Economic%20Comparison

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Economic Comparison

• Fr Clinic II

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Overview

• Economics and Engineers
• Time Value of Money
• Different types of Economic Analyses
• Comparing our filters two examples

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Warning

• The field of economic comparison is huge, Ive
  left a lot out.

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Engineers and Economics

• Engineers often must estimate the benefits and/or
  costs of their designs
• Buildings, roads, landfills
• New products
• Communication systems
• Refineries, oil platforms

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Time Value of Money

• What would you rather have, 100 now or 5 years
  from now? Why?
• Assuming you dont need the 100 to meet some
  immediate need, what is your answer? Why?

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Investments

• You can take that 100 and invest it in bank
  accounts, bonds, or stocks and get a return on
  your investment
• At a 10 annual return,
• what will 100 be worth in five years?
• 100 (1.1)(1.1)(1.1)(1.1)(1.1) 100 (1.1)5
  161
• getting the 100 five years from now would be the
  same as getting what amount now?
• 100 (1.1)-5 62

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Different types of Economic Analyses

• Present Worth
• Transform costs and benefits into equivalent
  present value
• Project with largest present worth is best
• Annual Cash Flow
• Transform costs and benefits into equivalent
  uniform annual amounts over project lifetime
• Project with largest annual net benefit is best

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Different types (Cont.)

• Payback Period
• How long will it take for an investment (say a
  new manufacturing process) to recover its cost?
• Projects with short payback period are good, but
  direct comparison of projects requires an
  incremental process
• Benefit/Cost Ratio
• Determine ratio of benefits to costs, see if its
  gt than 1
• High B/C ratios are good, but direct comparison
  of projects requires an incremental method
• Rate of Return
• Determine the rate of return provided by a
  project (similar to the interest rate for a bank
  account)
• High rate of return is good, but direct
  comparison of projects requires an incremental
  process

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What if all you have are costs?

• If its difficult to assign monetary value to
  benefits, you may be left with only costs
• Can still use present worth and annual net
  benefit methods
• Just look for alternative with the smallest
  present or annual cost
• This assumes alternatives provide similar benefits

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Comparing Filters

• Without time value of money
• Costs are purchase of (a) entire unit and (b)
  replacement cartridges
• Costs can be related to volume of water treated
• With time value of money
• Must estimate rate at which water will be
  treated, to estimate cartridge replacement times

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Without time value, example 1

• Filter 1
• Initial cost 40, replacement filter 30, every
  100 Liters
• Filter 2
• Initial cost 60, replacement filter 20, every
  100 Liters
• Filter 3
• Initial cost 80, replacement filter 60, every
  500 Liters

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Excel Calculations, example 1
Cumulative Expenditures
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Figure, example 1
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With time value, example 2

• Same as first example, but take into account time
  value of money.
• Need to determine when costs occur, then
  transform to equivalent present costs.
• PC FC (1 i)-n
• PC present cost
• FC future cost
• i annual interest rate
• n number of years

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Additional information, example 2

• Lifetime and salvage cost of Filters
• 10 year lifetime and 0 salvage cost
• Interest rate? ? 8 (i 0.08 in equation)
• When do you buy replacements?
• Buy replacements at beginning of year needed
  (i.e., end of previous year)
• How much water do people drink per day of filter
  use?
• 2 L/day

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Additional Information, example 2

• Lets conduct three different comparisons, for
  three levels of use.
• Low 12 people-days/year (24 L/yr)
• e.g., three 2-people, 2-day outings
• Moderate 48 people-days/year (96 L/yr)
• e.g., twelve 2-people, 2-day outings
• High 144 people-days/year (288 L/yr)
• e.g., twenty-four 3-people, 2-day outings

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Calculations, example 2
PC for filter 1, Low use scenario 40 30
(1.08)-4 30(1.08)-8 PC for Filter 1, Mod use
scenario 40 30(1.08-1) 30(1.08-2)
30(1.08-8) 30(1.08-9)
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Present Worth Figure
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Conclusion

• Conduct an economic comparison of the filters
  using the methods outlined here!