Cost Analysis and Estimating for Engineering and Management Chapter Cost Analysis © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-1 Overview Making Decisions (Tradeoffs) Cash Flow Effects Variations on Breakeven Analysis Marginal Costs, Revenues, Profits Life Cycle Costs © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-2 Tradeoffs Between/Among Design Alternatives Proceed or Terminate Make or Buy Current or Proposed Product/Method Often Before or During Design © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-3 Product Development © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-4 Tradeoff Study Search for Alternatives Determine Cost Estimates Use Comparative Economy Consider Constraints Understand Irreducible Factors Make Decisions © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-5 Considering Cash Flow Amount and Timing of Cash Coming In, From Sales Going Out, In Expenses Also Depreciation Taxes Inflation/Deflation © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-6 Taxation Effects on Cash Flow Property Taxes Fixed, Comparatively Small Sales Taxes Part of Material/Equipment Cost Income Taxes Federal and Sometimes State © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-7 Income Taxes Proportion of Gross Income Taxable income = gross income - all expenses (except capital expenditures) - depreciation deductions Net Income: Eq 9.1 What’s Left After Taxes Paid © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-8 Graduated Tax Schedule If Income is Between $ The tax is and $50,000 50,000 75,000 75,000 of the Amount Over 15% 7,500 + 25% 50,000 100,000 13,750 + 34% 75,000 100,000 335,000 22,500 + 39% 100,000 335,000 10,000,000 113,900 + 34% 335,000 10,000,000 15,000,000 3,400,000 + 35% 10,000,000 15,000,000 18,333,333 5,150,000 + 38% 15,000,000 6,416,667 + 35% 18,333,333 … $ © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-9 Inflation/Deflation “Value” of Dollar Changes Purchasing Power Quantized Through Indices For Comparisons Over Long Times Dr Da 1 f © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management n k Eq 9.3 Ch 9-10 Linear Breakeven © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-33 Higher Order Solutions To Fit Some Data Higher Order Polynomial Regression Is Needed Marginal Cost/Revenue Determined Using Derivation of Regressed Models dRT dCT Rm Cm dn dn Eq 9.14 © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Eq 9.15 Ch 9-34 Nonlinear Cost & Revenue © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-35 Marginal Plots © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-36 Consequences Minimum & Maximum Production Limits Marginal Profit = Zero dRT dCT dZ 0 dn dn dn Eq 9.17 Optimum Sales Revenue, Production Cost, Profit But Not All at the Same Point © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-37 Life Cycle Cost Considers Costs for Entire Life Production / Acquisition Operation Maintenance / Upkeep Salvage Value / Disposal Recycling Sum of All Costs from Concept Forward © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-38 LCC Use Used for Comparing Alternatives Initial Cost and Operating /Use Cost For Example High Cost, Reliable Item Low Cost, More Repair / Replacement Pay Now or Pay Later © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-39 Estimates Required for LCC Design Capital Investment Operation, Maintenance, Use Replacement Upgrading Salvage © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-40 Phases of Project Life © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-41 End of Life Worn Out Ceases Function Loss of Profit Costs Too Much to Continue Operation Obsolete Purpose No Longer Exists Superior Replacement Available © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-42 Operating & Maintenance Costs Need Operating Profile Maintenance Schedule Repair Data Scheduled Maintenance (Preventative) SOH PM actions = PM cycle time © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Eq 9.18 Ch 9-43 Breakdown Costs Mean Time Between Failure (MTBF) Mean Time to Repair (MTTR) C cm SOH MTTR C m MTBF © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Eq 9.19 Ch 9-44 LCC Comparison © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-45 Long Life Costs Life in Multiple Years Interest Rate Considerations Time Value of Money $1 in Years Is Worth Less Today Impacts LCC Calculations Covered In Chapter 10 © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-46 Summary Methods for Making Tradeoff Decisions Considerations Involving Cash Flow More Complicated Breakeven Models Marginal Costs, etc Limits on Production Costs for Entire Life Cycle © 2004 Pearson Education, Inc Pearson Prentice Hall, Pearson Education, Upper Saddle River, NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-47 ... Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Ch 9-12 Linear Cost Case Fixed Cost Is Constant for Period Does Not Change with Quantity Variable Cost Is... NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management Eq 9.4 Ch 9-11 Breakeven How Many Must Be Sold to Recover Costs Relationship Cost Price Volume... NJ 07458 Ostwald and McLaren / Cost Analysis and Estimating for Engineering and Management n k Eq 9.3 Ch 9-10 Calculating Cash Flow Usually for Annual Basis Only for Top/High Level