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Unformatted text preview: ISE 460: Engineering Economy University of Southern California Fall 2010 Joseph Chow Week 3: Lecture 6 HW Schedule Summary HW #1, due 9/14/10 • Lecture 1 – 1.3 – 1.4 • Lecture 2 – 1.5 HW #2, due 9/16/10 • Lecture 3 – 2.1 – 2.2 • Lecture 4 – 2.3 – 2.4 • Lecture 5 – 2.5 • Lecture 6 – 2.6 10/12/10 2 Review • Role of Engineering Economics (Ch 1) • Accounting Basics (Ch 2) • Economic Equivalence, Cash Flow Analysis (Ch 3) • Interest Rates, Borrowing and Investing (Ch 4) • Today… – Minimum Attractive Rate of Return, Present Worth Analysis (or Net Present Value), Analysis Periods (Ch 5) 10/12/10 3 Refresher: Payback Period • If a project costs $100,000 and is expected to return $25,000 annually, how long does it take to recover the initial investment? What would be the discounted payback period at i = 15%? 10/12/10 4 Conventional Payback Period • If a project costs $100,000 and is expected to return $25,000 annually, how long does it take to recover the initial investment? What would be the discounted payback period at i = 15%? Period n Cash Flow Project Balance ($100,000) ($100,000) 1 $25,000 ($75,000) 2 $25,000 ($50,000) 3 $25,000 ($25,000) 4 $25,000 5 $25,000 $25,000 10/12/10 5 Discounted Payback Period Period n Cash Flow Cost of Funds (15%) Cash Balance ($100,000 ) ($100,000) 1 $25,000 ($15,000) ($90,000) 2 $25,000 ($13,500) ($78,500) 3 $25,000 ($11,775) ($65,275) 4 $25,000 ($9791) ($50,066) 5 $25,000 ($7,510) ($32,576) 6 $25,000 ($4,886) ($12,463) 7 $25,000 ($1,869) $10,668 10/12/10 6 Interpolate: (x – 6)/(7 – 6) = (0+12463)/(10668+12463) x = 6.54 yrs Warm Up Problem: Identifying Project Cash Flows (PARK Ex 5.1) • XL Chemicals considering investing in a computerprocess control system in one of its process plants • Plant: – 40% of time (3500 operating hrs) produces proprietary demulsification chemical annually 30,000 kg that sells for $15/ kg – 60% produces other specialty chemicals • Control system costs $650,000, increase maintenance costs by $53,000/yr, useful life of 8 yrs – Improve purity of demulsification chemical: +$2/kg – Higher reaction yields: +4000 kg/yr for same raw materials and production time – Number of process operators reduced by one shift: $25 per operating hr • What are the steps to obtain the net cash flow?...
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