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MIE 754 - Class #4 Manufacturing & Engineering Economics

MIE 754 - Class #4 Manufacturing & Engineering Economics. Concerns and Questions Quick Recap of Previous Class Today’s Focus: Chap 2 - Computations Involving Interest Chap 3 - Measures of Merit Hmwk #2 Due Today: Chap 1 - Probs: 1, 6, 11, 12, 13 Hmwk #3 Due in 1 Week: Chap 2 - Probs:.

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MIE 754 - Class #4 Manufacturing & Engineering Economics

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  1. MIE 754 - Class #4 Manufacturing & Engineering Economics • Concerns and Questions • Quick Recap of Previous Class • Today’s Focus: • Chap 2 - Computations Involving Interest • Chap 3 - Measures of Merit • Hmwk #2 Due Today: • Chap 1 - Probs: 1, 6, 11, 12, 13 • Hmwk #3 Due in 1 Week: • Chap 2 - Probs:

  2. Concerns and Questions?

  3. Quick Recap of Previous Class • Present and Future Values • Uniform Cashflow Series • Gradient Cashflow Series • Deferred Cashflows • Changing Interests • Beginning of Effective Interest

  4. Effective Interest Rate • i eff = (1 + r/M)m - 1 where • M = number of interest periods per year • r = nominal interest rate • m = number of interest periods of concern

  5. Examples

  6. More Examples • What is the effective 1/2 year (semi-annual) interest rate for 12% compounded quarterly?

  7. More Examples • A variety of cashflow diagram types and effective interest • In-class examples for: • Uniform • Gradient • Single

  8. Where does the ieff formula come from?

  9. Systematic Procedure for Comparing Investment Alternatives • Define the alternatives • Determine the study period • Provide estimates of the cash flows for each alternative • Specify the time value of money or interest rate • Select the measure(s) of effectiveness • Compare the alternatives • Perform sensitivity analysis • Select the preferred alternative

  10. Economic Effectiveness • Present Worth - equivalent worth of entire cash flow at t= 0 • Annual Worth - equivalent uniform annual series • Future Worth - equivalent worth at t=n • Rate of Return (Chap 4) • Benefit-Cost Ratio (Chap 7)

  11. Defining Investment Alternatives • Alternatives are mutually exclusive • Perhaps a combination of m investment opportunities • How many possible alternatives? • Feasible alternatives determined by constraints (e.g., contingent, mutually exclusive, budget restrictions, etc.)

  12. Example: CAD technology • 2 CAD “systems” and 3 workstation vendors are under consideration • How many alternatives can be formed? • Enumerating these possibilities? • What’s mutually exclusive? • What’s contingent? • Is “do nothing” an alternative? • Other possible constraints?

  13. Judging the Economic Worth of Investment Alternatives • Equivalent Worth Methods (PW, AW, FW) • investment alternatives  0 • cost alternatives ... • Rate of Return Methods  MARR • Benefit-Cost Ratio  1

  14. Useful Life versus Study Period • Comparison must be over the same study period for ALL alternatives! • Useful Lives = Study Period • Useful Lives are Different Among Alters. • UL < SP • UL > SP

  15. Same Study Period Required!! • Use either: • Repeatability Assumption • Cotermination Assumption

  16. Example A B Capital Investment -$3,500 -$5,000 Annual Revenues 1,900 2,500 Annual Expenses -645 -1,020 Useful Life 4 6 Market Value 0 0

  17. Several In-class Examples

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