ENSC 201: The Business of Engineering & ENSC 411: The Business of Entrepreneurial Engineering

1. ENSC 201: The Business of Engineering & ENSC 411: The Business of Entrepreneurial Engineering Instructor: John Jones jones@sfu.ca Office Hours: 3:30-4:30 Mondays, ASB 10845 Course Website: http://www.sfu.ca/~jones/ENSC201/ Course Text: Engineering Economics Fraser, Jewkes, Bernhardt and Tajima Fifth Edition (earlier editions OK)

2. Course TA’s Arianezhad, Majid marianez@sfu.ca Office Hours: TBA and Tseng, Hsiu Yang htseng@sfu.ca Office Hours: TBA and Altrad, Omar oaltrad@sfu.ca Office Hours: TBA

3. Course Structure Three threads: Engineering Economics Theory (Mondays & Fridays) and Engineering Economics Problem-solving (Weds 12:30 -2:30pm) and Engineering Entrepreneurship (Weds 4:30 pm)

4. What to expect from this course: 1. Dull

5. Exhibit 1

6. ENSC 201 ENSC 411

7. ENSC 411: Entrepreneurial Engineering Economics Today, 4:30 pm, WMC 2210 (not AQ 4150)

8. What to expect from this course: 1. Dull 2. Easy

9. What to expect from this course: 1. Dull 2. Easy Conceptually Easy

10. What to expect from this course: 1. Dull 2. Conceptually Easy 3. Useful

11. What to expect from this course: 3. Useful 1. Dull 2. Conceptually Easy 4. Win Valuable cash prizes!

12. Alternative Grading Schemes Scheme 2: ENSC 201 Assignments: 30% Mid-Term: 20% Final: 50% No valuable cash prizes. Scheme 1: ENSC 411 Project: 30% Assignments: 0% Mid-Term: 20% Final: 50% Plus valuable cash prizes!

13. Divisions of Economic Theory Macroeconomics Microeconomics

14. Divisions of Economic Theory Macroeconomics Microeconomics Global or national scale ``What effect does the interest rate have on employment?’’ Hard to distinguish from politics Not a science, since no experiments

15. Divisions of Economic Theory Macroeconomics Microeconomics Global or national scale ``What effect does the interest rate have on employment?’’ Hard to distinguish from politics Not a science, since no experiments Company or personal scale ``Given a particular interest rate, how profitable will my project be?’’ Used as a guide to company policy or individual investment decisions.

16. The Idea I would rather have a dollar now than a dollar at this time next year. So would you. (If you wouldn’t, please see me after class. Bring your dollar.)

17. Irrelevant Philosophical Question 1: What is a Bank? One answer: a secure vault

18. Another answer: a source of investment funds

19. Utopia Suppose the interest rate is 5%. Everyone in society has at least $1,000,000 in the bank. So everyone gets $50,000/year in interest, and no-one works. Where does the money come from?

20. A model economy: Ten farmers live in a village. One farmer borrows enough grain from his neighbours to live for a year without farming. During the year he studies engineering and designs a better plough. Now he can grow twice as much grain. He repays the grain he has borrowed, with interest.

21. Capital Improved Means of Production Ideas Surplus Labour

22. Warning of possible confusion: Our preference for money now rather than money later has nothing to do with inflation. There will be no inflation in this course until Unit 14. Inflation is when a pizza costs $10 now and $11 next year. In the cases we are considering, the pizza costs $10 this year and $10 next year, but we still want our pizza now.

23. End of Philosophical Digression

24. Consequences of The Idea We cannot directly compare cash flows occurring at different times. To decide whether or not to begin a project, we must bring all the cash flows to the same moment in time. If you’d just as soon get $x at time t1 as $y at time t2, we say that the two cash flows are equivalent (for you).

25. Further Consequences of The Idea Our preference for getting money now rather than later can be expressed as an interest rate, i. To find the present cash flow, $P, equivalent to a cash flow of $Foccurring N years in the future, we can use a conversion factor: P = F(P/F,i,N) Is (P/F,i,N) greater or less than one?

26. Further Consequences of The Idea Our preference for getting money now rather than later can be expressed as an interest rate, i. To find the present cash flow, $P, equivalent to a cash flow of $F occurring N years in the future, we can use a conversion factor: P = F(P/F,i,N) If N increases, does (P/F,i,N) increase or decrease?

27. Further Consequences of The Idea Our preference for getting money now rather than later can be expressed as an interest rate, i. To find the present cash flow, $P, equivalent to a cash flow of $F occurring N years in the future, we can use a conversion factor: P = F(P/F,i,N) If i increases, does (P/F,i,N) increase or decrease?

28. The higher the value of i, the thicker the fog

29. Conversion Factors Conversely, to find the future cash flow, $F, equivalent to a cash flow of $P occurring now, we can use a different conversion factor: F = P(F/P,i,N) Is (F/P,i,N) greater or less than one?

30. Conversion Factors Conversely, to find the future cash flow, $F, equivalent to a cash flow of $P occurring now, we can use a different conversion factor: F = P(F/P,i,N) What is the relationship between (F/P,i,N) and (P/F,i,N)?

31. Sample Problem You are the chief financial officer of a large corporation. You have just completed the evaluation of two competing proposals, A and B. Proposal A involves spending a large sum of money right now to generate a larger return in five year’s time. Proposal B involves expenditures over the next three years, generating returns in years four and five. Given that the cost of capital to the company is 12%, you find both proposals equally attractive. You are now told that the cost of capital to the company has increased to 15%. Which proposal is more attractive now? You should be able to solve this in < 60 seconds.

32. Conversion Factors There are formulas, found in the back of the textbook, for evaluating the conversion factors. Warning! On no account should you remember these formulas! Write out the solutions to problems leaving the conversion factors unevaluated till the last stage. Then look them up in Appendix A. Sometimes you will find it useful to enter the formulas on spreadsheets.

33. Some of the formulas from the back of the textbook.

34. One page from Appendix A. (There is also an Appendix B and an Appendix C, which we can ignore for the present.)

35. Cash Flow Diagrams Receive $500 for the next 3 years Time Pay out $1000 now These are helpful in making sure we have taken all the important cash flows into account. They need not be exactly to scale, but it helps if they’re close.

36. Present Value This is an application of the notion of equivalence: We compare a series of cash flows by bringing them all to the present and adding them up. The sum is called the present value of the series. If the series represents cash flows coming to us, we want the present value to be positive and the bigger the better.

37. Present Value $500 $1000 For example, the present value of this series of cash flows is PV = -1000 + 500(P/F,i,1) +500(P/F,i,2) + 500(P/F,i,3)

38. Annuities A The Present The pattern of a regular series of annual payments comes up often enough that we give it a special name: an annuity. By convention, an annuity starts one time period after the present and continues for N years. We can find its equivalent present value using another conversion factor: PV = A(P/A,i,N)

39. Annuities A The Present The pattern of a regular series of annual payments comes up often enough that we give it a special name: an annuity. PV = A(P/A,i,N) As N increases, does (P/A,i,N) increase or decrease?

40. Annuities A The Present The pattern of a regular series of annual payments comes up often enough that we give it a special name: an annuity. PV = A(P/A,i,N) As i increases, does (P/A,i,N) increase or decrease?

41. Annuities A The Present The pattern of a regular series of annual payments comes up often enough that we give it a special name: an annuity. PV = A(P/A,i,N) As A increases, does (P/A,i,N) increase or decrease?

42. Present Value $500 $1000 So a more concise expression for the present value of this series would be PV = -1000 + 500(P/A,i,3)

43. Some Tips for the Assignments and Exams Say what you're doing. In the exams, you can get 25% credit for an answer if we can just tell what method it is you're using, and an additional 25-50% if it's the right method. You won't necessarily get exactly the numerical values we have on the model answer sheets -- in many questions there are several defensible ways of solving the problem. To make it easy for us to mark it right, say what the numbers you're writing down are supposed to be, e.g., ``Present worth of wages = A(P/A,i,N)'’ If we're just confronted by a page of anonymous calculations, there's not much we can do except glance through it and see if any of the numbers look anything like any of the numbers in the model answer.

44. Use explicit conversion factors, i.e., expressions like `(P/A,i,N)'. Using an algebraic formula instead is more work, and there are many more opportunities to make a numerical slip. The only time you should use the formulas is when creating a spreadsheet. Even then, it's a good idea to write out what it is you're calculating in terms of the conversion factors -- this makes it easy for us to give credit even when there's a mistake in the spreadsheet (which can easily happen). If you don't have a copy of the text, you can find tables of conversion formulae on line, for example at: http://www.uic.edu/classes/ie/ie201/discretecompoundinteresttables.html

45. Avoid excessive precision. If you're calculating the present value of a million-dollar investment, don't bother specifying it to the nearest thousandth of a cent. Three significant figures is usually adequate, and anything after the fifth significant figure is just imaginative fiction. When presenting a table of numbers, they should all be given to the same level of precision, and the decimal points should align vertically. Let the table entries be in thousand-dollar or million-dollar units, so there are only a few digits on either side of the decimal point. If you do have more than three digits to one side of the decimal point, separate them into groups of 3 by commas or spaces.

46. Answer the question asked. If the question asks, `` which alternative is best? '', don't just calculate the value of each alternative and leave it to the reader to figure it out. Say it explicitly.