Engineering Economics - Combined return with cost to fix it?

  • Engineering
  • Thread starter adamaero
  • Start date
  • #1
adamaero
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1
Homework Statement
What is the return?
Relevant Equations
NOI/(downPayment+rehab)
Say the annual return for a *used* widget producing machine is this:
`12*500/(5000+15000)` = 30%
It cost 5k for the loan to buy the machine and 15k to fix it to start.

Two years later, it is refinanced for a 30 year term. Is that initial 15k still in the denominator? What if it was refinanced two seconds later?

`12*600/(33000+15000)` = 15%

I am trying to determine the overall (average) return of an investment with a great return in the first two years, but a mediocre return for the rest of the new loan.

`(2*30% + 30*15%)/32` = 16% average
 
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  • #2
Are you familiar with "discounted cash flow analysis?" Can you please list the cash flows for this investment and the times that each of these cash flows occurs?
 
  • #3
Chestermiller said:
Are you familiar with "discounted cash flow analysis?" Can you please list the cash flows for this investment and the times that each of these cash flows occurs?
Yes, this is used for commercial. I am exclusively looking at residential investments. So while it could be used for fun, an appraiser would not use it in their valuation (at least in my area).

I realized two options could be a solution. I first tried to assume the cost to fix does not improve the value. Instead I should have the value increasing 0.5:1 or even as much as 1:1. Alternatively, an ARV could be used.
 
  • #4
Discounted cash flow is the only meaningful and valid method of evaluating an investment (in my judgment). I can see that you are not willing or are unable to make a list of cash flows vs time for the various alternatives. Sorry to hear that. If you do list the cash flows for the various alternatives, I would be pleased to evaluate the ROI for you (using continuous compounding or compounding at specified intervals). Otherwise, I'm not going to be able to help you consider alternatives using inferior methodologies..
 
  • #5
Oh, I agree as a tool to determine a maximum allowable offer (MAO). But for the deal analysis as the question is posed it doesn't make much sense.

Evaluating ROI also does not apply in this case and especially not for the purpose of my investment strategy. All investments will be put into trusts or sold off at such a far off date that there is no use to speculate on what they will appreciate to then.
 

FAQ: Engineering Economics - Combined return with cost to fix it?

What is Engineering Economics?

Engineering Economics is a field of study that focuses on the analysis of the economic aspects of engineering projects. It involves evaluating the costs, benefits, and financial impacts of engineering decisions to ensure that resources are used efficiently and effectively. This includes cost estimation, cost-benefit analysis, and the assessment of the economic viability of projects.

How is the combined return calculated in Engineering Economics?

The combined return in Engineering Economics is calculated by summing up all the returns from various components of a project. This includes direct financial returns, such as revenue and cost savings, as well as indirect benefits, such as improved efficiency and reduced downtime. The combined return is used to assess the overall economic value of a project.

What factors are considered when determining the cost to fix an engineering issue?

When determining the cost to fix an engineering issue, several factors are considered, including the severity and complexity of the problem, the materials and labor required, the time needed for repairs, and any potential downtime or lost productivity. Additionally, indirect costs such as project delays and the impact on other systems or processes are also taken into account.

How do you balance the combined return with the cost to fix an issue?

Balancing the combined return with the cost to fix an issue involves performing a cost-benefit analysis. This process compares the expected returns from fixing the issue, such as increased efficiency and reduced future costs, with the immediate and long-term costs of the repair. The goal is to ensure that the benefits outweigh the costs, leading to a positive net economic impact.

What tools and methods are used in Engineering Economics to evaluate combined return and repair costs?

Several tools and methods are used in Engineering Economics to evaluate combined return and repair costs, including Net Present Value (NPV), Internal Rate of Return (IRR), cost-benefit analysis, break-even analysis, and sensitivity analysis. These tools help in quantifying the economic impact of engineering decisions and in making informed choices to maximize the overall value of projects.

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