MIE 754 - Class #4 Manufacturing & Engineering Economics

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# MIE 754 - Class #4 Manufacturing & Engineering Economics - PowerPoint PPT Presentation

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

• 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:
Quick Recap of Previous Class
• Present and Future Values
• Uniform Cashflow Series
• Deferred Cashflows
• Changing Interests
• Beginning of Effective Interest
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
More Examples
• What is the effective 1/2 year (semi-annual) interest rate for 12% compounded quarterly?
More Examples
• A variety of cashflow diagram types and effective interest
• In-class examples for:
• Uniform
• Single
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
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)
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.)
• 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?
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
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
Same Study Period Required!!
• Use either:
• Repeatability Assumption
• Cotermination Assumption
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