ENGR 280 Engineering EconomicsENGR 280 Engineering Economics

Faculty of EngineeringFaculty of Engineering

University of VictoriaUniversity of Victoria

Fall 2005Fall 2005

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Teaching Group: InstructorTeaching Group: Instructor

Dr. Wei Li Dr. Wei Li

Adjunct Assistant ProfessorAdjunct Assistant Professor

Research: Wireless Communication EngineeringResearch: Wireless Communication Engineering

Office: ELW B356Office: ELW B356

wli@ece.uvic.cawli@ece.uvic.ca

www.ece.uvic.ca/~wliwww.ece.uvic.ca/~wli (ENGR280 Home!!!) (ENGR280 Home!!!)

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Teaching Group: Teaching AssistantsTeaching Group: Teaching Assistants

Craig Tipping   Craig Tipping    ctipping@uvic.ca  ctipping@uvic.ca   Tutorial and Quiz Group 1 Tutorial and Quiz Group 1

(Students with Last Name A-M(Students with Last Name A-M ))

Le Yang             yangle@ece.uvic.caLe Yang             yangle@ece.uvic.ca Tutorial and Quiz Group 2 Tutorial and Quiz Group 2

(Students with Last Name N-Z(Students with Last Name N-Z ))

Hanfeng ChenHanfeng Chen hchen@ece.uvic.cahchen@ece.uvic.ca Final Quiz, final markFinal Quiz, final mark

Jing ZhongJing Zhong jzhong@csc.uvic.cajzhong@csc.uvic.ca Report, Homepage Report, Homepage

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IntroductionsIntroductions

What Wei will do …..…….What Wei will do …..…….

Text BooksText Books Lectures and ProjectsLectures and Projects Quiz and TutorialQuiz and Tutorial Marking SchemesMarking Schemes Office HourOffice Hour

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Wei Wei (We?)(We?) will…………… will……………

Work Work hardhard and work and work smartsmart Communicate with teaching group when neededCommunicate with teaching group when needed Know the required content of the text bookKnow the required content of the text book Practice problems and examples in the text bookPractice problems and examples in the text book Show up in all Quizzes, Practical ReportsShow up in all Quizzes, Practical Reports Keep quiet in classroomKeep quiet in classroom Relax and have funRelax and have fun

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Text BookText Book Engineering Economics in Engineering Economics in

CanadaCanada 33rdrd Edition Edition Niall M. FraserNiall M. Fraser

Elizabeth M. JewkesElizabeth M. Jewkes

Irwin BernhardtIrwin Bernhardt

May TajimaMay Tajima

University of WaterlooUniversity of Waterloo ISBN: 0-13-126957-7ISBN: 0-13-126957-7

Pearson Education CanadaPearson Education CanadaCopyright: 2006Copyright: 2006

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Reference BooksReference Books

Economics: Canada in the Global Environment Economics: Canada in the Global Environment Michael Parkin and Robin Bade.Michael Parkin and Robin Bade.

Contemporary Engineering Economics: A Canadian Contemporary Engineering Economics: A Canadian Perspective, Addison Wesley Co. by Park, Porteous, Perspective, Addison Wesley Co. by Park, Porteous, Sadler and Zuo (1995).Sadler and Zuo (1995).

Engineering Economics, 2nd Canadian Edition, Engineering Economics, 2nd Canadian Edition, McGraw Hill Ltd. by Riggs, Bedworth, Randhwa, McGraw Hill Ltd. by Riggs, Bedworth, Randhwa, and Khan (1997)and Khan (1997)

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Lectures and ProjectLectures and Project Classroom LecturesClassroom Lectures

Sept. 13, 2005-Dec. 2, 2005 Sept. 13, 2005-Dec. 2, 2005 TWF, 11:30-12:30, ELL168 (ELL 061)TWF, 11:30-12:30, ELL168 (ELL 061) Slides will be on web www.ece.uvic.ca/~wliSlides will be on web www.ece.uvic.ca/~wli

Practice ProblemsPractice Problems 5 groups of practice problems will be given5 groups of practice problems will be given All the problems will be chosen from the text bookAll the problems will be chosen from the text book Solutions will be given in tutorial classesSolutions will be given in tutorial classes

Project: Group StudyProject: Group Study Practical Application: Find a project topicPractical Application: Find a project topic Project report, team work !!! Project report, team work !!! At least 3, up to 6 students a groupAt least 3, up to 6 students a group

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Quizzes and TutorialQuizzes and Tutorial

Quizzes and final quiz (all in class) (in two classrooms)Quizzes and final quiz (all in class) (in two classrooms) Based on examples and problems in the text bookBased on examples and problems in the text book 45 minutes long, about 5 problems45 minutes long, about 5 problems

Tutorial (in two classrooms)Tutorial (in two classrooms) Tutorial will follow the quizzes and cover practice problemsTutorial will follow the quizzes and cover practice problems Extra time will be given for questions in tutorialsExtra time will be given for questions in tutorials

When and whereWhen and where Time: announced in class, on the web (might be changed)Time: announced in class, on the web (might be changed) Room: ELL 168 and ELL 061Room: ELL 168 and ELL 061 Have to skip a quiz? Contact me before you do that!Have to skip a quiz? Contact me before you do that!

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Marking SchemeMarking Scheme

Practice ProblemsPractice Problems 00%00% 5 quizzes @ 10% each5 quizzes @ 10% each 50%50% Final quizFinal quiz 25%25% Project ReportProject Report 25%25%

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Office HoursOffice Hours

In TutorialIn Tutorial There will be question and answer time in tutorialThere will be question and answer time in tutorial

Other than TutorialOther than Tutorial WednesdayWednesday 3:30-4:203:30-4:20 ELW ELW B356 or B335B356 or B335 FridayFriday 3:30-4:203:30-4:20 ELW ELW B356 or B335B356 or B335

Email me before your visit, thanks.Email me before your visit, thanks.

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Teaching/Studying MethodTeaching/Studying Method Multi-media Multi-media

Power point presentation (PDF on Web)Power point presentation (PDF on Web) Email/Web communicationEmail/Web communication

Important Important Do not miss quizzes Do not miss quizzes Submit report on timeSubmit report on time

Key to successKey to success Study the examples and problems in text bookStudy the examples and problems in text book Report should be complete, practical, and originalReport should be complete, practical, and original

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Website…..Website…..

www.ece.uvic.ca/~wliwww.ece.uvic.ca/~wli

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Why is This Course Why is This Course ImportantImportant to You? to You?

It is required (the rule….)It is required (the rule….)

Background in economics and finance is an important Background in economics and finance is an important part of your educationpart of your education

Engineering is one of the better paid professions.Engineering is one of the better paid professions.

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Why is This Course Important to Why is This Course Important to YOUYOU?? Buy a car (leasing versus buying, cash or loan, cash or Buy a car (leasing versus buying, cash or loan, cash or

interest discount), home (mortgage: points, interest, interest discount), home (mortgage: points, interest, duration),duration),

Put children through college (options for saving money) Put children through college (options for saving money) be prepared for retirement:be prepared for retirement:

Many companies offer tax-deferred savings plans to Many companies offer tax-deferred savings plans to employees. How do you pick a good plan or plans?employees. How do you pick a good plan or plans?

Many companies offer stock options to employees. Many companies offer stock options to employees. Some Intel employees have become millionaires Some Intel employees have become millionaires through stock options. What is there to be concerned through stock options. What is there to be concerned about in investing in company stock options?about in investing in company stock options?

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Key IssuesKey Issues Important Important

Do not miss quizzes Do not miss quizzes Submit report on timeSubmit report on time

Key to successKey to success Study the examples and problems in text bookStudy the examples and problems in text book Report should be complete, practical, and originalReport should be complete, practical, and original

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SummarySummary

Getting the idea is important, not the numbers Getting the idea is important, not the numbers

Teaching Group is here to help youTeaching Group is here to help you

5 Quizzes, 1 Final Quizzes, 1 Project5 Quizzes, 1 Final Quizzes, 1 Project

No copy machine: everything on webNo copy machine: everything on web

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What is Engineering Economics?What is Engineering Economics? Subset of General EconomicsSubset of General Economics Not concerned with general economics Not concerned with general economics

situations - concerned with project at hand situations - concerned with project at hand onlyonly

Analysis performed by technical Analysis performed by technical professionals (not economists)professionals (not economists)

Requires advanced technical knowledge in Requires advanced technical knowledge in some casessome cases

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Engineering Economists AnswerEngineering Economists Answer Why do this at all? Why do this at all?

Is there a need for the project?Is there a need for the project? Why do it now?Why do it now?

Can it be delayed? Can we afford it now?Can it be delayed? Can we afford it now? Why do it this way?Why do it this way?

Is this the best alternative? Is this the optimal Is this the best alternative? Is this the optimal solution?solution?

Will the project pay?Will the project pay? Will we run a loss or make a profit?Will we run a loss or make a profit?

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Sample SituationSample Situation

Hydro:Hydro: expensive initiallyexpensive initially far away from load far away from load

centres (high centres (high transmission cost)transmission cost)

no fuel requiredno fuel required longer lifelonger life no pollutionno pollution

ThermalThermal less expensive initiallyless expensive initially can be near load can be near load

centrescentres require fuelrequire fuel shorter lifeshorter life can cause pollutioncan cause pollution

Hydro vs. Thermal power

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Other examplesOther examples

Buy vs. rent (car, house, equipment)Buy vs. rent (car, house, equipment) Good quality (expensive) but longer life Good quality (expensive) but longer life

vs. poor quality (cheap) but shorter lifevs. poor quality (cheap) but shorter life car, shoes, computerscar, shoes, computers

Investments decisions - GIC, RRSP, Investments decisions - GIC, RRSP, Bonds, Stocks and SharesBonds, Stocks and Shares

Steel vs. concrete bridgeSteel vs. concrete bridge Capacity expansion problemsCapacity expansion problems

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Choosing the Better AlternativeChoosing the Better Alternative Economic analysis conclusionsEconomic analysis conclusions Input fromInput from

governments / politiciansgovernments / politicians special interest groupsspecial interest groups public consultationspublic consultations family, spouse, financial advisorfamily, spouse, financial advisor

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4 Steps in Engineering Economics Study4 Steps in Engineering Economics Study

Define alternatives in physical termsDefine alternatives in physical terms Cost and revenue estimatesCost and revenue estimates All money estimates placed on a comparable basisAll money estimates placed on a comparable basis

appropriate interest rate usedappropriate interest rate used time horizon (economic life)time horizon (economic life)

Recommend choice among alternativesRecommend choice among alternatives

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Example: Voluntary Retirement PlanExample: Voluntary Retirement Plan

Marginal tax = 30%Marginal tax = 30% Allowed to deposit yearly=$9,000Allowed to deposit yearly=$9,000 2 years to retirement2 years to retirement Invest in the fund with expected return 20%Invest in the fund with expected return 20%

1. INVEST IN VOLUNTARY RETIREMENT ACCOUNT1. INVEST IN VOLUNTARY RETIREMENT ACCOUNT

before tax = (9,000*1.2*1.2 + 9,000*1.2) = 23,760before tax = (9,000*1.2*1.2 + 9,000*1.2) = 23,760

after tax = 23,760 *0.7 = $16,632after tax = 23,760 *0.7 = $16,632

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Voluntary Retirement PlanVoluntary Retirement Plan

2. RECEIVE MONEY AND INVEST IN FUND2. RECEIVE MONEY AND INVEST IN FUND

$9,000 after tax = $9,000*0.7 = $6,300 $9,000 after tax = $9,000*0.7 = $6,300

before tax = (6,300 *1.2*1.2 + 6,300 *1.2) = $16,632 before tax = (6,300 *1.2*1.2 + 6,300 *1.2) = $16,632

taxable income = 16,632 - 2* 6,300 = $4,032taxable income = 16,632 - 2* 6,300 = $4,032

tax = 4,032*0.3 = $1,210tax = 4,032*0.3 = $1,210

after tax = 16,632 - 1,210 = $15,422after tax = 16,632 - 1,210 = $15,422

DIFFERENCE = 16,632 - 15,422 = $1,210 DIFFERENCE = 16,632 - 15,422 = $1,210

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Voluntary Retirement PlanVoluntary Retirement Plan

2. RECEIVE MONEY AND INVEST IN FUND2. RECEIVE MONEY AND INVEST IN FUND

$9,000 after tax = $9,000*0.7 = $6,300 $9,000 after tax = $9,000*0.7 = $6,300

before tax = (6,300 *1.2*1.2 + 6,300 *1.2) = $16,632 before tax = (6,300 *1.2*1.2 + 6,300 *1.2) = $16,632

taxable income = 16,632 - 2* 6,300 = $4,032taxable income = 16,632 - 2* 6,300 = $4,032

tax = 4,032*0.3 = $1,210tax = 4,032*0.3 = $1,210

after tax = 16,632 - 1,210 = $15,422after tax = 16,632 - 1,210 = $15,422

DIFFERENCE = 16,632 - 15,422 = $1,210 DIFFERENCE = 16,632 - 15,422 = $1,210