EngrEcon-LECTURE MATERIAL

EngrEcon-LECTURE MATERIAL - ME 416/516 Engineering...

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Unformatted text preview: ME 416/516 Engineering Economics ME 416/516 ME 416/516 Topics Motivation Types of Costs Two Typical Scenarios for Analysis “Simple” Methods The Time Value of Money The Present Value Method The Project Timetable Accounting for Taxes and Depreciation Accounting for Inflation ME 416/516 Motivation The objective is to introduce methods of economic analysis for energy engineering decision making in a corporate, institutional or governmental setting. Legal, environmental, public relations, energy efficiency, safety and ethical considerations are important, but the most important consideration for engineering design decisions is economics-- “dollars and cents”. ME 416/516 More Motivation If factors can be valued in $ , they should be included in the economic analysis. The analysis methods here do not require tables. The use of computer spreadsheets (like EXCEL) will be emphasized. A spreadsheet is a computerized accountant’s ledger- ideal for economic analysis. Spreadsheets give greater flexibility than table-based methods. ME 416/516 Types of Costs There are usually two types of costs associated with an engineering project, one-time costs , which include first costs and salvage costs, and annual costs (or benefits) that occur every year or several years of the project. ME 416/516 First Costs First Costs First Costs or Initial Costs Initial Costs are the costs necessary to implement a project, including: • Costs of new equipment • Costs of shipping and installation • Costs of renovations needed to install equipment • Cost of engineering • Cost of permits, licenses, etc. ME 416/516 Items that Reduce First Cost Some costs of starting projects may be offset by immediate savings: • Deduct gains from sale of replaced equipment • Deduct investment tax credits . These are government tax incentives to purchase certain equipment, and reduce first costs by reducing taxes. ME 416/516 Salvage Value We are attempting to estimate the total cost of doing a project. Cost is reduced if we can sell the equipment at end of project. Salvage value Salvage value is the money that can be obtained at the end of the project by selling equipment. Salvage value is a benefit rather than a cost. ME 416/516 Annual Costs or Benefits Annual Costs Annual Costs and Benefits Benefits are costs and benefits of the project that accrue over two or more years of the project, including: Direct operating costs such as labor, supervision, janitorial, supplies, maintenance, material, electricity, fuel, etc. Indirect operating costs sometimes included, such as a portion of building rent, a portion of secretarial expenses, etc. ME 416/516 Annual Costs or Benefits (Cont’d) Sometimes include tax costs or benefits. If the project increases profits, it also increases taxes, which are an additional cost. There is a tax benefit if project reduces profits....
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EngrEcon-LECTURE MATERIAL - ME 416/516 Engineering...

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