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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:.

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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
Quick Recap of Previous Class
  • Present and Future Values
  • Uniform Cashflow Series
  • Gradient Cashflow Series
  • Deferred Cashflows
  • Changing Interests
  • Beginning of Effective Interest
effective interest rate
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
More Examples
  • What is the effective 1/2 year (semi-annual) interest rate for 12% compounded quarterly?
more examples1
More Examples
  • A variety of cashflow diagram types and effective interest
  • In-class examples for:
    • Uniform
    • Gradient
    • Single
systematic procedure for comparing investment alternatives
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
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
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.)
example cad technology
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?
judging the economic worth of investment alternatives
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
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
Same Study Period Required!!
  • Use either:
    • Repeatability Assumption
    • Cotermination Assumption
example
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