Engineering Economics

All engineering programs in Canada are required to include content on “Engineering Economics”.  At Waterloo, students in most programs take MSCI 261 Engineering Economics:  Financial Management for Engineers.  I also include some capital and operating cost estimation in the CHE 480 course I teach (Process Analysis and Design).

These are not your typical economics courses, like ECON 101, looking at consumers, outputs, markets, money supply and all that stuff.  Engineering economics is much more project-oriented, so it teaches techniques for comparing different options.  For example, given certain capital and operating costs and lifespans, is it better to purchase Machine A or Machine B?  To illustrate, let’s compare the costs of 4 university engineering programs, namely:  Waterloo stream 8, Waterloo stream 4, Toronto-PEY, and Toronto-regular.

(Just to clarify:  Waterloo stream 8 is a co-op program with 2 terms (8 months) initially then a co-op term, Waterloo stream 4 has 1 term (4 months) initially followed by a co-op term, Toronto-PEY has a 16 month internship between 3rd and 4th year, and Toronto-regular is the traditional 4 year program with summer jobs.)

Each of our 4 alternatives will have expenses (I will mainly focus on tuition and fees), and income (summer jobs, co-op jobs, or a PEY job).  First let’s compile the expenses.  I looked up the tuition and incidental fees for both universities (links to the data are given at the end of the post).  For Toronto, we will have to include the PEY fees when appropriate in 3rd year.  Also, Waterloo’s tuition includes an unlimited bus pass, so we must include the cost of one in Toronto’s expenses too, to keep things on an equal basis.  I also include the cheapest residence and meal plan package for first year university.  After that, I assume the rental of a bachelor or studio apartment, using average rental cost data from the government (Toronto rent is more expensive).

Waterloo Toronto PEY Toronto
Tuition per term 6082 6182 6182
Incidental fees per term 1196 737 737
First Year Residence per term (w meals) 4548 5044 5044
PEY Fees 1025
Transit pass per term (4 months) 0 424 424
Apartment Rent per month (upper years) 640 834 834

Next we compile the income data.  For Waterloo, I use the average weekly income for each work term, assuming 16 weeks of work.  For Toronto-PEY their data is a bit unclear, but I use their reported figure of $45,264 and assume that that is an equivalent annual income rate, not the total for a 16 month internship (seems low for 16 months).  For summer jobs, I assume $14/hour for 35 hours per week and 15 weeks per summer, and it increases by 10% per year (I think this is a relatively generous assumption).  For a salary after graduation, I assume $60,000 per year, with a 10% bonus for the co-op and PEY experience.  Summarizing:

Waterloo Toronto-PEY Toronto
Average Income
Work term 1 (16 weeks) $9,472
Work term 2 $10,512
Work term 3 $11,392
Work term 4 $12,576
Work term 5 $13,744
Work term 6 $14,752
Internship salary (p.a.) $45,264
Summer job $7,350 $7,350
After graduation salary $66,000 $66,000 $60,000

Now for the analysis!  The problem here is that the expenses and income are spread out over 4 or 5 years in different ways, depending on the program.  Also, there is this concept called “the time value of money”, meaning that earning $100 today is not the same as earning $100 five years in the future.  If you can make 5% on investments, then a promise of $100 in five years is worth about $78 today, because I could take that $78 and invest it at 5% and make it grow to $100 five years later.  A proper economic analysis requires that we take all the income and expenses over time, and bring them all to a common point in time.  To do this, we will use a Net Present Value calculation (the NPV function in Excel).  For this we require that all the cash flows (incomes – expenses) be worked out for each regular time period, which will be a 4 month term.  So here are all the cash flows (black is positive, red is negative):

Year Term Waterloo-8 Waterloo-4 Toronto PEY Toronto
2014 Fall -$11,826 -$11,826 -$12,387 -$12,387
2015 Winter -$11,826 $9,472 -$12,387 -$12,387
2015 Spring $9,472 -$11,826 $7,350 $7,350
2015 Fall -$9,838 $10,512 -$10,679 -$10,679
2016 Winter $10,512 -$9,838 -$10,679 -$10,679
2016 Spring -$9,838 $11,392 $8,085 $8,085
2016 Fall $11,392 -$9,838 -$10,679 -$10,679
2017 Winter -$9,838 $12,576 -$11,704 -$10,679
2017 Spring $12,576 -$9,838 $15,088 $8,894
2017 Fall -$9,838 $13,744 $15,088 -$11,951
2018 Winter $13,744 -$9,838 $15,088 -$11,951
2018 Spring -$9,838 $14,752 $15,088 $9,783
2018 Fall $14,752 -$9,838 -$10,679 $20,000
2019 Winter -$9,838 -$9,838 -$10,679 $20,000
2019 Spring $22,000 $22,000 $22,000 $20,000
2019 Fall $22,000 $22,000 $22,000 $21,000
Net present value $23,068 $25,014 $18,272 $10,777

So we see at the bottom that Waterloo’s stream 4 program has the best Net Present Value, generally because income starts sooner, and some expenses are delayed.  It’s also interesting that a regular engineering program (i.e. with no co-op or internship) has the poorest NPV, even though you graduate a year earlier.  There seems to be a significant benefit to spreading the tuition costs over 5 years.

There is one other aspect that should be analyzed, and that is the tax implications.  Waterloo’s co-op income is spread out, but the Toronto-PEY income is concentrated into a 16 month period and this may push a student into a higher tax bracket for that year.  (Also, being out of school for more than 6 months will trigger student loan, OSAP, repayments, but I haven’t included that here.)  Let’s work out a very rough estimate for income taxes each year, based on a simple estimate of taxable income (income minus tuition) and an online calculator for income taxes in Ontario.

Tax Payable (Ontario)
Water-8 Water-4 Tor PEY Toronto
2015 Tax income -$2,692 $13,902 -$5,013 -$5,013
Tax payable 0 648 0 0
2016 Tax income $15,822 -$772 -$4,278 -$4,278
Tax payable 1033 0 0 0
2017 Tax income $412 $20,238 $23,995 -$3,470
Tax payable $0 $1,919 $2,672 $0
2018 Tax income $22,414 $2,588 $23,995 $23,601
Tax payable $2,355 $0 $2,672 $2,593
2019 Tax income $37,918 $37,918 $37,819 $61,000
Tax payable $5,463 $5,463 $5,444 $12,184

At Waterloo, some tax years have higher income than others because they include 2 workterms.  You can see that the Toronto-PEY students get a bigger tax hit because the income is concentrated in a couple of years.  Graduating a year earlier in a regular program pushes you into a higher tax bracket, so the benefit of early graduation diminishes somewhat.  If we include the tax effects in our cash flow and net present value calculation, we get these results:

Yearly  cash flow including taxes
Year Water-8 Water-4 Toronto PEY Toronto
2015 -$12,192 $7,510 -$15,715 -$15,715
2016 $11,033 -$8,284 -$13,272 -$13,272
2017 -$7,100 $14,563 $15,801 -$13,736
2018 $16,303 -$4,924 $16,826 $15,239
2019 $28,699 $28,699 $27,878 $48,816
Net present value
$28,162 $30,654 $22,329 $11,916

So we see that Waterloo’s stream 4 is the best choice, followed by stream 8, then Toronto’s PEY. It seems that a program without co-op or internship is not as economically favourable, under my assumptions.

There are many costs I haven’t included, like books, food (except for the initial meal plan), accommodations during work terms or internships, etc.  Many of these will be highly variable and dependent on the individual situation, so an estimate really isn’t possible.  So my analysis is on the basis of everything else being equal, simply for the purpose of comparing alternatives on that equal basis.

So that’s my example of engineering economic analysis.  Another interesting observation is that Waterloo’s tuition + fees appear to be a bit higher than Toronto’s, but one shouldn’t ignore all the other factors.  It’s much more complicated than just looking at listed tuition prices.

Here are my data sources:

Click to access 13+14+APSC+dom+fee+sch.pdf

Click to access PEY-Student-Guide-2014-2015.pdf

4 thoughts on “Engineering Economics

  1. Pingback: Comparing Software Engineering to Computer Science | A Professor in Waterloo Engineering

  2. This post is awesome! Understanding topics like economics and forecasting is so important and empowering, not just for engineering students but for anyone.

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