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Fundamentals of Engineering Economics

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Fundamentals of Engineering Economics

Chan S. Park

Daniel and Josephine Breeden Professor

Department of Industrial & Systems Engineering

Auburn University

- 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

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

- Fundamentals of Engineering Economics, 3rd ed., Pearson, 2012
- Contemporary Engineering Economics, 5th ed., Pearson, 2010
- Advanced Engineering Economics, Wiley, 1991

- Most current edition – 3rd ed., published in 2012
- International edition in English
- Translated in Spanish, Chinese, Korean

- 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

- This companion book website is developed and supported by the author.

- 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

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

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.

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

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

Solutions are provided with Excel Worksheet in the Instructor’s Manual

- All Excel worksheets that appear in the text as well as in the solution manual are available to the instructors who adopt the text.

Cash flow analyzer

Loan payment schedule

Depreciation

- 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.

- 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.

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.

- This outline is based on a semester-long (two meetings per week,75 min session) for 15 weeks.

- This outline is based on a semester-long (two meetings per week, 75 min session) for 15 weeks.

Sample Lecture Slides in PowerPoint

- 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.

PW(i) > 0

- 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

$37,360

$35,560

$31,850

$34,400

inflow

0

3

1

2

outflow

$76,000

=NPV(12%,B3:B6)+B2

Project Balance Concept

Investment Pool 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.

The exposure to financial risk

The discounted payback period

The profit potential

The net future worth

- 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.

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

- 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