Engineering EconomyWhy is Engineering Economy important?• Practical everyday questions

– Should you finance your car or pay cash? Finance for $6995 –vs- pay $4000 in cash. At what interest rate would you have to invest the $4000 so either option is equivalent.

– Buying a new car: should you take 0% financing for the next 4 years, or a $2000 cash rebate.

– Purchasing rental property: I just offered committed to purchase a house near campus for $70,000 with 20% down. What are my month P&I payments if interest rates are 6.25% for a 30 year loan or 5.875% for a 15 year loan. What would I pay over the lifetime of each of these mortgages?

 

Engineering EconomyWhy is Engineering Economy important?• As an Engineer

Engineers tend to work on projects. Projects use capital (money) to improve a process, develop a new product, improve a product , improve the safety of a process, etc…

Engineers are typically responsible for “writing the project” which determines the cost of the project and the return on investment.

When doing a project study, Engineers compare and contrast alternative options for accomplishing the goals of a project. These alternative are often compared from an economic standpoint. Lease –vs- Buy. Payback period. Rate of Return. Return on Investment.

 

Engineering EconomyTime Value of Money - Fundamental concept of Engineering Economy

The change in the amount of money over a given time period is called the time value of money.

Money makes money.

When borrowing money, over time more is owed than amount borrowed.

 

Engineering EconomyPerforming an Engineering Economy Study

Purchase rental property – or do nothing.

Details:• $70K Purchase price with 20% down ($14K)• Monthly expenses (utilities, maintenance, insurance, etc..) - $200• 2.5% Current Money Market Interest Rate• Expected rental income $750• Mortgage table:

 P I N (years) I/12 N(months) A56000 0.0575 15 0.004792 180 465.029656000 0.0625 30 0.005208 360 344.8016

Engineering Economy

Performing an Engineering Economy Study

 

Do Nothing

Invest $14K in Money Market at 2.5%.

Annual return: $350

Rental Property

Invest $14K in Rental Property for 30 years at 6.25%.

Annual return:

12* (750 – 345 – 200) = $2460

To

8 * (750 – 345 – 250) = $1240

What about taxes? Depreciation!!