Making Money is the Bottom Line httpfairwayecnpurdueedu stepclassmaterial What are we learning A large percentage of engineers in the work force today are in management positions Engineers are able to combine their knowledge of technology with business skills to improve their com ID: 784308
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Slide1
The Business of Engineering
Making Money is the Bottom Line!
Slide2http://fairway.ecn.purdue.edu/~step/class_material
Slide3What are we learning?
A large percentage of engineers in the work force today are in management positions.
Engineers are able to combine their knowledge of technology with business skills to improve their company by making important and educated business decisions.
Plus you make more $$$
Slide4Why are we learning it?
Your project will not only involve
design;
it will also involve cost analysis. Everything you learn about Engineering Economics will be used to complete your final project
.
Your project can be the coolest and most novel idea to hit this planet, but if no one can afford it, it won’t sell.
Slide5In the Beginning there was
Simple Interest
Easiest and oldest form of interest.
The amount of interest is easily calculated by multiplying the amount by the interest rate by the number of
periods (years or months, usually).
Slide6Simple Interest
Calculations
I =
P
∙
n
∙
i
where...
I =
accumulated interest
P =
principal amount (money
deposited)
n =
number of interest periods
i
=
interest rate (as a decimal, not percentage
i.e
, 0.12 not 12%)
per period
Slide7Simple Interest
Individual Exercise
The bank is going to loan you $1000 at 8% interest for 6 years.
What would be the total interest?
How much would you have to repay at the end of the 6 years? (F = final payment or total)
Slide8Simple Interest
Simplified
F = P + I
Since
I =
P
∙
n
∙
i
→
F = P +
P
∙
n
∙
i
→
F = P(1 +
n
∙
i
)
Slide9Compound Interest
The Next Level
As
time moved on, businesses
started taking
out loans for longer and longer periods of time. Simple interest was applied to the single-interest period, resulting in compound interest.
Slide10For the first period,
n = 1
and:
F
1
= P(1 +
i
)
Compound Interest
The First Period
Slide11Compound Interest
The Second Period
The compound interest for the second period is:
F
2
= F
1
∙
i = P(1 +
i
)
∙
i
And the sum at the end of the second period is:
F
1+2
= F
1
+ F
2
= P(1 +
i
) + P(1 +
i
)
∙
i
→
F
1+2
= [1 +
i
]
∙
P(1 +
i
)
→
F
1+2
= P(1 +
i
)
2
Slide12Compound Interest
The Third Period
The interest for the third period is:
F
3
= F
1+2
∙
i = P(1 +
i
)
2
∙
i
And the sum after the third period is:
F
1+2+3
= F
1+2
+ F
3
= P(1 +
i
)
2
+ P(1 +
i
)
2
∙
i
→
F
1+2+3
=
(1
+
i
)
∙
P(1 +
i
)
2
→
F
1+2+3
= P(1 +
i
)
3
Slide13Compound Interest
For n Periods
To recap!!!
1 period:
F = P(1 +
i
)
1
2 periods:
F = P(1 +
i
)
2
3 periods:
F = P(1 +
i
)
3
So for n periods:
F = P(1 +
i
)
n
This is consistent with our previous work.
Slide14Same example as before ($1000 at 8% for 6 years), but
compounded annually
Compound Interest
Individual Exercise
Slide15Compound Interest
Team Exercise
What if the same scenario ($1000 at 8% per year for 6 years) was compounded semi-annually instead of just annually?
What are n and
i
in this example?
Slide16Compound
Interest
:
Exercise
What’s the Better Deal?
Team
You have to borrow
$6000
from the bank and will pay it back in 5 years. Which is a better deal?
12% compounded monthly?
16% simple interest?
Slide17Better
Deal 2
$4000 borrowed
3 years
10% interest compounded monthly
12% simple interest
5
%
interest compounded bimonthly