Fundamentals of Engineering Economics

1. Fundamentals of Engineering Economics Chan S. Park Daniel and Josephine Breeden Professor Department of Industrial & Systems Engineering Auburn University

2. Contents • About the author • About the book • Unique Features of the book • How to use it in class • What supporting ancillary materials are available • A typical 3-credit hour course syllabus • Questions and Answers

3. About the Author • Daniel F & Josephine Breeden Professor of Industrial & Systems Engineering at Auburn University • PhD: Georgia Institute of Technology • MSIE: Purdue University • Editor in Chief (1997-2003): The Engineering Economist

4. Textbooks Written on Engineering Economics from the Author • Fundamentals of Engineering Economics, 3rd ed., Pearson, 2012 • Contemporary Engineering Economics, 5th ed., Pearson, 2010 • Advanced Engineering Economics, Wiley, 1991

5. Fundamentals of Engineering Economics • Most current edition – 3rd ed., published in 2012 • International edition in English • Translated in Spanish, Chinese, Korean

6. Table of Contents (2nd ed.)

7. Table of Contents (3rd ed.)

8. Book Website from Publisher • http://www.prenhall.com/park What’s Available? Various on-line financial calculators Java based Cash Flow Analyzer Loan analysis program Various Excel templates for financial analysis

9. Companion Book Website (2nd ed.)http://www.eng.auburn.edu/~park/fee/index.html • This companion book website is developed and supported by the author.

10. C. Unique Features of the Book • Chapter opening vignettes • Example problems – Given, Find, Approach, and Comments • A large number of end-of-chapter problems and exam-type questions varying in level of difficulty • Short Case Studies with Excel • Excel spreadsheet modeling • Online Financial Calculator – Cash Flow Analyzer

11. The main purpose is to introduce the students how an individual decision maker or actual corporation has wrestled with the issues discussed in the chapter Chapter Opening Vignettes

12. Chapter Opening Vignettes (2nd ed.)

13. Chapter Opening Vignettes (3rd Ed.)

14. In working out each individual chapter examples, students are encouraged to highlight the critical data provided by each question, isolate the question being asked, and outline the correct approach in the solution. Example problems – given, find, methodology, comments

15. A Sample Chapter Example’s Formats

16. Continued • Note that each worked out example has the following formats in presenting the solution: • Problem Description • Dissecting the problem • Methodology • Comments

17. A large number of example problems, practice problems, and self-test questions

18. Numbers of Examples, End-of-Chapter Problems, Case Studies, and Self-Test Questions

19. How to use it in class – In my presentation, I will explain how a case-study could be used in a classroom environment. Short case studies

20. A Sample Example Solutions are provided with Excel Worksheet in the Instructor’s Manual

21. Excel worksheets/templates

22. Sample Excel Worksheet Modeling • All Excel worksheets that appear in the text as well as in the solution manual are available to the instructors who adopt the text.

23. Cash flow analyzer Loan payment schedule Depreciation Online financial calculators

24. Online Financial Calculator(Cash Flow Analyzer)http://www.eng.auburn.edu/~park/cfa.html

25. D. How to Use the Book in Class • Cover the Chapter Opening Stories • Use or modify the provided lecture slides in each chapter. • Whenever a live demonstration of Excel is desired, use the built-in Excel Worksheet within PPT Slides. • Whenever internet is available, access various online financial calculators through the book website to answer many “what-if” questions.

26. E. What Supporting Ancillary Materials Are Available • Lecture slides in PowerPoint • Instructor’s Manual in both WORD and PDF versions – all solutions to the end-of-chapter problems along with many live Excel worksheets. • Chapter by chapter Self-study problems for students. • Sample Fundamentals Engineering Review problems with answers. • Book website with many online financial calculators.

27. What is shown in this slide is only for the lecture outline. If a detailed course syllabus is desired, it can be obtained from the author by emailing at park@eng.auburn.edu. F. A Sample 3-credit Hour Course Syllabus

28. Lecture Outline based on 2nd Ed. • This outline is based on a semester-long (two meetings per week,75 min session) for 15 weeks.

29. Lecture Outline based on 3rd Ed. • This outline is based on a semester-long (two meetings per week, 75 min session) for 15 weeks.

30. G. Questions and Answers

31. Sample Lecture Slides in PowerPoint

32. B. Present Worth Analysis • Principle – find the equivalent present worth of the economic merit of the project. • How – compute the present worth of the total benefits (cash inflows) and the present worth of the total costs (cash outflows). Then, determine the net present worth by PW(i) = PW(i)cash inflows – PW(i)cash outflows • Decision – Project can be justified if the net present worth is positive.

33. PW(i) > 0 Procedure • Principle: Compute the equivalent net surplus at n = 0 for a given interest rate of i. • Decision Rule for Single Project Evaluation: Accept the project if the net surplus is positive. • Decision Rule for Comparing Multiple Alternatives: Select the alternative with the largest net present worth. Inflow 01 2 3 4 5 Net surplus Outflow PW(i) inflow 0 PW(i) 0 outflow

34. Project Justification for Tiger Machine Tool Company $37,360 $35,560 $31,850 $34,400 inflow 0 3 1 2 outflow $76,000

35. Excel Solution: =NPV(12%,B3:B6)+B2

36. Present Worth Amounts at Varying Interest Rates

37. Can you explain what $30,065 really means? Project Balance Concept Investment Pool Concept

38. 1. Project Balance Concept • Suppose that a firm has no internal funds to finance the project, so it will borrow the entire investment from a bank at an interest rate of 12%. • Then any proceeds from the project will be used to pay off the bank loan. • Then we should see if how much money would be left over at the end of the project period.

39. Calculating Project Balances

40. Project Balance Diagram – Four Pieces of Information The exposure to financial risk The discounted payback period The profit potential The net future worth

41. 2. Investment Pool Concept • Suppose acompany has $76,000. It has two options: (1)Take the money out and invest it in the project, or (2) leave the money in the pool and continue to earn 12% interest. • If you take Option 1, any proceeds from the project will be returned to the investment pool and earn 12% interest yearly until the end of the project period. • Let’s see what the consequences are for each option.

42. Option A If $76,000 were left in the investment pool for 4 years $76,000(F/P,12%,4) $119,587 Option B If $76,000 withdrawn from the investment pool were invested in the project $166,896 Investment Pool PW(12%) = $47,309(P/F,12%,4) = $30,065 The net benefit of investing in the project

43. What Factors Should the Company Consider in Selecting a MARR in Project Evaluation? • Cost of capital • The required return necessary to make an investment project worthwhile. • Viewed as the rate of return that a firm would receive if it invested its money someplace else with a similar risk • Risk premium • The additional risk associated with the project if you are dealing with a project with higher risk than normal project Risk premium MARR Cost of capital