IENG 302 – SUM 2013
• Meetings:
•M, Tu, W:
1:00 – 3:00 PM
• Instructor: Dr. Dean Jensen
•Phone: 394 – 1278
•E-mail: dean.jensen@sdsmt.edu
•Office Hours:
(held in IER 308)
•M, Tu, W:
3:00 – 4:00 PM
• Class website:
http://webpages.sdsmt.edu/~djensen/IENG302
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Other Course Objectives
1. Solve problems in a manner expected
on the Fundamentals of Engineering
exam.
2. Evaluate personal finance choices.
3. Become an Engineering Economics
NINJA!
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Suggested / Required Materials
 Blank, L. & Tarquin, A. (2005). Engineering
Economy (6th ed.). New York NY: McGraw –
Hill. 759pp. ISBN 0-07-320382-3. (or similar)
 Engineering Notebook – 9-3/4" x 7-1/2", 5x5
quad-ruled, 80-100 pp. (approx.). REQUIRED
 Engineering Problems Paper – 8-1/2" x 11", three
hole drilled, ruled five squares/division, 50 pp.
(approx.).
 FE Supplied-Reference Tables for Eng. Econ.
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Engineering Notebook
 Anything you can copy, cut, staple, paste, glue,
or otherwise persuade to live permanently within
the covers of your engineering notebook may be
used on the exams …
EXCEPT old exams and other’s assignments.
 MUST HAVE in your notebook by next class:
FE Supplied-Reference Tables for Eng. Econ.
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FE Supplied-Reference Tables
 Go to www.ncees.org
 Exams
 Study Materials
 Download FE Supplied-Reference Handbook
 Enter e-mail address to receive a password
 Submit e-mail
 Enter a valid password to download …
 Submit password
 Click the click here to download … save to your
desktop
 Open the Supplied-Reference PDF to Contents page
 Click Engineering Economics link (page 114)
 Print these pages out, cut & paste into your
Engineering Notebook
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Course Structure
• Grading:
• Weighting:
•Assignments
•Exam I
•Exam II
•Exam III
•Exam IV
Bonus Points
Percentage
302
20%
20%
20%
20%
20%
5%
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Policies
• Assignments:
•Due at class (or earlier), all equal wt. (%)
•No late work – drop lowest scoring HW
• Exams:
•Open engineering notebook
•Closed text, etc.
•Put FE reference tables in notebook
•Make-up Exams
•Sponsored activities schedule ahead of time
•Otherwise, add extra weight to next midterm
•No make-up Final
• Bonuses: – add 5%, but no make-ups
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Assignment #0
Name
Preferred name
Your SDSM&T E-mail address
Course ID
Term / Year
Your major and anticipated graduation date
Your hometown
Anything else the instructor should know
about you
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Assignment Structure
• Format for most problems:
•Find (objective)
•Given (organize relevant data, only)
•Cash Flow Diagram (rarely dropped)
•Soln. (steps to solve):
•Write equation in Table Factor Form
•Convert to values (or equation forms)
•Double underline answer to question
• Turn in on EP Paper
•Not graded if illegible!
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Engineering Econ Process
•
Identify alternative uses for limited resources
•
Obtain needed data
•
Analyze data to determine preferred
alternative:
(usually provided in class)
•Screening decisions
(meets minimum acceptable?)
•Preference decisions
(Select from competing alternatives)
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Typical Decisions
• Cost reduction
(e.g., equipment, tooling, facility layout)
• Capacity expansion
(e.g., to increase production, sales)
• Equipment / Project selection
• Lease or buy decisions
• Make or buy decisions
• Equipment replacement
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Fundamental Concept:
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Lets Get Started…
• Would you rather have $10 000 today
or $10 000 five years from now?
•
If you don’t need it right now, what could
you do with it?
•
Would it be worth the same in five years?
• Money changes value with time!
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Risk
•
Because money changes value over time, it is
risky to invest it.
•
If you need money to do something, you will
need to convince someone to finance your
project … they will want something in return:
• Equity Financing … investor owns part of assets,
gets part of the profit or gets (part) of their asset
• Debt Financing … investor gets a specified amount
of money for their risk within a specified time
• Angel Financing … investor gets a token they value
The expectation is:
Higher Risk  Higher Return
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Rate of Return
• (ROR) is the rate of change in value
earned over a specific period of time –
expressed as a percentage of the
original amount
ROR = Period Ending Amount – Period Starting Amount x 100%
Period Starting Amount
•
The Rate of Return is a measure of how much
risk there is in an investment
Higher Risk  Higher ROR
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Rate of Return and Interest
•
The Interest Rate (i) is the percentage change
in value earned over a specific period of time.
•
For simple interest, a return is earned only on
the original amount (principal, p) each period.
•
If the principal is invested for n periods:
Total Interest Earned = (p)(n)(i)
Total Money Returned = p + (p)(n)(i)
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Compound vs Simple Interest
•
For simple interest, a return is earned only on
the original principal each period.
•
For compound interest, a return is earned on
the entire amount (principal + total interest
already earned) invested at the beginning of
the current period.
•
•
Effectively, you are also earning interest on your
interest (and on your investment principal)!
Unless explicitly stated otherwise, this course
uses compound interest.
(And so does the rest of the world!)
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•
•
•
•
Using Compound Interest to
Make Economic Decisions …
Paid $100,000 for it - 3 years ago
Don’t need it now
Option 1 – Sell it for $50,000
Option 2 – Lease it for $15,000
for 3 years. Sell it for
$10,000 at the end of
the lease.
Note:
Leases typically pay at the beginning of a time period.
Loans typically pay at the end of a time period.
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Questions?
• What about the $100,000?
•The $100 K is irrelevant - it is a sunk cost, and makes no
difference in the decision at this point in time.
• How do we select between the options?
•We need to know under which conditions we would be
economically indifferent (equivalent) - have the same amount
of money at the same time - and then if the conditions are
better for one option, we will select that option.
• Any other factors?
•Since we need to account for the time value of money - we
need to know the interest rate and the compounding period.
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Cash Flow Diagrams
OPTION 1:
$50 k
n= 0
1
2
3 YRS
F3?
OPTION 2:
$15 k
n= 0
$15 k
1
$15 k
2
$10 k
3 YRS
F3?
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The Question
• Under what conditions would I be
indifferent between Options 1 & 2?
•
Indifferent means Economically Equivalent:
– Have the same amount of money at same
point in time, after accounting for all of
the cash flows.
– In this case, 3 years from now.
• Interest Rates…
– Percentage
– Compounding annually
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Future Value in 3 years…
I%
2.5%
5.0%
7.5%
10%
Option 1
$53,844
$57,881
$62,115
$66,550
Option 2
$57,288
$59,652
$62,094
$64,615
At what interest rate, am I indifferent
between the two options?
•
They are economically equivalent at an
interest rate just a little less than 7.5%
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Option 1
50,000 now
i = 10% compounded annually
F1 = 50,000 + 50,000 (.10) = 55,000
F2 = 55,000 + 55,000 (.10)
= 50,000 (1 + .10)2 = 60,500
F3 = 60,500 + 60,500 (.10)
= 50,000 (1 + .10)3 = 66,550
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Generalizing …
P = Present value at the
beginning of first period.
Fn = Future value at end of n
periods in the future.
Fn = P (1 + i)n
= P (F/P,i,n)
so … (F/P,i,n) = (1+i)n
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Standard Factors Used to
Solve ECON Problems
( F / P, i, n) 
( P / F, i, n) 
( F / A, i, n) 
( A / F, i, n) 
( P / A, i, n) 
( A / P, i, n) 
( P / G, i, n) 
( A / G, i, n) 
( F / G, i, n) 
Find F Given P
Find P Given F
Find F Given A
Find A Given F
Find P Given A
Find A Given P
Find P Given G
Find A Given G
Find F Given G
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Tables…
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Tables…
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… or Formulas …
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… or Formulas …
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Future Given Present
 P is the present value at Time 0
 F is the future value at Time n
 (n compounding periods in the future)
 i is the effective interest rate
F?
0
1
2
3
n
P
F = P(F/P,i,n)
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Tables…
=i
F3 = 50 000(F/P,10%,3) = 50 000(1.3310) = $66 550
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Formulas…
F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 = 50 000(1.3310) = $66 550
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