Easy Course on Engineering Economics

1. How to Make this an Easy Course • All the problems are done the same way • If I offered you $100 now or $100 when you graduate which would you choose? • 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

2. 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

3. 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.

4. 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

5. I Can Also Draw Pretty Pictures 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. +$10 0 +$10 +$150 1 2 3 4 5 6 -$100

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

7. 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