supplied-Reference PDF to Contents page • Click Engineering Economics link (page 114) • Print these pages out, cut & paste into your Engineering Notebook

6. Course Structure • Grading: Percentage • Weighting: 302 • Assignments 20% • Exam I 20% • Exam II 20% • Exam III 20% • Exam IV 20% Bonus Points 5%

7. Policies • Assignments: • Due at class (or earlier), all equal wt. (%) • No late work – drop lowest scoring HW • 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 • Bonuses: – add 5%, but no make-ups

8. Assignment #0 Name Course ID Preferred name Term / Year Your SDSM&T E-mail address Your major and anticipated graduation date Your hometown Anything else the instructor should know about you

9. 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 • Not graded if illegible!

10. Engineering Econ Process • Identify alternative uses for limited resources • Obtain needed data (usually provided in class) • Analyze data to determine preferred alternative: • Screening decisions • (meets minimum acceptable?) • Preference decisions • (Select from competing alternatives)

11. 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

12. Fundamental Concept:

13. Lets Get Started… • Would you rather have $10 000 today or $10 000 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!

14. Risk • Because money changes value over time, it is risky to invest it. • If you need money to do something, you will need to convince someone to finance your project … they will want something in return: • Equity Financing … investor owns part of assets, gets part of the profit or gets (part) of their asset • Debt Financing … investor gets a specified amount of money for their risk within a specified time • Angel Financing … investor gets a token they value • The expectation is: Higher Risk  Higher Return

15. 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 ROR = x 100%

16. 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 Interest Earned = (p)(n)(i) Total Money Returned = p + (p)(n)(i)

17. 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!)

18. 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.

19. 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.

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

21. 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

22. Future Value in 3 years… I% Option 1 Option 2 2.5% $53,844 $57,288 5.0% $57,881 $59,652 7.5% $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%

23. Option 1 50,000 now i = 10% compounded annually F1 = 50,000 + 50,000 (.10) = 55,000 F2 = 55,000 + 55,000 (.10) = 50,000 (1 + .10)2 = 60,500 F3 = 60,500 + 60,500 (.10) = 50,000 (1 + .10)3 = 66,550

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

25. 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 GivenA ( A / F, i, n)  Find A GivenF ( P / A, i, n)  Find P GivenA ( 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

26. Tables…

27. Tables…

28. … or Formulas …

29. … or Formulas …

30. Future Given Present • P is the present value at Time 0 • F is the future value at Time n • (ncompounding periods in the future) • i is the effective interest rate F ? 0 1 2 3 n P F = P(F/P,i,n)

31. Tables… = i F3 = 50 000(F/P,10%,3) F3 = 50 000(F/P,10%,3) = 50 000(1.3310) F3 = 50 000(F/P,10%,3) = 50 000(1.3310) = $66 550

32. F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 = 50 000(1.3310) = $66 550 Formulas… F3 = 50 000(F/P, 10%,3) F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 = 50 000(1.3310)