01EngineeringDecision1

# 01EngineeringDecision1 - Centre for Management of...

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08/09/2010 1 Centre for Management of Technology and Entrepreneurship University of Toronto Copyright: Joseph C. Paradi, 1996-2007 Yuri Lawryshyn, 2008-2010 Course: CHE374 Engineering Decision Making 2 What to Expect Question 1 You are looking to finance your first home purchase. The price of your “dream” home is \$500,000. You have \$50,000 cash but need to finance the rest. Good Bank offers you a mortgage loan at 6.0755% for 25 years. You recall that mortgage rates are quoted based on semi annual compounding. What would be your monthly mortgage payments? (3 marks) Onest Ed, who works for Ace Mortgage Brokers (who “Make Your Dreams Come True” and who work closely with the RSG Investment Bank of Wall Street) offers you a “great deal”. For the first 3 years you would pay just \$700 per month after which your payment rates would increase to a pre calculated amount. You notice Onest Ed is somewhat reluctant to tell you what this pre calculated amount is. Estimate the minimum amount of the “pre calculated” payment assuming the entire mortgage needs to be paid off in a total of 25 years. (4 marks) 3 What to Expect Question 7 The purchase of a new machine costing \$350,000 (asset class with a CCA rate of 20%) will lead to a revenue increase of \$200,000 in the first year. You expect the revenue increase to grow by \$10,000 real dollars (as of today) in the subsequent years. The gross margin % is expected to be 35% and you revenue increase to be negligible. The new machine is expected to last 10 years at which point its salvage value will be \$100,000 in today’s dollars. Taxes are 40%, the actual MARR is 15% and inflation is estimated to be 4%. Calculate the present worth of this opportunity.

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08/09/2010 2 4 A Few Questions First Do you know anything about the following? 1. The GDP (Gross Domestic Product) 2. Investments 3. Macro and micro Economics 4. Accounting 5. Finance 6. Statistics 7. What salary you would like to make upon graduation 8. Why making a profit is important for all of us 9. Why is a company in business 10. What is the lowest acceptable ROI 5 The Monetary Consequences Capital Investments have lives of 3 50 years or more Often the choice between alternatives is: Which one is cheaper? Don’t mix technical with economic efficiency The concept of time value of money is fundamental to Engineering Economy The main issue usually is the decision between current value and expected future revenue streams Need to balance expenses now with revenues later 6 Engineering Economy is Important The importance of money to engineering (or more generally, any business undertaking) has been known for a long time: “engineering . .. is the art of doing well with one
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01EngineeringDecision1 - Centre for Management of...

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