656 Chapter 20 Engineering Economics
As we explained in Chapter 3, economic factors always play important roles in engi-
neering design decision making. If you design a product that is too expensive to man-
ufacture, then it cannot be sold at a price that consumers can afford and still be
profitable to your company. The fact is that companies design products and provide ser-
vices not only to make our lives better but also to make money! In this section, we will
discuss the basics of engineering economics. The information provided here not only
applies to engineering projects but can also be applied to financing a car or a house or
borrowing from or investing money in banks. Some of you may want to apply the
knowledge gained here to determine your student loan or credit card payments. There-
fore, we advise you to develop a good understanding of engineering economics; the
information presented here could help you manage your money more wisely.
20.1 Cash Flow Diagrams
Cash flow diagrams are visual aids that show the flow of costs and revenues over a period of time.
Cash flow diagrams showwhen the cash flow occurs,the cash flow magnitude,and whether the cash
flow is out of your pocket (cost) or into your pocket (revenue). It is an important visual tool that
shows the timing, the magnitude, and the direction of cash flow. To shed more light on the con-
cept of the cash flow diagram, imagine that you are interested in purchasing a new car. Being a
first-year engineering student, you may not have too much money in your savings account at
this time; for the sake of this example, let us say that you have $1200 to your name in a savings
account. The car that you are interested in buying costs $15,500; let us further assume that
including the sales tax and other fees, the total cost of the car would be $16,880. Assuming you
can afford to put down $1000 as a down payment for your new shiny car, you ask your bank for
a loan. The bank decides to lend you the remainder, which is $15,880 at 8% interest. You will
sign a contract that requires you to pay $315.91 every month for the next five years. You will soon
learn how to calculate these monthly payments, but for now let us focus on how to draw the
cash flow diagram. The cash flow diagram for this activity is shown in Figure 20.1. Note in
Figure 20.1 the direction of the arrows representing the money given to you by the bank and the
payments that you must make to the bank over the next five years (60 months).■Figure 20.1
A cash flow diagram for borrowed
money and the monthly payments.$15,880
$315.91
0
1 2 3 4 57 58 59 60
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).圀圀圀⸀夀䄀娀䐀䄀一倀刀䔀匀匀⸀䌀伀䴀圀圀圀⸀夀䄀娀䐀䄀一倀刀䔀匀匀⸀䌀伀䴀