Lecture 3 - Basic Financial Review

Lecture 3 - Basic Financial Review - CE 395 Engineering...

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Unformatted text preview: CE 395 Engineering Economics Spring 2005 W. Hitchcock Basic Decision Examples Basic Financial Review Life Cycle Costs Product or Project Costs incurred over the life of the project (cradle to grave) Typical Facility Life Cycle Identified Need Starts Process Conceptual Planning & Feasibility Design and Engineering Procurement and Construction Facility Startup for Occupancy Occupancy and Operation Disposal of Facility Financial Consultants A/E Firms Professional Project Mgrs Design Construct Firms Legal Consultants Regulatory Consultants Specialty Consultants General Contractor Subcontractors Material Suppliers Professional Const Mgr Specialty Contractors Facility Mgr Demolition Contractor Realtor Construction Project Life Cycle Concept & Feasibility Studies Engineering & Design Period of Progressively More Detailed Cost Estimates & Time Schedules Detailed Design Plans and Specs Completed Before Construction Typically Point of Overlap Between Designer and Contractor Procurement Construction Period of Monitoring, Control, Risk Mgmt, and Adjustment Startup Operate Year 1 Year 2 Time Year 3 Planning and Construction Cost Hendrickson, Project Management for Construction, Fig 2.1 Life Cycle Costs Remember early decisions can have long-term cost ramifications Early planning costs save future dollars Engineering/design decision makers are expected to make solid economic choices Example Problem 2-10 Applied Engineering Design Principle: Heat Exchange Determine the most economic amount of attic insulation in a one story home Heat load (heat loss) through roof determined by the following relationship: Example Problem 2-10 Number of heating days: 230/yr Average daily degree-days: (65 46 = 19) Total annual degee-days: 4,370 degree-days/yr 2,400 sq. ft. house With no insulation annual space heating load is 100 X 106 Btu/yr Example Problem 2-10 Reduction in the cost of electric heating will provide the economics for installation of insulation. Cost of electricity is : $.074/kwh Convert kwh to Btu (1kwh = 3,413 Btu) There are 293 kwh per 106 Btu Therefore the cost per 106 Btu is $.074 X 293 = $21.75 / 106 Btu We have enough data for a study based on a 25 year life cycle for the insulation. Insulation Options Analysis Incremental Benefits Viewpoint Sales Price and Cost Dependent Upon Units of Volume Problem 2-10 Large plywood processing plant Fixed cost is $900,000/ month Variable cost per 1000 board-ft = $131.50 The price charged per 1000 board-ft: P = $600 (.05)D (where D are the # units/mo) Questions: a. b. What is optimal sales volume? What is the domain of profitable demand? Problem 2 10 Analysis Part a. Revenue (600 .05D)D Total Cost = 900,000 + 131.5D Profit = Revenue Total Cost = .05D2 + 468.5D 900,000 d(Profit) = .1D + 468.5 = 0 dD Therefore D optimal = 4,685 thousand bdft/mo Maximum profit = $197,461.25/mo d2(Profit) Note: confirm is negative dD2 Problem 2 -10 Analysis - Continued Part b. Solve for roots of profit Equation: 0 = .05D2 +468.5D 900,000 = .05D2 468.5D + 900,000 Problem 2-35 Mining Methodology Choice 100,000 tons of potential ore to be mined 300 lbs of metal recovered from each ton of processed ore at a cost of $40/ton processed Recovered metal can be sold at $.80/lb Owner wants to maximize total profit Two process choices are available. Pick the most economic one Problem 2-35 Mining Methodology Choice Choice A 62% efficient $23/ton of material removed Choice B 50% efficient $15/ton of material removed Problem 2-35 - Analysis Problem 2-37 Excellent review question for 1st exam Financial Terminology Review Terminology Review Cost Estimating: Always uncertain Top Down Bottom Up Varying degrees of accuracy (usually depends on stage of development and funds available) Direct Costs: Material and labor costs easily traced to the activity or service Indirect Costs: Material and labor costs not easily traced to the activity or service Fixed Costs: Unchanged by activity level Variable Costs: Based on quantity of output or activity level Terminology Review Overhead Costs: Incremental Cost: Cost to increase output by one unit Standard Costs: Established product or service price based on historical and projected costs Opportunity Cost: Return/benefit available from most attractive option not selected Cash Cost: Actual market cash price Book Cost: Original cost less depreciation Sunk Cost: Breakeven Point: Reviews recovered equal costs incurred Profit Centers: Divisions of organizations intended to provide management with freedom to conduct operations in a cost conscious and competitive manner Indirect Costs Aggregate of all indirect costs not included on separate line Terminology Review Traditional Cost Accounting Allocation (Pricing): Direct Costs (labor and materials) (traceable to activity) Indirect Project Costs (traceable to activity) Overhead Burden Allocation (average/unit methodology) o Overhead/unit = [(total overhead/period)/(total direct labor cost/period)] X [direct labor cost/unit] Resulting pricing or cost allocation may be badly distorted Terminology Review Activity-Based Costing Accounting Systems: Necessary when direct labor and material costs are a small portion of the actual cost of product Hidden overhead costs are tracked to the activity or activities they support Improved pricing and estimating results Terminology Review Basic Financial Statements Balance Sheet: Snapshot in time of the assets, liabilities and owner's equity of a business entity Satisfies Equation: Owner's Equity = Assets Liabilities Income Statement: Shows the revenue, expenses, and resulting income during a particular period of time Statement of Cash Flows: Reports a firm'sm cash inflows and outflows and the net increase or decreas of cash over a specified period. Financial Data Common Financial Measures Working Capital: (current assets) (current liabilities) Quick Assets: Cash and other current assets that can quickly be converted to cash (as good as cash) Current Ratio: (current assets)/(current liabilities) Quick Ratio: [(current assets)-(inventories)]/ (current liabilities) Acid-Test Ratio: (quick assets)/(current liabilities) Financial Data Common Financial Measures -cont Profit Margin on Sales: (net profit)/(sales) Return on Total Assets: (profit after tax)/(total assets) Return on Equity: (profit after tax)/(total equity) Inventory Turnover: (cost of goods sold)/ (average inventory) Ratio of Net Sales to Assets: (net sales)/(average total assets excluding long-term investments) Ratio of Liabilities to Stockholders' Equity: (total liabilities)/(total stockholder's equity) Financial Data Common Financial Measures -cont Debt to Total Assets: (total debt)/(total assets) Debt Equity Ratio: (total debt)/(total equity) Earnings Per Share of Common Stock: (net income preferred dividends)/(# shares of common stock) Price-Earnings Ratio: (market price per share of common stock)/(earnings per share of common stock) Dividend Yield: (dividends per common share)/ (market price per common share) Financial Data Common Financial Measures -cont EBITDA: Earnings before interest, taxes and depreciation EBIT: Earnings before interest and taxes ...
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This note was uploaded on 09/26/2008 for the course CE 395 taught by Professor Hitchcock during the Summer '05 term at University of Alabama at Birmingham.

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