Basic Patterns for Engineering Econ Problems ©Dr. B. C. Paul 2001

How to Make this an Easy Course  All the problems are done the same way  Everything is based on two questions  How Much Do I Get  When Do I Get it  If I had a pile of money on a table – How would you decide how much was there?  Count It

Basics of Engineering Econ  I offer you an opportunity to work – get paid in one of two ways  $800 as soon as you finish the job  $1000 with 50 cents when done and rest in 20 years  Money has the ability to gratify - people want to be gratified now - you have to give them something more to make them put-off gratification  With money this is usually done by giving people more money later  Means part of future money pays you off for waiting

The Pattern  All engineering econ problems involve writing down a list of the money you make and the money you spend  The list is written down in order of when the “cash flows” occur  usually this means money spent or earned each year

Example  Right now I spend $100 to buy stock in Pee Wee Herman’s Bicycle Company  At the end of the year get a dividend check for $10.  At the end of the next five years after that I get a dividend check for $10  Then at the end of the sixth year I sell my stock (after I get the dividend check of course) for $150.

Example  This is written down like so  0 -$100  1 +$10  2 + $10  3 + $10  4 +$10  5 +$10  6 +$10 + $150  I call this a cash flow

I Can Also Draw Pretty Pictures $100 +$10 +$10 +$150 Note that the X axis tells me when the money moved. Above or below the axis tells me whether the money moved in or out of my pocket.

Example Continued  I multiply each number in the cash flow by a magic factor that credits part of the money to waiting – ie - converts it into an equal amount of money right now.  -$100 * Magic1  +$10 * Magic2  +$10 * Magic3  +$10 * Magic4  +$10 * Magic5  +$10 * Magic6  +$160 * Magic7

Example Continued  Then I add up all the numbers and get a total  Smart (Greedy) people then look at the pile of money and decide whether it is big enough to make them invest  All engineering econ problems are done by writing down a cash flow, multiplying by magic factors, and adding up the total  A very simple concept surrounded by bull pucky