Data Transfer & Decisions I (1) Fall 2005 Lecture 3: MIPS Assembly language Decisions I.
Lecture No1 Engineering Economic Decisions
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Transcript of Lecture No1 Engineering Economic Decisions
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8/12/2019 Lecture No1 Engineering Economic Decisions
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Contemporary Engineering Economics, 4th
edition, 2007 1
Engineering Economic
Decisions
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Copyright 2006
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Contemporary Engineering Economics, 4thedition, 2007 2
Chapter 1
Engineering Economic Decisions Rational Decision- making Process
Role of Engineers in Business
What Makes the Engineering Economic
Decision Difficult? Types of Strategic Engineering
Economic Decisions
Fundamental Principles in Engineering
Economics
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Contemporary Engineering Economics, 4thedition, 2007 3
Rational Decision-Making Process
1. Recognize a decision problem
2. Define the goals or objectives
3. Collect all the relevant
information4. Identify a set of feasible
decision alternatives
5. Select the decision criterion touse
6. Select the best alternative
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Contemporary Engineering Economics, 4thedition, 2007 4
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
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Contemporary Engineering Economics, 4thedition, 2007 5
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
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Contemporary Engineering Economics, 4thedition, 2007 6
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
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Contemporary Engineering Economics, 4thedition, 2007 7
Present
FuturePast
Engineer ing EconomyAccount ing
Evaluat ing past
performance
Evaluat ing and
predict ing fu ture events
Accounting Vs. Economic
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Contemporary Engineering Economics, 4thedition, 2007 8
Two Factors in Engineering
Economic Decisions
The factors of time and uncertaintyare the defining aspects of anyengineering economic decisions
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Contemporary Engineering Economics, 4thedition, 2007 9
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
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Contemporary Engineering Economics, 4thedition, 2007 10
Types of Strategic Engineering
Economic Decisions in Manufacturing
Sector
Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
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Contemporary Engineering Economics, 4thedition, 2007 11
1. 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
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Contemporary Engineering Economics, 4thedition, 2007 12
2. 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.
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Contemporary Engineering Economics, 4thedition, 2007 13
3. Equipment Replacement Problem
Now is the time toreplace the oldmachine?
If not, when is the righttime to replace the oldequipment?
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Contemporary Engineering Economics, 4thedition, 2007 14
4. New Product and Product Expansion
Shall we build oracquire a new facility tomeet the increaseddemand?
Is it worth spendingmoney to market a newproduct?
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Contemporary Engineering Economics, 4thedition, 2007 15
5. Cost Reduction
Should a company buyequipment to performan operation now donemanually?
Should spend moneynow in order to savemore money later?
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Contemporary Engineering Economics, 4thedition, 2007 16
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
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Principle 1: A nearby dollar is worth
more than a distant dollar
Today 6-month later
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Contemporary Engineering Economics, 4thedition, 2007 18
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
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Contemporary Engineering Economics, 4thedition, 2007 19
Principle 3: Marginal revenue must
exceed marginal cost
Manufacturing cost
Sales revenueMarginal
revenue
Marginal
cost
1 unit
1 unit
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Contemporary Engineering Economics, 4thedition, 2007 20
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%
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Contemporary Engineering Economics, 4thedition, 2007 21
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.