Lecture Cp1 No1

download Lecture Cp1 No1

of 28

  • date post

    02-Jun-2018
  • Category

    Documents

  • view

    225
  • download

    0

Embed Size (px)

Transcript of Lecture Cp1 No1

  • 8/10/2019 Lecture Cp1 No1

    1/28

    Contemporary Engineering Economics, 4th

    edition, 2007 1

    Engineering Economic

    Decisions

    Lecture No.1

    Chapter 1

    Contemporary Engineering Economics

    Copyright 2006

  • 8/10/2019 Lecture Cp1 No1

    2/28

    Contemporary Engineering Economics, 4thedition, 2007 2

    Chapter 1

    Engineering Economic Decisions Rational Decision- making

    Process

    Role of Engineers in

    Business What Makes the

    Engineering EconomicDecision Difficult?

    Types of StrategicEngineering EconomicDecisions

    Fundamental Principles inEngineering Economics

  • 8/10/2019 Lecture Cp1 No1

    3/28

    Contemporary Engineering Economics, 4thedition, 2007 3

    Chapter Opening StoryGoogle Inc.

  • 8/10/2019 Lecture Cp1 No1

    4/28

    Contemporary Engineering Economics, 4thedition, 2007 4

    A Little Google History

    1995 Developed in dorm room of Larry Page and Sergey Brin,

    graduate students at Stanford University

    Nicknamed BackRub

    1998 Raised $25 million to set up Google, Inc.

    Ran 100,000 queries a day out of a garage in Menlo Park

    2005 Over 4,000 employees worldwide Over 8 billion pages indexed

    Market value of $110 billion

  • 8/10/2019 Lecture Cp1 No1

    5/28

    Contemporary Engineering Economics, 4thedition, 2007 5

    Rational Decision-Making Process

    1. Recognize a decisionproblem

    2. Define the goals orobjectives

    3. Collect all the relevantinformation

    4. Identify a set of feasibledecision alternatives

    5. Select the decision criterionto use

    6. Select the best alternative

  • 8/10/2019 Lecture Cp1 No1

    6/28

    Contemporary Engineering Economics, 4thedition, 2007 6

    Which Car to Lease?

    Saturn vs. Honda

    1. Recognize a decisionproblem

    2. Define the goals orobjectives

    3. Collect all the relevantinformation

    4. Identify a set of feasibledecision alternatives

    5. Select the decisioncriterion to use

    6. Select the best alternative

    Need a car

    Want mechanicalsecurity

    Gather technical as wellas financial data

    Choose betweenSaturn and Honda

    Want minimum totalcash outlay

    Select Honda

  • 8/10/2019 Lecture Cp1 No1

    7/28

    Contemporary Engineering Economics, 4thedition, 2007 7

    Engineering Economic Decisions

    Planning Investment

    Marketing

    ProfitManufacturing

  • 8/10/2019 Lecture Cp1 No1

    8/28

    Contemporary Engineering Economics, 4thedition, 2007 8

    What Makes the Engineering Economic

    Decision Difficult? - Predicting the Future

    Estimating a Requiredinvestment

    Forecasting a product

    demand Estimating a selling

    price

    Estimating a

    manufacturing cost Estimating a product

    life

  • 8/10/2019 Lecture Cp1 No1

    9/28

    Contemporary Engineering Economics, 4thedition, 2007 9

    Create & Design

    Engineering Projects

    Evaluate

    ExpectedProfitabilityTiming of

    Cash FlowsDegree ofFinancial Risk

    Analyze

    Production MethodsEngineering SafetyEnvironmental ImpactsMarket Assessment

    Evaluate

    Impact onFinancial StatementsFirms Market Value

    Stock Price

    Role of Engineers in Business

  • 8/10/2019 Lecture Cp1 No1

    10/28

    Contemporary Engineering Economics, 4thedition, 2007 10

    Present

    FuturePast

    Engineer ing EconomyAccount ing

    Evaluat ing past performance Evaluat ing and predict ing future events

    Accounting Vs. Accounting

  • 8/10/2019 Lecture Cp1 No1

    11/28

    Contemporary Engineering Economics, 4thedition, 2007 11

    Two Factors in Engineering

    Economic Decisions

    The factors of time and uncertaintyare the defining aspects of anyengineering economic decisions

  • 8/10/2019 Lecture Cp1 No1

    12/28

    Contemporary Engineering Economics, 4thedition, 2007 12

    A Large-Scale Engineering Project

    Requires a large sumof investment

    Takes a long time to

    see the financialoutcomes

    Difficult to predict therevenue and cost

    streams

  • 8/10/2019 Lecture Cp1 No1

    13/28

    Contemporary Engineering Economics, 4thedition, 2007 13

    Types of Strategic Engineering

    Economic Decisions in Manufacturing

    Sector Service Improvement

    Equipment and Process Selection

    Equipment Replacement

    New Product and Product Expansion

    Cost Reduction

  • 8/10/2019 Lecture Cp1 No1

    14/28

    Contemporary Engineering Economics, 4thedition, 2007 14

    Service Improvement - Healthcare

    Delivery

    Which plan is moreeconomically viable?

    Traditional Plan: Patients

    visit each service provider.

    New Plan: Each serviceprovider visits patients

    : patient

    : serv ice provider

  • 8/10/2019 Lecture Cp1 No1

    15/28

    Contemporary Engineering Economics, 4thedition, 2007 15

    Equipment & Process Selection

    How do you choose between the Plastic SMCand the Steel sheet stock for an auto bodypanel?

    The choice of material will dictate themanufacturing process for an automotivebody panel as well as manufacturing costs.

  • 8/10/2019 Lecture Cp1 No1

    16/28

    Contemporary Engineering Economics, 4thedition, 2007 16

    Equipment Replacement Problem

    Now is the time toreplace the oldmachine?

    If not, when is the righttime to replace the oldequipment?

  • 8/10/2019 Lecture Cp1 No1

    17/28

    Contemporary Engineering Economics, 4thedition, 2007 17

    New Product and Product Expansion

    Shall we build oracquire a new facility tomeet the increaseddemand?

    Is it worth spendingmoney to market a newproduct?

  • 8/10/2019 Lecture Cp1 No1

    18/28

    Contemporary Engineering Economics, 4thedition, 2007 18

    Example - MACH 3 Project

    R&D investment: $750

    million Product promotion through

    advertising: $300 million

    Priced to sell at 35% higherthan Sensor Excel (about

    $1.50 extra per shave). Question 1: Would

    consumers pay $1.50 extrafor a shave with greatersmoothness and lessirritation?

    Question 2: What wouldhappen if the bladeconsumption dropped morethan 10% due to the longerblade life of the new razor?

    Gillettes MACH3

    Project

  • 8/10/2019 Lecture Cp1 No1

    19/28

    Contemporary Engineering Economics, 4thedition, 2007 19

    Cost Reduction

    Should a company buyequipment to performan operation now donemanually?

    Should spend moneynow in order to savemore money later?

  • 8/10/2019 Lecture Cp1 No1

    20/28

    Contemporary Engineering Economics, 4thedition, 2007 20

    Types of Strategic Engineering Economic

    Decisions in Service Sector

    Commercial Transportation

    Logistics and Distribution

    Healthcare Industry

    Electronic Markets and Auctions

    Financial Engineering

    Retails

    Hospitality and Entertainment

    Customer Service and Maintenance

  • 8/10/2019 Lecture Cp1 No1

    21/28

    Contemporary Engineering Economics, 4thedition, 2007 21

    U.S. Gross Domestic Products (GDP)

    Manufactur ing

    (14%)

    Service secto r(80%)

    Healthc are (14%)

    Ag ricu lture (2%)

  • 8/10/2019 Lecture Cp1 No1

    22/28

    Contemporary Engineering Economics, 4thedition, 2007 22

    Industrial Employment

    Industry 1993Employmentdistribution

    1983-94National

    Average

    1994-2005ProjectedChange

    Manufacturing 12.6% -0.70% -7.2%

    Services 30.5% 60.0% 39.0%

    Retail trade 16.7% 31.1% 13.0%

    Financial 8.0% 26.8% 6.3%

    Source: Bureau of Econom ic Analysis/Bureau of Labo r Stat is t ics

  • 8/10/2019 Lecture Cp1 No1

    23/28

    Contemporary Engineering Economics, 4thedition, 2007 23

    Fundamental Principles of Engineering

    Economics

    Principle 1: A nearby dollar is worth more

    than a distant dollar

    Principle 2: All it counts is the differences

    among alternatives

    Principle 3: Marginal revenue must

    exceed marginal cost

    Principle 4: Additional risk is not takenwithout the expected additional return

  • 8/10/2019 Lecture Cp1 No1

    24/28

    Contemporary Engineering Economics, 4thedition, 2007 24

    Principle 1: A nearby dollar is worth

    more than a distant dollar

    Today 6-month later

  • 8/10/2019 Lecture Cp1 No1

    25/28

    Contemporary Engineering Economics, 4thedition, 2007 25

    Principle 2: All it counts is the

    differences among alternatives

    Option MonthlyFuelCost

    MonthlyMaintenance

    Cashoutlay atsigning

    Monthlypayment

    SalvageValue atend ofyear 3

    Buy $960 $550 $6,500 $350 $9,000

    Lease $960 $550 $2,400 $550 0

    Irrelevant items in decision making

  • 8/10/2019 Lecture Cp1 No1

    26/28

    Contemporary Engineering Economics, 4thedition, 2007 26

    Principle 3: Marginal revenue must

    exceed marginal cost

    Manufacturing cost

    Sales revenueMarginal

    revenue

    Marginal

    cost

    1 unit

    1 unit

  • 8/10/2019 Lecture Cp1 No1

    27/28

    Contemporary Engineering Economics, 4thedition, 2007 27

    Principle 4:Additional risk is not

    taken without the expected additional

    returnInvestment Class Potential

    Risk

    Expected

    Return

    Savings account(cash)

    Low/None 1.5%

    Bond (debt) Moderate 4.8%Stock (equity) High 11.5%

  • 8/10/2019 Lecture Cp1 No1

    28/28

    Contemporary Engineering Economics, 4thedition, 2007 28

    Summary

    The term engineering economic decisionrefers to any investment decision related toan engineering project.

    The five main types of engineering economicdecisions are (1) service improvement, (2)equipment and process selection, (3)equipment replacement, (4) new product and

    product expansion, and (5) cost reduction. The factors of timeand uncertaintyare the

    defining aspects of any investment project.