is the root of all evil.

Transcription

1 Money

2 Money is the root of all evil.

3 Money is the root of all evil. makes the world go round.

4 Money is the root of all evil. makes the world go round. can t buy you love.

5 Money is the root of all evil. makes the world go round. can t buy you love. doesn t grow on trees

6 Money is the root of all evil. makes the world go round. can t buy you love. doesn t grow on trees...is time and time is money.

7 Engineering is $$$

8 The Legend of the Chessboard and the Grains of Wheat 18,446,744,073,709,551,615 grains total!

9 Which is better? Student A Student B = = (for 30 days) (for 30 days)

10 Which is better? Student A Student B = (for 30 days) = (for 30 days) Arithmetic Series 30 n Geometric Series 30 n1.01(2) n1

11 Student A 30 n1 S n 1000 n 2 a 1 a n S ,000

12 Student B 30 n1 S S n (2) a 1 (1 r 0.01 n1 1 r n ,737, ) r 1 2

13 Present Value vs. Future Value Same or Different? Is $1000 today the same as $1000 tomorrow? In 30 years? If $1000 is the present value, what is its future value? Average Inflation rate has been 3-4%

14 Inflation Inflation---The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Investopedia explains 'Inflation' As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. Long term has been 3-4% per year.

15 Effects of Inflation What is the value of today s $ , thirty years from now? P n = P r n P 0 = Principal 0 time units into the future (Present Worth) P n = Principal n time units into the future (Future Worth) r = Interest rate per interest period (for this example, r = inflation rate = -0.03) n = Number of interest rate periods P n = $ = $401

16 Effects of Inflation If a gallon of milk costs $4.00 today, how much did a gallon of milk cost thirty years ago? P n = P r n P 0 = cost of milk 30 years ago P 30 = cost of milk today r = 3% = 0.03 n = 30 Rearranging: P 0 = P n 1+r n P 0 = $ = $1.65

17 How do you beat inflation?

18 Dow Jones Industrial Average

19 Dow Jones

20 How do you beat Taxes?

21 How do you beat Taxes? with a Tax Shelter. There are certain heavy industries, such as mining or oil drilling operations, that can spend a lot of capital money on exploration, and dedicate years of effort before generating real income for investors. To encourage investment in these types of industries, the U.S. tax code allows the cost of exploration to be distributed to shareholders in the form of a tax deduction. This mechanism allows investors an immediate income tax savings, as well as the ability to realize future gains from the exploration effort. Rental real estate, natural resource prospecting, film production, and alternate energy sources are examples of common tax shelters.

22 Retirement???

23 $ $ $$ Why think about retirement when I haven t graduated? Mr. M provided incentive for his son to graduate on time. He said he would put $5000 in an account when he graduated college at 20. When his son is (1.07)^35= 53, When his son is 65? 5000(1.07)^45 = 105, When his son is 75? 5000(1.07)^55 = 206,575.01

24 A dollar today is worth more than a dollar tomorrow: Compound Interest

25 Effective and Nominal Interest: How are interest rates reported when they are compounded more than once a year? The rate of interest quoted in describing a given compound interest is called the nominal rate (r). The rate per year at which interest is earned during the year is called the effective rate (i). i = effective interest rate r = nominal interest rate per year q = number of times interest is compounded during the year i = 1 + r q q 1

26 Annual Percentage Rate (APR): APR (annual percentage rate) is the nominal annual interest rate plus one-time fees and additional charges. Although APR is intended to represent the total cost of credit to the consumer, it understates the true (effective) rate. An announced APR of 12.99% compounded monthly (as with credit card debt) is effectively a rate of 13.78%.

27 Compound interest different forms Interest compounded once per year P n P 1 0 r n Interest compounded q times per year P n P0 1 r q nq Interest compounded continuously r q nq Pn P0 lim 1 P0 q e rn

28 Let s do some financing

29 You just won the lottery! Suppose you win $9 million in the lottery, and that after taxes this amounts to $6.8 million. You are offered two choices Annuity option: Receive 25 annual installments of $272,000 per year. Lump Sum option: Receive an immediate lump sum of $3.75 million.

30 Annuities: Equal payments paid (or received) over n time periods Future value of an annuity: P n A[(1 r) n1 (1 r) n2 (1 r) 0 ] where P n = the value of the annuity after n payments of A Multiply both sides by (1+r) to obtain P (1 n r) A[(1 r) n (1 r) n 1 (1 Subtract the first equation from the second to obtain r) 1 ] P n n [( 1 r) 1] A r

31 Annuity You opt to get 25 payments of $272,000. We can calculate the future value of this sequence of payments, and compare to the future value of the lump sum. $272,000* (1.05) P = $12,981,771 25

32 Lump Sum $3.75million What is the future value of the lump sum after 25 years? P n = P r n P 25 = $3,750, P $3,750, $12,698, 831

33 Lump Sum -$3.75million Suppose you could get a better rate of return P $3,750, $25,681, 781

34 Annuity example: You win $1M in a lottery which pays you in 20 annual installments of $50K? What s it worth $$ today, i.e., what is its present value? Assume 5% interest. P n n [( 1 r) 1] A r but, P n P 1 0 r n So, P 0 n 20 [(1 r) 1] A $50K n 20 r(1 r).05*(1.05) $623K

35 BORROWING $ Suppose you DON T win the lottery You will still require large sums of money for

36 BORROWING $ A loan works much like an annuity, only the bank charges you interest. An n-year loan of $P 0, at an interest rate r, paid back with monthly payments $A is given by A P 0 q1 1 r r q qn For loan amount compounded monthly and payments made monthly, q =12.

37 BORROWING $ A q1 P 0 1 r r q qn Calculate your monthly payment on a $20,000 car loan with an 9% interest rate for five years. A = $415.17

38 BORROWING $ A P q1 1 r r q qn How much did you actually pay for the car? $ * 12 *5 = $24,910.20

39 A Dutchman Peter Inuit bought Manhattan from the Canarsie Indians for $23 in Who got robbed...? Assuming funds were invested at 6% compounded monthly since The investment today would be worth $23*(1+.06/12) (12*( )) = $220 *10 9

40 Cash Flow Diagram Analysis A company has a 5-year old compressor with an expected total life of 5 years. Annual operation and maintenance costs are about $1050. Due to increased production at the facility, more compressed air is needed. The company must decide how to address this additional requirement. They have two options:

41 Cash Flow Diagram Analysis OPT. 1: Add an additional compressor, costing $1000 with annual expenses of $300. After 5 years the new compressor would have residual value of $550 and the original compressor would have no residual value. OPT 2: Replace the existing compressor with a new, larger compressor costing $4000 with annual expenses of $500. After 5 years the new compressor would have a residual value of $2000. The current compressor could be sold today for $200.

42 Opt 1: Cash Flow Diagram $550 You should convert all payments to a single time period, P 0, P n or A. In this analysis, everything will be converted to P 0. $1000 $1350 $1350 $1350 $1350 $1350 P 0 = $1000 $ $ =-$

43 Opt 2: Cash Flow Diagram $200 $4000 $2000 $500 $500 $500 $500 $500 You should convert all payments to a single time period, P 0, P n or A. In this analysis, everything will be converted to P 0. P 0 = $3800 $500 + $ =-$4,411.66

44 Lease vs. Buy? Example: Honda Pilot LX A4WD price = $33,595 Purchase with 20% down and a 36 month down payment = monthly payment = spent after 36 mo = residual value = total cost = Lease for 36 months down payment = monthly payment = spent after 36 mo = residual value = total cost =

45 Lease vs. Buy? Example: Honda Pilot EX AWD price = $33,595 Purchase with 20% down and a 36 month down payment - $ 6,719 monthly payment - $ 825 spent after 36 mo - $36,419 residual value + $23,701 total cost - $12,718 Lease for 36 months down payment - $ 2,000 monthly payment - $ 359 spent after 36 mo - $14,565 residual value $0 total cost - $14,565

46 Financial Decisions and Opportunity Cost The opportunity cost of a decision is based on what must be given up (the next best alternative) as a result of the decision. Any decision that involves a choice between two or more options has an opportunity cost. The concept of opportunity cost has a wide range of applications including: Consumer choice Cost of capital Career choice Production possibilities Time management Analysis of comparative advantage

47 Financial Decisions and Opportunity Cost Consumer choice---buying a flat screen tv now (what do you give up?) You can t use the $1000 for vacation. Production Possibilities---your company decides to produce item A Cost of capital (borrowing means being charged interest) Career choice --- go for the bigger salary, but give up family time.

48 Should you own a car in NYC? Pros Few Taxi fees No Car rentals (getaways) Few metro passes Sublet to friends Convenience Cons Parking Maintenance/Repair Insurance Car payment Fuel

49 Average NYC rates Taxi: $10.00 for a 2 mile ride. Bus/Subway: $2.50 per ride or $100 monthly unlimited ticket Parking: $200/month, $1/hr at a meter, $8 per day. Car rental: $200 per week + gas. Zip Car: $60 annual fee, $14/hour, $100/day (incl gas and insurance Repair/Maintenance: $100/hour + parts Car Insurance: $2500/year

50 Should you own a car in NYC? ANNUAL BENEFITS NO Taxi fees No Car rentals (getaways)+$3000 Few metro passes +$500 Sublet to friends +$2000 Convenience +$3000 TOTAL = $10,500 ANNUAL COSTS Parking -$2200 Maintenance/Repair -$1500 Insurance -$1000 Car payment -$4000 Fuel -$2500 TOTAL = -$6700

51 Financial Decisions in Engineering

52 Payback Period The length of time required to recover the cost of an investment. Shorter paybacks are better investments. Problems with this metric: 1. It ignores any benefits that occur after the payback period and, therefore, does not measure profitability. 2. It ignores the time value of money.

53 Engineering is $$$ So often, engineering activity is aimed at attaining specified ends using available or purchased resources within a fixed time. The specification of the goals, means, limits and measures define the project. A principal activity of an engineer is to propose solutions for the problem posed for a project and select the best among the alternatives.

54 Engineering is $$$ Engineering = Efficiency. What does it mean to be efficient? Use the least amount of materials to get the maximum result. Using fewer materials means, less costly. So money is one of the main parameters when it comes to solving engineering problems.

55 Engineering is $$$