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MERCER EGR 312 - Engineering Economy

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Engineering EconomySlide 2Slide 3Slide 4Slide 5Engineering 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 purchased a house near campus for $70,000 with 20% down. What are my monthly 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 EngineerEngineers 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 EconomyThe 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 StudyPurchase 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 360 344.8016Engineering EconomyPerforming an Engineering Economy StudyDo NothingInvest $14K in Money Market at 2.5%.Annual return: $350Rental PropertyInvest $14K in Rental Property for 30 years at 6.25%.Annual return: 12* (750 – 345 – 200) = $2460To8 * (750 – 345 – 250) = $1240What about taxes?


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