lecture 10: economics for engineering designmech350/lectures/mech350-lecture-10.pdf · 3 economics...

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MECH 350Engineering Design I

University of VictoriaDept. of Mechanical Engineering

Lecture 10: Economics for Engineering Design

© N. Dechev, University of Victoria

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INTRODUCTIONENGINEERING ECONOMIC CONCEPTSCOST ESTIMATIONBUSINESS PLAN

Outline:


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Economics is the social science that analyzes the production, distribution and consumption of goods and services. [1]

Economics aims to explain how economies work and how economic agents interact. Economic analysis is applied throughout society, in business, finance and government, but also in crime, education, the family, health, law, politics, religion, social institutions, war, and science. [1]

Economics


[1] “Economics”, Wikipedia, http://en.wikipedia.org/wiki/Economics

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Economics is an important aspect of engineering design.

Cost, Time, and Market are frequently noted as important factors in:Needs/Goal statementsMission statementObjectives/ContraintsDecision making processEvaluation of designDocumentation

Often, we make statements such as “low cost” or “minimum time”, or “maximize users” but such Design Objectives are often too simplistic to be truly useful, during decision making when choosing between design options.

Economics for Engineering Design


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A number of advanced economic analysis techniques are available to assist engineers, to make better decisions. Specifically, some economic analysis techniques concerning costs/money include: (to name just a few):

Economic decision rulesTime value of moneyAnnualized costsAccounting Concepts and TaxesOpportunity CostInflationPlus many more ...

Next Fall, you will take a course in Engineering Economics (ENGR280), where you will study these and other concepts in greater detail.

Engineering Economics


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It is vitally important to include economic factors into your Design Objectives and Decision Making Process during engineering design.

Non-engineering stakeholders, such as the public, government, or business, will judge the success/failure of engineering design activities by considering:

(1) Objectives/Goals/Performance Satisfied?(2) Within Budget?(3) On Time?

These three measures of success are easily seen and understood by all stakeholders of a project. However, only one of these three measures (objectives/goals/performance satisfied) involves traditional engineering science.

Engineering Economics


Different engineering economic principles apply to different areas of engineering design, such as:

Product Design

Process Design

Component Design

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Engineering Economic Objectives:


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[N. Dechev]

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An engineering activity involving product design, is where the ‘product’ is a complete system to carry out a function, and usually purchased by a customer for private use. For example, the design of: bicycle, toaster, television, etc...

Economic factors related to product design include Objectives such as:Overall budget for the productMaterials and Manufacturing costsLabour costsExpected sales/revenueMarkup/profitDistribution costs___________________________

Engineering Economic Objectives for: Product Design


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An engineering activity involving process design, is where the ‘process’ is a method/technique to make something, or transform something. For example, the design of a process to:

Heat/cool fluid as part of a refinery plantRoll hot steel into rods, plates, etc...Extract minerals from raw ore

Economic factors related to process design include Objectives such as:Overall budget for processEquipment costsLabour costsEnergy cost______________________________________________________

Engineering Economic Objectives for: Process Design


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An engineering activity involving component design, is where the ‘component’ is one part or sub-system within a larger system. For example, the design of: a car door, or airplane landing gear, etc..

Economic factors related to component design include Objectives such as:

Component budgetOverall budget for systemMaterials and Manufacturing costsLabour costs______________________________________________________

Engineering Economic Objectives for:Component Design


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In order to use economics as a basis for decision making, we need to define some basic terms:

Economic decision rulesTime value of moneyAnnual Rate of Return (Interest)Conversion to Present ValueAnnualized CostsAccounting Concepts and TaxesInflation

Engineering Economics: Basic Concepts


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You may determine whether to proceed with a certain decision based on some of the following economic principles:

Lowest Initial Cost________________________________________________

Lowest Life Cycle Cost________________________________________________

Annual Rate of Return________________________________________________

Payback Period________________________________________________

Basic Concepts: Economic Decision Rules


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Consider some simple questions, to illustrate this concept:

Basic Concepts: Time Value of Money


If I offered you $100 today, or $150 next year, which would you choose? Why?

If I offered you $100,000 today, or $150,000 next year, which would you choose? Why?

If I offered you $10 today, or $10 next week, which would you choose? Why?

There is a ‘systematic and analytical way’ to evaluate these various options, based on the concepts of ‘time value of money, interest rates, inflation, etc....’. These concepts and others will be taught in detail, during your ENGR280 engineering economics course.

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The annual rate of return (or annual interest rate) is the value for i that will convert a present value P (today’s value) into a future amount F, (future value) one year from now. This relationship is defined as:

F = P(1+i)

For example, what do you feel is a ‘good interest rate’?__________

Therefore, if I offered you $10 today, or $_______ next year, these two amounts would be would both have an equivalent present value P.

Similarly, if I offered you $100,000 today, or $__________ next year, these two amounts would be would both have an equivalent present value P.

Basic Concepts: Annual Rate of Return (Interest Rate)


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Suppose we are considering a choice between alternatives, A, B, or C, where each alternative has a series of different ongoing ‘costs’ and ongoing ‘income cash’ spanning a few years.

We can use variations of the present value method to put the various alternatives on a common evaluation scale (present value). We can use conversions such as:

Present Worth Factor: T F P, i, n

Uniform Series Present Worth Factor: T UP, i, n

Geometric Series Present Worth Factor: T GP, i, e, n

These factors and their use are described in Chapter 8 of the textbook.

Therefore, we can apply a rule, such as the ‘Least Present Value Decision Rule’ to make a decision as to which alternative to choose.

Basic Concepts: Conversion to Present Worth


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Present Worth Factor: T F P, i, n

P = F(1+i)-n

where:P - Present Value of the amount in $F - future transaction amount in $i - interest raten - number of years until future transaction

Example:what is the present value of a $100,000 financial transaction that takes place 4 years from now? Assume the annual interest rate is 6%.

Basic Concepts: Conversion to Present Worth


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Depreciation: The perceived reduction in value of a capital investment (or asset) over time. This value reduction may also be due to usage, wear and tear, technological outdating, or other...

Capital Cost Allowance (CCA as used in Canada). The percentage amount you are permitted to ‘depreciate’ a capital investment per year.

Tax implications: Based on your choice of capital equipment the CCA may be a different amount. Therefore, your eligible expenses to deduct from your business income will differ and hence, your calculated tax owing will differ. Therefore your decision making for capital equipment selection can be influenced by the CCA and other tax rules.

Accounting Concepts and Taxes


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Inflation (general): The perceived increase in cost of goods and services, over the previous period.

Inflation (specific, defined as f): The percentage increase in the cost of goods and services, over the previous year.

Inflation will make the present value of future goods and services ‘cost more’ today.Interest will make the present value of future goods and services ‘cost less’ today.

In general*, we can define the ‘real interest rate’ ireal as the annual interest rate i, minus the annual inflation rate f. (ireal = i - f)*A derivation and justification of this is provided on page 359 of the textbook.

Inflation


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Throughout an engineering design activity, it is important to create cost estimation tables, to tally the cost of a proposed design.

A spreadsheet program, such as MS Excel, is useful since the cost totals can be easily modified/updated as the proposed design evolves.

To create a table, the following approach is recommended:Split up the overall design into ‘sub-systems’ representing major functions. Add further sub-system branches as necessary.Split the costs into major categories. Recommended are: Materials, Labour, and ConsumablesCreate headings for: quantity (i.e. number, sq.ft., length, hours, units, etc...), dollars per quantity, dollars.

Cost Estimation


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Example #1: Cost Estimate for manufacture of a saltwater aquarium filter.

The product shown here is a Protein Skimmer, used in a marine aquarium water filtration system.

The following cost estimation is focused on cost directly involved in manufacture of this product.

Other business overhead costs (rent, equipment/tools, phones, insurance, etc...) are not included.

Cost Estimation: Example 1


Saltwater Protein Skimmer 18[Saline Solutions Inc.]



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Example #2: Manufacturing cost estimation for an experimental prosthesis

This is a multi-fingered, experimental prosthetic hand, for use by children in the 7-11 year range.

This prosthesis was a Master’s of Engineering design project.

The financial information was part of a Master’s of Business Administration business plan project.

Cost Estimation: Example 2 (TBM Hand)


TBM Hand, (Toronto Bloorview Macmillan)[N. Dechev, S. Naumann, W.L. Cleghorn ]

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The following cost estimation is focused on costs directly involved in producing the TBM Hand. Other business overhead costs are not included.

There are three separate cost estimations provided, for the manufacture (materials, machining/labour, machine setup, and assembly) for:

A single unitFor 25 unitsFor 100 units

Note the significant cost differences of some items, when manufacturing exactly the same product, in different quantities.

Cost Estimation: Example 2 (TBM Hand, cont.)



TBM Hand Cost Estimate for (1, 25 or 100 units) March 21st, 2002

Item Description: # required COST (to make one Hand): COST (to make 25 Hands): COST (to make 100 Hands):

per hand Setup Material Labour Setup Material Labour Setup Material Labour

Finger Links 1, 2, 3, 4, 5, 6 (7075-T6 Aluminum) 4 $1,800.00 $8.44 $450.00 $1,980.00 $211.00 $11,250.00 $2,160.00 $844.00 $30,000.00

Thumb Links 1, 2, 3, 4 (7075-T6 Aluminum) 1 $1,200.00 $1.58 $75.00 $1,320.00 $39.50 $1,875.00 $1,440.00 $158.00 $5,000.00

Roll Pins for Finger & Thumb Links (302 stainless, 1.5 mm, $20.34 U.S. per 100) 23 $32.54 $203.37 $813.48

Slot Pins for Fingers and Thumb (302 stainless, 1.5 mm, $20.34 U.S. per 100) 5 $32.54 $40.68 $162.70

The Palm ( Delrin Plastic, white) 1 $1,125.00 $24.25 $150.00 $1,237.50 $606.25 $3,750.00 $1,350.00 $2,425.00 $13,125.00

Cylinder, Cap, Piston (7075-T6 Aluminum) 5 $825.00 $7.91 $187.50 $907.50 $197.75 $4,687.50 $990.00 $791.00 $12,500.00

Spring-Anti-Buckler (For Thumb Return) (Delrin Plastic, white) 1 $225.00 $0.25 $6.25 $247.50 $6.25 $156.25 $270.00 $25.00 $312.50

Pulleys (within Palm) 2 $225.00 $0.25 $12.50 $247.50 $6.25 $312.50 $270.00 $25.00 $625.00

Pulley (within Carpometacarpal Links) 1 $225.00 $0.25 $6.25 $247.50 $6.25 $156.25 $270.00 $25.00 $312.50

Aramid Fibre Cable, 1/32", 50 lbf max tensile, ($16.40 Can. for 25 feet) 1 $16.40 $16.40 $65.60

Thumb Carpometacarpal Link (Right) (Delrin Plastic) 1 $450.00 $2.69 $31.25 $495.00 $67.25 $781.25 $540.00 $269.00 $2,500.00

Thumb Carpometacarpal Link (Left) (Delrin Plastic) 1 $450.00 $2.69 $31.25 $495.00 $67.25 $781.25 $540.00 $269.00 $2,500.00

Thumb Rotation Sleeve and Sleeve Cap (7075-T6 Aluminum) 1 $450.00 $0.52 $25.00 $495.00 $13.00 $625.00 $540.00 $52.00 $1,562.50

Thumb Base Link (7075-T6 Aluminum) 1 $375.00 $0.52 $12.50 $412.50 $13.00 $312.50 $450.00 $52.00 $1,250.00

Palm Rear Bearing Holder (Delrin Plastic, white) 1 $225.00 $1.00 $12.50 $247.50 $25.00 $312.50 $270.00 $100.00 $625.00

Wrist Socket (Delrin Plastic, white) 1 $375.00 $4.04 $12.50 $412.50 $101.00 $312.50 $450.00 $404.00 $1,250.00

Wrist Ball, (Delrin Plastic, white) 1 $375.00 $4.04 $12.50 $412.50 $101.00 $312.50 $450.00 $404.00 $1,250.00

Forearm Motor Mount (Delrin Plastic, white) 1 $600.00 $5.38 $25.00 $660.00 $134.50 $625.00 $720.00 $538.00 $1,875.00

Force Plate (7075-T6 Aluminum) 1 $375.00 $0.78 $18.75 $412.50 $19.50 $468.75 $450.00 $78.00 $1,250.00

Table of TBM Hand Cost Estimation[T. Dechev, M. Zirbser, N. Dechev ]



TBM Hand Cost Estimate for (1, 25 or 100 units) March 21st, 2002

4-40 Bolts, counter Sunk (for Thumb Carpometacarpal Link) 2 $4.00 $100.00 $400.00

(for Thumb Sleeve and Sleeve Cap) 3

(for Thumb Base) 2

(for Bearing Nut to Force plate) 2

(for Palm Rear Bearing Holder) 2

(for Wrist Socket (to Palm)) 2

(for Wrist Ball (to forearm)) 2

4-40 Set Screws, (for Universal Joint) 2 $0.50 $12.50 $50.00

Electric Motor #1724E, 6 Volt,16AK gearhead, 22:1, ($131.25 U.S.) 1 $210.00 $4,462.50 $15,750.00

Electronic Control System (Was Supplied by BloorView MacMillan) 1 $700.00 $14,875.00 $52,500.00

Myo-Electric Sensors (Was Supplied by BloorView MacMillan) 2 $800.00 $17,000.00 $60,000.00

DC Battery (Was Supplied by BloorView MacMillan) 2 $200.00 $4,250.00 $15,000.00

DC Battery Charger (Was Supplied by BloorView MacMillan) 1 $300.00 $6,375.00 $22,500.00

Ball Screw, 1mm lead, 6mm O.D. screw ($235 U.S.) 1 $376.00 $7,990.00 $28,200.00

Universal Joint, 1/4" O.D., molded Acetal, max Ult Torque 2.5 lbf. ($9.36 U.S.) 1 $14.98 $318.33 $1,123.50

Springs (for Cylinders), 50N@10 mm deflect ($12.20 U.S. for 10)(302 stainless) 5 $19.52 $244.00 $976.00

Spring (For Thumb), 15N@10mm deflect, ($12.20 U.S. for 10) (302 stainless) 1 $19.52 $48.80 $195.20

Angular Contact ball Bearings 2 $80.00 $1,700.00 $6,000.00

Radial Roller Bearings ($27.50 per 5) 1 $27.50 $137.50 $550.00

Cost to Assemble $100.00 $50.00 $1,440.00 $500.00 $250.00 $9,000.00 $500.00 $1,000.00 $36,000.00

Cost to Inspect / Break In / Quality Test $100.00 $50.00 $360.00 $500.00 $0.00 $3,000.00 $500.00 $1,000.00 $12,000.00

Cost for Shipping to Site/ Packaging/ shipping insurance $75.00 $1,250.00 $5,000.00

Sub Totals: $9,500.00 $2,998.09 $2,943.75 $11,230.00 $59,638.82 $39,968.75 $12,160.00 $212,745.48 $128,937.50

Total: $15,441.84 $110,837.57 $353,842.98

Cost per Hand: $15,441.84 $4,433.50 $3,538.43

Table of TBM Hand Cost Estimation[T. Dechev, M. Zirbser, N. Dechev ]


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Upon developing an engineering ‘product design’, your team may feel that there is commercial potential for the product. In this case, you may choose to go down the road of commercialization activities.

Before rushing out and starting a company, your first activities will likely include:

Developing a Business PlanCreating Intellectual PropertyTalking to an ‘entity’ willing to loan you startup money.

Commercialization of Engineering Product Designs


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“A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals.” [Wikipedia]

A typical business plan is often structured as follows:Executive SummaryMarket AnalysisBackground on the Industry and StakeholdersThe Proposed Company Structure and PrincipalsThe ProductThe Growth StrategyDistribution and Marketing StrategyFinancial Analysis/DataConcluding Remarks

Business Plans


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Business Plan Example: TBM Hand


Document is available on course website

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[1] Wikipedia, “Economics”, online article: http://en.wikipedia.org/wiki/Economics[2] Bradford Waugh, “bike, product design”, online article: http://www.behance.net/gallery/bike/111883 [3] Vincent Heeringa, “Wood works”, Idealog In The Idea Business, online article: http://www.idealog.co.nz/magazine/20/wood-works

References:


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