engineering economic analysis - ninth edition newna/eschenbach/lavelle copyright 2004 by oxford...
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Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 1
Engineering Economic Analysis9th Edition
Chapter 2
ENGINEERING COSTS AND COST ESTIMATING
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 2
Engineering Costs
Classifications of costs• Fixed - constant, unchanging
• Rent is constant (single, married, children)
• Variable - depend on activity level• Food depends on the number of occupants
• Marginal - variable cost for the next unit• Depends on the next unit (adult, child, baby)
• Average - total cost/number of units• Rent+ food+…+n/number of units
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 3
Fixed, Variable, and Total Costs
Example 2-1
Bus Rental 80.00$ Event Tickets 12.50$ Gas Expense 75.00$ Refreshments 7.50$ Other Fuels 20.00$ Bus Driver 50.00$ Total FC 225.00$ Total VC 20.00$
People Fixed cost Variable cost Total cost0 225.00$ -$ 225.00$ 5 225.00$ 100.00$ 325.00$
10 225.00$ 200.00$ 425.00$ 15 225.00$ 300.00$ 525.00$ 20 225.00$ 400.00$ 625.00$
Fixed Costs Variable Costs
Total costs
$-
$200.00
$400.00
$600.00
$800.00
0 5 10 15 20
VolumeC
ost (
$) Total cost
Fixed cost
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 4
Profit and Loss Terms
• Breakeven: total revenue = total costs• Just getting by
• Profit region: total revenue > total costs• Putting money in the bank
• Loss region: total revenue < total costs• Going into debt
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 5
Breakeven Charts
Example 2-2Ticket price
Bus Rental 80.00$ Event Tickets 12.50$ 35.00$ Gas Expense 75.00$ Refreshments 7.50$ Other Fuels 20.00$ Bus Driver 50.00$ Total FC 225.00$ Total VC 20.00$
People Fixed cost Variable cost Total cost Revenue Profit Region0 225.00$ -$ 225.00$ -$ (225.00)$ Loss5 225.00$ 100.00$ 325.00$ 175.00$ (150.00)$ Loss
10 225.00$ 200.00$ 425.00$ 350.00$ (75.00)$ Loss15 225.00$ 300.00$ 525.00$ 525.00$ -$ Breakeven20 225.00$ 400.00$ 625.00$ 700.00$ 75.00$ Profit25 225.00$ 500.00$ 725.00$ 875.00$ 150.00$ Profit30 225.00$ 600.00$ 825.00$ 1,050.00$ 225.00$ Profit35 225.00$ 700.00$ 925.00$ 1,225.00$ 300.00$ Profit40 225.00$ 800.00$ 1,025.00$ 1,400.00$ 375.00$ Profit
Fixed Costs Variable Costs
Profit-loss breakeven chart
$-
$500.00
$1,000.00
$1,500.00
0 5 10 15 20 25 30 35 40
Volume
Co
st
($)
Total cost
Fixed cost
Revenue
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 6
Past (Sunk) Costs and Future (Opportunity) Costs
• Sunk cost: money spent due to a past decision. We cannot do anything about these costs.• Purchase price paid for a car two years ago
• Opportunity cost: a benefit that is foregone by engaging a resource in a chosen activity instead of engaging that same resource in some foregone activity. We make a choice or decision.• Buying lunch instead of gas
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 7
Which amount is the value at present?
Example 2-3Price when purchased 7,000.00$ Sunk cost Past decisionsStorage costs 1,000.00$ Sunk cost Past decisionsList price when purchased 9,500.00$ Old list Past decisionsCurrent list price of new pumps 12,000.00$ New list different features Past decisionsAmount offered for pumps 2 years ago 5,000.00$ Foregone opportunity Past decisionsCurrent price that the pumps could be sold for 3,000.00$ Market value Present opportunity
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 8
Expense Types
• Recurring expense: anticipated and occur at regular intervals.• Purchasing food, paying rent
• Non-recurring expense: one-of-a-kind event that occurs at an irregular interval.• Illness, accident, death
Sometimes we attempt to plan for large non-recurring costs by buying insurance. Paying the periodic insurance premium turns this expense into a recurring cost.
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 9
Incremental Costs
• An incremental cost is the difference between the costs of two alternatives.
Cost Items A BPurchase price 10,000.00$ 17,500.00$ 7,500.00$ Installation costs 3,500.00$ 5,000.00$ 1,500.00$ Annual maintenance costs 2,500.00$ 750.00$ (1,750.00)$ Annual utility expenses 1,200.00$ 2,000.00$ 800.00$ Disposal costs after useful life 700.00$ 500.00$ (200.00)$
Model Costs
Incremental
Example 2-4
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 10
Cash vs. Book Costs
• Cash costs: movement of money from one owner to another - also known as a cash flow.• Payment this month on an auto loan
• Book cost: cost of a past transaction that is recorded in a book.• Down payment recorded in your checkbook from
last year’s automobile purchase
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 11
Life-cycle Costs
• Life-cycle: all the time from conception to death of a product (process).
• Life-cycle costs: sum total of all the costs incurred during the life cycle.
• Life-cycle costing: designing with an understanding of all the costs associated with a product during its life-cycle.
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 12
Cost Estimating
• Economic analysis is future based.• Costs and benefits in the future require
estimating.• Estimated costs are not known with certainty.• The more accurate the estimate, the more
reliable the decision.
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 13
Types of Estimates
• Rough: gut level, inaccurate • -30% to +60%.
• Semi-detailed: based on historical records, reasonably sophisticated and accurate • -15% to +20%.
• Detailed: based on detailed specifications and cost models, very accurate • -3% to +5%.
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 14
Estimating Models
Model Explanation
Per Unit Uses a “per unit” factor$/sq ft, Benefits/employee
Segmenting Divide problem into items, estimate each & sum
Cost Indexes Index number based on history
Power Sizing Scaling previous known costs up or down
Triangulation Looking at costs from several perspectives
Learning Curve Tracking cost improvements
Examples
US CPI
Microsoft Excel
Worksheet
Microsoft Excel
Worksheet
Engineering Economic Analysis - Ninth Edition Newna/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc. 15
Cash Flow Diagrams
• Summarizes the flow of money over time• Can be represented using a spreadsheet
Year Capital costs O&M Overhaul Total0 (80,000.00)$ (80,000.00)$ 1 (12,000.00)$ (12,000.00)$ 2 (12,000.00)$ (12,000.00)$ 3 (12,000.00)$ (25,000.00)$ (37,000.00)$ 4 (12,000.00)$ (12,000.00)$ 5 (12,000.00)$ (12,000.00)$ 6 10,000.00$ (12,000.00)$ (2,000.00)$
Cash flow
$(100,000.00)
$(80,000.00)
$(60,000.00)
$(40,000.00)
$(20,000.00)
$-
$20,000.00
0 1 2 3 4 5 6
Year
Ca
sh
flo
w
Overhaul
O&M
Capital costs