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://canvas.sfu.ca/courses/17549
Course Text:
`Engineering Economic Analysis, 3rd Canadian edition',
Oxford University Press, by Newnan, Whittaker,
Eschenbach and Lavelle, ISBN 978-0-19-543017-2.
Course TA’s
Abdolahi, Zahra mabdolah@sfu.ca
Office Hours:
10:15-12:15 Fridays, ASB 10814
and
Tseng, Hsiu Yang htseng@sfu.ca
Office Hours:
10:30-12:30 Tuesdays, ASB 8813
and
Merchant, Ali Asgar amerchan@sfu.ca
Office Hours:
2 pm – 4 pm Mondays, TA Room
Course Structure
Three threads:
Engineering Economics Theory (Mondays & Fridays)
and
Engineering Economics Problem-solving
(Weds 12:30 -1:20 pm, Friday 1:30-2:20 pm)
and
Engineering Entrepreneurship (Weds 4:30 pm)
What to expect from this course:
1. Dull
Exhibit 1
ENSC 201
ENSC 411
What to expect from this course:
1. Dull
2. Easy
What to expect from this course:
1. Dull
2. Easy
Conceptually Easy
What to expect from this course:
1. Dull
2. Conceptually Easy
3. Useful
Alternative Grading Schemes
Scheme 2: ENSC 201
Assignments:
Mid-Term:
Final:
Scheme 1: ENSC 411
30%
20%
50%
Project:
Assignments:
Mid-Term:
Final:
30%
0%
20%
50%
Divisions of Economic Theory
Macroeconomics
Microeconomics
Divisions of Economic Theory
Macroeconomics
Global or national scale
``What effect does the interest
rate have on employment?’’
Hard to distinguish from
politics
Not a science, since no
experiments
Microeconomics
Divisions of Economic Theory
Macroeconomics
Microeconomics
Global or national scale
Company or personal scale
``What effect does the interest
rate have on employment?’’
``Given a particular interest
rate, how profitable will my
project be?’’
Hard to distinguish from
politics
Not a science, since no
experiments
Used as a guide to company
policy or individual investment
decisions.
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.)
Irrelevant Philosophical Question 1: What is a Bank?
One answer: a secure vault
Another answer: a source of investment funds
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?
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.
Capital
Ideas
Labour
Improved Means
of Production
Surplus
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 November.
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.
End of Philosophical Digression
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).
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)
Is (P/F,i,N) greater or less than one?
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?
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?
The higher the value of i, the thicker the fog
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?
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)?
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.
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 B.
Sometimes you will find it useful to enter the formulas on
spreadsheets.
Some of the formulas
from the back of the
textbook.
One page from Appendix B.
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.
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.
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)
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)
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?
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?
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?
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)
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.
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/discretecompoundinteresttable
s.html
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 milliondollar 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.
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.