Engineering Economics Course Notes 08

Engineering Economics Course Notes 08 - MAE 412 - Design of...

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MAE 412 - Design of Thermal Systems Course Notes Engineering Economic Topics Topics: 1. Introduction 2. Definitions 3. Cost Estimates 4. Visualizations a. Fixed vs. Variable Cost b. Profit-Loss Diagram c. Cash Flow Diagram d. Cumulative Cash Flow Diagram 5. Time Value of Money 6. Present Worth and Future Worth a. Formulae b. Analysis 7. Annual Cash Flow Analysis 8. Payback Period 9. Annual Rate of Return 10. Benefit/Cost Ratio Analysis 11. Inflation and Price Change 12. Depreciation 13. Taxes 1
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1. Introduction One difference between science and engineering is that scientists are only concerned with the physics of a problem. Engineers must always be concerned about the cost of a problem, even to the point of deciding whether it is cheaper to let a problem continue or to fix it. A personal example is periodic maintenance of your automobile. Do you spend the money to change the oil and oil filter periodically, or do you just top up the oil level occasionally and leave the car alone? If you are going to get rid of the car in a few years, you may decide not to spend the money on preventive maintenance. This will minimize your expenditures on the car, although it will take its toll on the next owner. An engineering firm is always faced with making a choice between alternatives in a project, and the ultimate goal is to select an alternative that will minimize costs over the life of the project. The project life does not just include purchase and installation of equipment, or manufacture and sales of products, but includes the entire projected life of the equipment or product line. In this section of MAE 412, we will examine a set of tools that can be used to analyze alternatives for minimum project cost. One of the most important aspects of any project is the schedule of expenditures and anticipated income or savings due to the project. For example, if you are responsible for developing the manufacturing facilities for a new product line, is it better to spend more money initially to purchase long-lived equipment, or to purchase cheap equipment that reduces your initial outlay but will have to be replaced after the production line has run for a few years? The advantage of the latter approach is that sales of the product will pay for the equipment more quickly and you will not have as much money at risk at any given time. Before we begin to look at the analytical tools available to us, we need to define a number of terms that we will use. The next section will present those definitions. 2
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2. Definitions a. Fixed Cost: cost unrelated to the level of production. Example: the mortgage on Broughton Hall, which is independent of the number of students using the building. The building might be closed for asbestos removal, but the mortgage must still be
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This note was uploaded on 08/01/2008 for the course MAE 412 taught by Professor Terry during the Spring '08 term at N.C. State.

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Engineering Economics Course Notes 08 - MAE 412 - Design of...

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