Engineering Economics

Engineering Economic Decisions

by L Thanh Tng

Road Map
The Rational-Decision-Making Process How Do We Make Typical Personal Decisions? How Do We Approach an Engineering Design Problem? What Makes Economic Decisions Different from Other Design Decisions? The Engineers Role in Business Making Capital-Expenditure Decisions Large-Scale Engineering Economic Decisions Impact of Engineering Projects on Financial Statements Types of Strategic Engineering Economic Decisions Fundamental Principles in Engineering Economics Summary
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How Do We Make Typical Personal Decisions?

You need to buy a new car for your family. What are the steps you will do? Each group has 120 seconds to formulate your steps.

How Do We Make Typical Personal Decisions?

1. 2. 3. 4. 5. 6. 7. Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative Monitor and evaluate the decision

Logical steps to follow in making a decision

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How Do We Approach an Engineering Design Problem?

What most distinguishes engineering from science? Engineering: design and development Science: understanding the world as it is Decisions made during the engineering design phase of a product's development determine the majority of the costs of manufacturing that product

What Makes Economic Decisions Different from Other Design Decisions?

Difference: types of decisions typically encountered in engineering design The design is time invariant Economic evaluation are not necessarily time invariant. Economic decisions based on:
the best information available thorough understanding of the uncertainties in the forecasted data

Road Map
The Rational-Decision-Making Process How Do We Make Typical Personal Decisions? How Do We Approach an Engineering Design Problem? What Makes Economic Decisions Different from Other Design Decisions? The Engineers Role in Business Making Capital-Expenditure Decisions Large-Scale Engineering Economic Decisions Impact of Engineering Projects on Financial Statements Types of Strategic Engineering Economic Decisions Fundamental Principles in Engineering Economics Summary
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Engineers Role in Business

Engineers participate in a variety of decision-making processes, ranging from manufacturing and marketing to financing decisions. Our focus: to various economic decisions related to engineering projects engineering economic decisions

Making Capital-Expenditure Decisions

Acquisition of equipment: capital expenditure Need to estimate the profits (cash flows) Inaccurate estimate of asset needs: serious consequences invest too much: incur unnecessarily heavy expenses too little: also harmful
Loose market share Cost to regain customers
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Large-Scale Engineering Economic Decisions

More complex More significant to the company Erroneous forecast of product demand can have serious consequences

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Impact of Engineering Projects on Financial Statements

Engineers must also understand the business environment generate profits strengthen the firm's overall financial position Market value of a company: not profits per se, but rather cash flows Available cash that determines the future investments and growth of the firm

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Road Map
The Rational-Decision-Making Process How Do We Make Typical Personal Decisions? How Do We Approach an Engineering Design Problem? What Makes Economic Decisions Different from Other Design Decisions? The Engineers Role in Business Making Capital-Expenditure Decisions Large-Scale Engineering Economic Decisions Impact of Engineering Projects on Financial Statements Types of Strategic Engineering Economic Decisions Fundamental Principles in Engineering Economics Summary
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Types of Strategic Engineering Economic Decisions

service or quality improvement, new products or product expansion equipment and process selection cost reduction equipment replacement

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Road Map
The Rational-Decision-Making Process How Do We Make Typical Personal Decisions? How Do We Approach an Engineering Design Problem? What Makes Economic Decisions Different from Other Design Decisions? The Engineers Role in Business Making Capital-Expenditure Decisions Large-Scale Engineering Economic Decisions Impact of Engineering Projects on Financial Statements Types of Strategic Engineering Economic Decisions Fundamental Principles in Engineering Economics Summary
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Fundamental Principles in Engineering Economics

Four principles of engineering economics: 1. A nearby dollar is worth more than a distant dollar 2. All that counts is the differences among alternatives 3. Marginal revenue must exceed marginal cost 4. Additional risk is not taken without the expected additional return
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Example of Engineering Economic Problem

You wrecked your car! You ruled out any other forms of transportation. A wholesaler offers $2,000 for the wrecked car and $4,500 if it is repaired. The car has a mileage standing of 58,000 miles. Your insurance company offers you $1,000 to cover the cost of the accident. To repair the car costs $2,000. A newer second-hand car costs $10,000 with a mileage standing 28,000 miles. A part-time technician offers to repair the car for $1,100, but it takes one month. In the meanwhile you will need to rent a car for $400 per month. What should you do?

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Engineering Economic Analysis Procedure

1. Problem recognition, formulation, and evaluation. 2. Development of the feasible alternatives. 3. Development of the cash flows for each alternative. 4. Selection of a criterion ( or criteria). 5. Analysis and comparison of the alternatives. 6. Selection of the preferred alternative. 7. Performance monitoring and post-evaluation results.
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Example of Engineering Economic Problem

No panic! Follow the engineering economic principles. Step 1. Define the problem.
the problem: you need a car.

Step 2. Develop alternatives.

A1: sell wrecked car then buy the newer car. A2: repair the car. A3: repair the car, then sell it, and then buy the newer one.

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Example of Engineering Economic Problem

A4: Let the part-time technician repair it and then keep the car. A5: Let the part-time technician repair the car, and then sell it to buy the newer one.

Step 3. Estimate the cash flows.

A1: -7,000 (Get the newer car)
2,000: for the wrecked car 1,000: from insurance company -10,000: buy new car

A2: -$1,000. (Keep the old car).

1,000: from insurance company -2,000: to repair
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Example of Engineering Economic Problem

A3: -$6,500. (Get the newer car).
1,000: from insurance company -2,000: to repair 4,500 sell repaired car -10,000: buy new car

A4: -$500. (Keep the old car).

1,000: from insurance company -1,100: to repair buy part-time mechanic -400: to rent a car in one month

A5: -$6,000. (Get the newer car).

-500: Option A4 4,500 sell repaired car -10,000: buy new car
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Example of Engineering Economic Problem

Step 4. Use a consistent criterium. Dollar value in your perspective. Step 5. Compare the alternatives.
A1: $10,000-$7,000=$3,000. A2: $4,500-$1,000=$3,500. A3: $10,000-$6,500=$3,500. A4: $4,500-$500=$4,000. A5: $10,000-$6,000=$4,000.

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Example of Engineering Economic Problem

Step 6. Consider uncertainties and decide.
Choose A5!

Step 7. Monitor and evaluate the decision.

Road test the newer car, and confirm your decision.

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Engineering Economic Analysis Procedure

1. Problem recognition, formulation, and evaluation. 2. Development of the feasible alternatives. 3. Development of the cash flows for each alternative. 4. Selection of a criterion ( or criteria). 5. Analysis and comparison of the alternatives. 6. Selection of the preferred alternative. 7. Performance monitoring and post-evaluation results.
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Summary
Place of engineers in a firm "engineering economic decision
all investment decisions evaluation of costs and benefits making a capital investment

The five main types of engineering economic decisions

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Any Question?

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