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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    Contemporary Engineering Economics, 4thedition, 2007 17

    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.