# UTPA STEM/CBI Courses/Thermal Systems Design and Optimization/Economics

Course Title: Thermal Systems Design and Optimization

Lecture Topic: Economics

Instructor: Young-Gil Park

Institution: UTPA

## Backwards Design[edit]

**Course Objectives**

**Primary Objectives**- By the next class period students will be able to:- Calculate Life-Cycle Saving (LCS)
- Calculate equivalent annual cost

**Sub Objectives**- The objectives will require that students be able to:- Convert money between current worth and future worth
- Use various interest factors

**Difficulties**- Students may have difficulty:- Taking effect of inflation into cost estimation
- Incorporating shift in time or irregular events

**Real-World Contexts**- There are many ways that students can use this material in the real-world, such as:- Purchasing a personal vehicle
- Making real estate investment decisions

**Model of Knowledge**

**Concept Map**- Engineering Design Optimization
- Objective function
- Factors directly related to cost
- Non-monetary factors

- Economic decision making
- Life-cycle savings
- Annual cost
- Interest rate, inflation
- Depreciation, Tax

- Engineering Design Optimization

**Content Priorities****Enduring Understanding**- Money now is worth more than money later.
- When and why Life-cycle Saving (LCS) is useful for financial decision
- When and why equivalent annual cost is useful for financial decision

**Important to Do and Know**- Use various interest factors
- Incorporate inflation and calculate real interest rate
- Calculate effective interest rate to merge regular financial events at different intervals.
- Calculate payback time and rate of return on investment

**Worth Being Familiar with**- Implications of financial risk
- Value of option (financial instrument)
- Financial value of insurance

**Assessment of Learning**

**Formative Assessment**- In Class (groups)
- Calculate monthly payment amount for a car loan of known initial amount and fixed interest rate and duration.
- Calculate maximum value of a house you can afford with given monthly income, loan interest rate, property tax rate, and maintenance cost.

- Homework (individual)
- Calculate the remaining principle of a 15-year fixed-rate mortgage loan after 5 years of monthly payments (60 payments).
- Refinance the above loan to a new 20 year mortgage at a different interest rate. How much reduction of monthly payment is achieved?

- In Class (groups)
**Summative Assessment**- Compare two equipment purchase options with different amount of initial cost, maintenance cost, tax credit, refurbishing schedule, and salvage value.
- Decide a better option from two methods: (1) Life Cycle Saving, (2) Equivalent Annual Cost.
- If an option with low initial cost and high operating cost is chosen, determine after how long time, it is better to replace the equipment.
- If an option with high initial cost and low operating cost is chosen, determine the payback time, i.e. how long it takes to recover the additional initial cost.

## Legacy Cycle[edit]

**OBJECTIVE**

By the next class period, students will be able to:

- Compare financial merits of equipment purchase options with a trade off in the initial and the operating costs.
- Compare financial merits of buying vs. leasing of a car or a house.
- Compare financing options for automobile or real estate purchase.
- Calculate monthly saving requirement for financial goals (e.g. retirement, college tuition).

The objectives will require that students be able to:

- Cast value of assets to a common reference point in time.
- Formulate an objective function (total value of assets) as a function of various parameters (costs, credits, interest rates, inflation, etc.).

**THE CHALLENGE**

Students will be told this story: How many of you drive every day? Do you know the official gas mileage of your vehicle and the actual gas mileage you get? A number of factors affect the gas mileage--these are related to the traffic/road condition, car maintenance, and driving style. [present chart or table] Here are some typical data on the energy consumption for a conventional passenger vehicle on a city area and a highway. Now the numbers look different for a gas-electric hybrid vehicle. A gas-electric hybrid vehicle recaptures some of the kinetic energy through a regenerative braking and generates electricity which can be stored and later used during acceleration. Now imagine that you are going to buy a car. After a long research, you came down to a popular passenger vehicle, which comes in two models: one equipped with a conventional gasoline engine, the other with a gas-electric hybrid engine. Both have comparable functionality and appearance. You have to decide which one is a more desirable choice.

**GENERATE IDEAS**

- Students should discuss what criteria should be used to compare different options: How much do you pay initially? What about gas mileage? Are there federal/local tax credits, or did they expire/phase out? Is there any difference in maintenance cost? How long does the battery pack last before it becomes necessary to replace it? How much does a battery pack cost? What if gas price become really high or low in the near future?
- What are some non-monetary values these options have? You can feel good about driving a car with less environmental impact from pollution, global warming, etc. Besides, there is the "Hey, look what I've got!" factor. Is a hybrid car really friendly to the environment because much of the body is built with aluminum which takes a lot of energy to produce? What about the batteries made of rare substances (Nickel, Lithium, etc.)?
- In general, these discussions can be summarized into a conclusion that there are some factors that can be translated to monetary values but not all merits can be readily converted to money. Students can discuss what factors they want to choose for further investigation.

**MULTIPLE PERSPECTIVES**

- By this point, students should have generated a list of relevant merits of candidate choices grouped in monetary and non-monetary values.
- Students should discuss what kind of data are needed and what sources they need to refer to obtain these data.
- Some websites can be visited during the class (e.g. epa.gov, fueleconomy.gov, car review web portals, lender websites)
- After an initial discussion led by the students, instructor can provide some printed materials regarding relevant issues with gas-electric hybrid cars and their merits. Students should have further discussions with these additional materials.
- The discussions should identify most key financial data such as: MSRP, tax incentive (if any), gas mileage (regional information adjusted: traffic, climate), average mileage per year, gas price, prevailing interest rate for auto loans, maintenance cost (routine), major maintenance cost (e.g. battery pack), insurance premium (any difference), and so on.

**RESEARCH & REVISE**

- By this point, students should have collected all relevant financial data that will be used for further comparison.
- Students will be provided a document summarizing all interest factors that are used to cast value of money at different points in time.
- Students will work in groups to calculate the lifecycle cost of the two options at the current point in time. Each group will present their results showing how they came up with the answers.
- After all groups have presented, students will go back to individual groups to revise their calculations. This process can be repeated until a dominant majority of groups have reached similar conclusions.

**TEST YOUR METTLE**

Students will take quizzes. Students in the same group will grade each other's quiz and teach each other until everyone understands the problems. A similar set of quizzes can be taken again afterwards, with possible repetition on individual basis.

**GO PUBLIC**

Student groups will use a computer software (e.g. Excel, Matlab, Javascript, etc.) to generate financial tools to assist car purchase. The model should account for multiple input factors used in comparing the car purchase options in this CBI module and produce a comparison in terms of Lifecycle Saving (LCS) and Equivalent Annual Cost. This tool can be showcased in the course website.

## Pre-Lesson Quiz[edit]

- You want to purchase a new 55" LED TV at a local store and they offer a 12-month no interest payment option. However, you have enough cash to pay in full up front. Will you have a compelling case to negotiate with the store manager to get a discount instead of the 12-month payment option? (a) Yes (b) No
- What is the reason for your answer in the previous question?

## Test Your Mettle Quiz[edit]

- You deposited $1,000 in a saving account at your bank with an interest rate of 3%. How much interest will be accrued in a month?
- In the previous question, if the interest is paid and compounded monthly, what will be the balance of the account after 12 months?
- In the previous question, if the inflation rate during the 12 month period is 2%, what is the real interest rate?
- Calculate the monthly payment of a 30-year mortgage loan of $250,000 with fixed interest rate of 5%.
- In the previous question, after 15 years, the loan is refinanced to a new 30-year loan at 4% interest rate. What is the new monthly payment?