CEE 202

CEE PLANNING &

ENGINEERING ECONOMICS
Lecture 1. Engineering
Economics & Decision Making
Prof. Pervizpour
x8-2137
mepa@lehigh.edu
January 14, 2015

Outline

Introduction
Class

Objectives
Course Information
Lecture Outlines
Learning Objectives

Making Economic Decisions

Why

Engineering Economics and Analysis

Engineering Economics Investment Decisions
Decision Making Process (Nine steps)

Ethics of Decision Making

Current Costs

Contact Information
Prof. Pervizpour
Office Location: Fritz Lab. Room 401A
Office Hours (Tentative):
Monday 1:00 2:00 PM
Tuesday/Thursday 8:10 9:00 AM
Email: mepa@lehigh.edu
Office Phone: x8-2137
Cell Phone: 484-431-0815

Course Grader
Jade Van Streepen
TBA: jbv215@lehigh.edu
Office: TBA
Office Hours:
By Appointment
Office Phone:

Textbook

Engineering Economic Analysis, 11th Ed.

Newnan,

Eschenbach, and Lavelle (2012)

ISBN 978-0-19-977804-1.

Errata

and Resources:

http://www.oup.com/us/companion.websites/978019977812

6/student/?view=usa

Assignment # 0
http://parameterid.com/

Disclaimer: Students are expected to keep their own notes. The handouts highlight the
lecture content and are by NO MEANS a complete set. The instructor reserves the right to
make changes that may not be reflected in the handouts below, it is the students'
responsibility to keep a complete and current set of notes for each lecture.

CEE 202 Course Topics

Economic decisions
Cost estimating
Time value of money
Alternative comparisons
Uncertainty and risk
Depreciation, replacement and rate of return
Non-monetary benefits
Mathematical modeling and optimization
Decision making

Course Learning Objectives

Economic elements of a civil engineering project.

Present and future worth based on cash flow
scenarios and their use for comparison of
alternatives.
Non-monetary costs/benefits and utilizing them in
comparisons.
Basic accounting concepts as they relate to cash flow.
Cost concepts, estimating and life cycle cost
components.
Linear programming of constrained problems.
Techniques for scheduling projects.

Homework, Quizzes, and Project

Homework assignments due beginning of class

Work with classmates, but submit your own work
Homework, Quizzes, Project
30%
Mid-term Exams worth
35%
Final Exam worth
35%
Exams:
Material

covered up to exam date

Closed book, closed notes
If needed equation sheet will be provided
Comprehensive final

Policies

Homework can be discussed with classmates, but do

your own work, if not clear, ask
Class attendance MANDATORY and participation
important, Attendance WILL be taken.
Late homework is penalized 10% (One day!)
Late homework is not accepted once solution is posted
Reference any source you use
Group work:
Course

Project
Specific Assignments and Student Team presentations

Making Economic Decisions

Making Economic Decisions

What is Engineering?
Why decision making?
Should you Care!

Making Economic Decisions

Engineering is the application of science

to solution of problems that needs to meet
certain criteria:
Technical

feasibility/efficiency:

meet or exceed specifications.

Economic

feasibility/efficiency:

meet budgets and provide attractive return.

Tools for proper analysis and solution of

economic aspects of engineering problems.

Making Economic Decisions

Outline
Simple vs. Complex problems
Why engineering economic analysis?
Steps in problem solving and decision
making.
Ethical dimensions of decisions

Type of Problems

Simple:
Purchase in cash or credit?
Parking pass or meters?

Intermediate:
Buy or lease a car?
Concrete vs. asphalt resurfacing?
CFL, LED, Incandescent light bulbs?

Complex:
Planning for new highways
Feasibility of a new plant
Removal of a dam or a nuclear plant

Economic, political, and social elements

Example Engineering Problem

Water!

*http://www.bbc.co.uk/news/business-20931606

Global Risk Report 2014

http://www.weforum.org/reports/global-risks-2014-report

TOP FIVE GLOBAL RISKS

Likelihood

Impact

Engineering Economy

Every technical solution has financial consequences.

WHY?
Engineering economic analysis determines whether
a solution is financially viable:
Will

it pay off?
Is this minimum cost solution?
Will it generate acceptable return?

Example applications:
Product/process

design
Purchase of capital equipment
Project selection

Engineering Economic Decisions

Reasons for Investing:
Profit Enhancement:
Projects designed to
generate revenues.
Cost Control: Projects
designed to generate
savings.
Public improvement:
Capital expenditure by
government entities.

Profit Enhancing Examples

Posco (Korea) said it would invest $12 billion to build an

integrated steel plant in India -- capacity of 12 million tons/yr.
Cha, S.-J., Posco to Invest $3.7B in First Phase of India Steel Plant, Dow Jones Newswires, December 18, 2005.

Matsushita and Toray (Japan) will invest 180 billion yen to

build a plasma display panel (PDP) plant, increasing
production by 6 million panels/yr.
Nakamoto, M., Plans revealed for biggest PDP plant - NEWS DIGEST, Financial Times, p. 29, January 11, 2006.

Cargill (USA) announced a $20 million investment to increase

capacity of liquid chocolate and a production line for
chocolate flakes, drops and chunks in Mouscron, Belgium.
Kallal, L., Cargill to Increase Capacity at Belgian Chocolate Plant, Dow Jones Newswires, December 1, 2005.

Cost Control Examples

Union Pacific, North Americas largest railroad,

purchased 98 RailPower hybrid road switcher
locomotives (Green Goats). The base price is $750K,
but a 20-40% reduction in diesel fuel use and
greenhouse gas emissions are expected
Union Pacific announces plan to reduce pollution, Associated Press Newswires, October 16, 2005.
Vaccaro, A., RailPower Corners Locomotive-Switcher Market, Dow Jones Newswires, June 9, 2005.

Air Canada announced a fleet modernization plan with

the purchase of 14 Boeing 787 and 18 777s, list priced
at $6 billion. The planes will replace Airbus A330s and
A340s.

Air Canada opts for Boeing fleet replacement: Two-engined jets cheaper to operate than Airbus, Edmonton Journal, p. F3, April 26, 2005.

Public Improvement Examples

Amtrak is spending $76 million to replace a 100year old bridge span over the Thames River
connecting New London and Groton, Connecticut.
Amtrak and Cianbro Corp. Announce $76 Million Bridge Span Replacement at New London, Conn., State News Service, January 11, 2006.

The Czech Airport Authority constructed a new

terminal at the Prague airport for 8.2 billion koruna
to increase capacity from 6.8 million to 10 million
passengers/year.
Rousek, L., Czech Airport Authority Expands Busy Prague Airport, Dow Jones Newswires, January 13, 2006.

Investment
Investment Categories
Expansion
Products, services, capacity
can expand
Often requires choice of
technology

Investment Decisions
Invest

Releases

project

Replacement
Technology selection
Outsourcing vs. in-house

Do Not Invest
Eliminates

the project from

further consideration

Abandonment

funds to start a

Eliminate products, services,

or capacity

Wait (Delay)
Time

to gather information
about future can aid in
decision-making

Decision-Making Process
1. Recognize Problem / Opportunity
2. Define Goals/Objectives
3. Assemble Relevant Data
4. Identify Feasible Alts

Overall Mission /
Objectives

5. Select the Criterion

6. Construct a Model

7. Predict Alts Outcomes

9. Audit the Results

8. Choose the Best Alt.

Design decisions (developing alternatives) are discipline specific, but economics

surrounding design decisions are for all engineers!

Decision-Making Process
1.

Recognize problem/opportunity

2.

Product or process need

Define goals/objectives
General/specific,

System,
Limitations/Conflicts

3.

Assemble Relevant Data

Collection, relevance, $/time,

sources of information
Depends on viewpoint (Ex 1-1
page 8)

Decision-Making Process
4.

Identify feasible alternatives

5.

Do nothing, simple solutions ..

Select the criterion

Multiple/conflicting/integrating
Most

common criterion: Max(profit)

Category

Economic Criterion

Fixed input

Maximize the benefits or other outputs

Fixed output
Neither input nor
output fixed

Minimize the costs or other inputs

Maximize the profits (Value of outputs cost of
inputs)

Relative subjective judgment scale: Worst/Bad/Fair/Good/Better/Best

Decision-Making Process
6.

Construct models

7.

Real system vs model

Describe/capture
interrelationship among relevant
data to predict outcomes of
alternatives.

Predict alternatives outcomes

Comparable

outcomes (single

criterion)
Risk and uncertainty
Feedback for more info and
modification of alternatives

Decision-Making Process
7. predict alternatives outcomes
Market consequences (Prices available): Bananas, screws
Extra-Market consequences (No direct market, priced
indirectly): Congestion, smog
Intangible consequences (Judgment, not monetary):
Slavery

Example Value of natural Asset

29
http://www.wavespartnership.org/waves/sites/waves/files/images/Moving_Beyond_GDP.pdf

Wealth

How do we measure wealth?

What is considered as wealth?

http://www.wavespartnership.org/sites/waves/files/images/Moving_Beyond_GDP.pdf

Value of Natural Asset Natural Capital

Natural income is representation of natural resources and the services from the
natural capital. General services by natural capital can be grouped in to four
categories:
The UN Millennium Ecosystem Assessment has defined the main four groups of services, and studied the
linkage between these services & human well-being (2005).

Provisioning Services
(products obtained from
ecosystems)
Food
Fresh Water
Fuelwood
Fiber
Biochemicals
Genetic resources

Regulating Services
(Benefits obtained from
regulation of ecosystem
processes)
Climate regulation
Disease regulation
Water regulation
Water purification
Pollination

Cultural Services
(Nonmaterial benefits
obtained from
ecosystems)
Spiritual & religious
Recreation &
ecotourism
Aesthetic
Inspirational
Educational
Sense of place
Cultural heritage

Supporting Services
(Services necessary for the
production of all other
ecosystem services)
Soil formation
Nutrient cycling
Primary production

http://www.sustainablescale.org/ConceptualFramework/UnderstandingScale/BasicConcepts/NaturalCapitalandIncome.aspx

How to Factor Natural Capital into Economic Decision Making

System of National Accounts (SNA 2008): internationally agreed set of
accounting rules to measure economic activity. (http://unstats.un.org/unsd/nationalaccount/sna.asp)
System of Environmental and Economic Accounts (SEEA) is an
international statistical standard (similar SNA) that allows accounting for
natural resources, minerals, timber and environmental protection expenses,
taxes and subsidies (Approved on February 2012 by UN Statistical
Commission). This type of accounting is significantly important for
low-income countries where their natural capital is
a large portion of their total wealth. It allows
mainstreaming the natural capital into economic
accounts (ecosystem accounting) to allow
analysis and decision making.

http://www.wavespartnership.org/waves/sites/waves/files/images/Moving_Beyond_GDP.pdf

Decision-Making Process
8.

Choose Best Alternatives

Selection criterion
Intangible considerations

9.

Audit Results
Reality

vs. prediction
Learn from mistakes
Replacement analysis

Ethics

Concept of distinguishing between right and wrong

in decision making.
Ethics includes:
Establishing

systems of beliefs and moral obligations

Defining values and fairness
Determining duty and guidelines for conduct

Code of Ethics
National Soc. of Professional Eng.
Engineers, in the fulfillment of their professional
duties, shall:
1.
2.
3.

4.
5.
6.

Hold paramount the safety, health, and welfare of the public.

Perform services only in areas of their competence.
Issue public statements only in an objective and truthful
manner.
Act for each employer or client as faithful agents or trustees.
Avoid deceptive acts.
Conduct themselves honorably, responsibly, ethically, and
lawfully so as to enhance the honor, reputation, and
usefulness of the profession. (http://www.nspe.org/ethics/eh1-code.asp)

Ethical Dimensions in Engineering

Decision Making
Decision Process Step

Example Ethical Lapses

1. Recognize the
problem

Looking the other way, or not to

recognize the problem due to bribes or
fear of retribution

2. Define goals/objectives Favoring one group of stakeholders by

focusing on their objective
3. Assemble relevant data Using faulty or inaccurate data
4. Identify feasible alts.

Leaving legitimate alts out of

consideration

5. Select criterion to
determine best alt

Considering only monetary consequences

when other significant consequences exist

Ethical Dimensions in Engineering

Decision Making
Decision Process Step

Example Ethical Lapses

6. Construct a model

Using a short horizon that favors one alt

over another

7. Predict alts outcomes

Using optimistic estimates for one alt. and

pessimistic ones for the other alts

8. Choose the best alt

Choosing an inferior alt, one that is unsafe,

adds unnecessary cost for user, harms the
environment

9. Audit the result

Hiding past mistakes

How well and how honestly the decision-making process is conducted

the data, method of analysis, recommendations, and follow-up
Recognize ethical issues exist and make them an explicit part of
decision making process

Decision Making for Current Costs

If results of the decision occur in a very short period of

time, costs and benefits can be added up quickly.
Using suitable economic criterion, the best alternative
can be identified.

Example 1-2
Linear Programming Model
Maximize $3.00X + $4.40Y
Subject to: (0.25)X + (0.40)Y 0.31
X+Y1
X, Y 0
Where

X = portion from 1st source of material

Y = portion from 2nd source of material

Maximize $3.00X + $4.40Y

Subject to: (0.25)X + (0.40)Y 0.31
X+Y1
X, Y 0
1.2

0.8

0.6

0.25X+0.4Y=0.31
0.4

X+Y=1

X0
0.2

Y0

0
0

0.2

0.4

0.6

0.8

1.2

1.4

1.2

1.4

Maximize $3.00X + $4.40Y

Subject to: (0.25)X + (0.40)Y 0.31
X+Y1
X, Y 0
1.2

Z=$5
0.8

Z=$4
0.6

0.25X+0.4Y=0.31
X+Y=1

(0.6,0.4)
Z=$3.56

0.4

0.2

0
0

0.2

0.4

0.6

0.8

Excel LP Solution by Solver

Excel:
Set up the problem
Unknowns are quantities of: x & y
Profit per each X & Y are $3.0 and $4.40
Profit (Z) is calculated by:
Z = $3X + $4.4Y

Quantity
Profit

x
0.6
$3.0

y
0.4
$4.4

z
$3.56

Constrains Required Required Used

Available
Const.#1
0.25
0.4
0.31
0.31
Const.#2
1
1
1
1

Two constraints and Two non-negativity conditions:

Constraint 1: Coefficients for X & Y are:
0.25 and 0.4
The available limit of #1 is: 0.31
Constraint 2: Coeff.s for X & Y are:
1&1
The available limit of #2 is: 1

Select the cell with Z formula

Excel tabs Data / Solver

Setup the equation for amount of constraint used based

on quantity of x & y:
Const. #1used: 0.25*x + 0.4*y = used 1
Const. #2used: 1*x + 1*y = used 2

Decision Making for Current Costs

Example 1-3:
Concept of Sunk Cost
Only

Is the assumption of other costs as variable

reasonable?
Example 1-4:
Intangible constraint
The

the remaining production is considered

thickness of wall space

Further Study
Trade-off

between insulation and energy cost