1. LECTURE 3

2. Prof. Chester Watson A 203 ERC – 491-8313 A207 I Engr – 491-7722

3. Engineering Your Future by Walesh (2000) Chapter 8, p. 209 – 276

5. Engineering Your Future by Walesh (2000) Chapter 8, p. 209 – 276 –Decision Economics –Resources are limited and should be invested wisely –The technical work is not an end, and is one input to the decision-making process

6. Why are we interested in Decision Economics? To pass this portion of CE 408 To pass the FE exam Because the stuff is useful and will make you a better engineer

7. Steps in the Decision Economics Process What is the goal of the project? Select feasible alternatives Step 1: Determine Physical & Economic Life of Project Components Step 2: Diagram Expenditures Step 3: Select Interest Rates

8. Steps in the Decision Economics Process Step 4: Put Costs and Benefits on a Comparable Basis & Calculate B:C or Least Cost Step 5: Consider Intangible Benefits & Costs Step 6: Recommend Best Alternative

9. Steps in the Decision Economics Process Step 1: Determine Physical & Economic Life of Project Components Physical life –the time over which a component could perform the intended function Economic life –the time over which the incremental benefits of a component are greater than the incremental costs

10. Did the power saw affect the economic life of the hand saw? What is the physical life of the hand saw, with proper care?

11. For example, tanks, pipes, and other components in a wastewater treatment plant may have physical lives of up to 50 years, but given the rate of change of treatment technology, significant improvements are likely to occur in the time span of much less than 50 years.

12. Physical life is important in determining salvage value, because salvage value can become an important component aspect of economic analysis. We will cover salvage value later.

13. Steps in the Decision Economics Process Step 2: Diagram Expenditures

14. Fig. 8-2

15. Fig 8-3

16. Fig 8-4

17. Fig 8-5

18. Steps in the Decision Economics Process Step 3: Select Interest Rates

19. Interest – money paid for the use of money Rate of interest – The ratio between the interest payable at the end of a period of time, and the money owed at the beginning of that period (principle). You borrow $10,000 and pay it off at the end of the year for $10,900. You pay $900 for the use of the $10,000.

20. You borrow $10,000 and pay it off at the end of the year for $10,900. You pay $900 for the use of the $10,000. Principle Interest Interest rate

21. Unless otherwise stated, the interest rate used in problems is for one year, not months, weeks, days, etc. How would you select the interest rate? Use the rate that the owner (client, sponsor) has to pay to borrow the money, or perhaps investment such as government bonds.

22. Which is the best deal??