Lecture No1

Contemporary Engineering Economics, 4th edition, 2007*Engineering Economic DecisionsLecture No.1Chapter 1Contemporary Engineering EconomicsCopyright 2006

Contemporary Engineering Economics, 4th edition, 2007

Contemporary Engineering Economics, 4th edition, 2007*Chapter 1 Engineering Economic DecisionsRational Decision- making ProcessRole of Engineers in BusinessWhat Makes the Engineering Economic Decision Difficult?Types of Strategic Engineering Economic DecisionsFundamental Principles in Engineering Economics


Contemporary Engineering Economics, 4th edition, 2007*Rational Decision-Making ProcessRecognize a decision problemDefine the goals or objectivesCollect all the relevant informationIdentify a set of feasible decision alternativesSelect the decision criterion to useSelect the best alternative


Contemporary Engineering Economics, 4th edition, 2007*Which Car to Lease?Saturn vs. HondaRecognize a decision problemDefine the goals or objectivesCollect all the relevant informationIdentify a set of feasible decision alternativesSelect the decision criterion to useSelect the best alternative

Need a car

Want mechanical security Gather technical as well as financial dataChoose between Saturn and HondaWant minimum total cash outlaySelect Honda


Contemporary Engineering Economics, 4th edition, 2007*What Makes the Engineering Economic Decision Difficult? - Predicting the FutureEstimating a Required investmentForecasting a product demandEstimating a selling priceEstimating a manufacturing costEstimating a product life


Contemporary Engineering Economics, 4th edition, 2007*Create & Design

Engineering ProjectsEvaluate

Expected Profitability Timing of Cash Flows Degree ofFinancial RiskAnalyze

Production Methods Engineering Safety Environmental Impacts Market Assessment

Evaluate

Impact on Financial Statements Firms Market Value Stock PriceRole of Engineers in Business


Contemporary Engineering Economics, 4th edition, 2007*PresentFuturePastEngineering EconomyAccountingEvaluating past performanceEvaluating and predicting future eventsAccounting Vs. Economic


Contemporary Engineering Economics, 4th edition, 2007*Two Factors in Engineering Economic Decisions The factors of time and uncertainty are the defining aspects of any engineering economic decisions


Contemporary Engineering Economics, 4th edition, 2007*A Large-Scale Engineering ProjectRequires a large sum of investmentTakes a long time to see the financial outcomesDifficult to predict the revenue and cost streams


Contemporary Engineering Economics, 4th edition, 2007*Types of Strategic Engineering Economic Decisions in Manufacturing Sector

Service Improvement Equipment and Process SelectionEquipment ReplacementNew Product and Product ExpansionCost Reduction


Contemporary Engineering Economics, 4th edition, 2007*1. Service Improvement - Healthcare Delivery Which plan is more economically viable?

Traditional Plan: Patients visit each service provider.

New Plan: Each service provider visits patients : patient: service provider


Contemporary Engineering Economics, 4th edition, 2007*2. Equipment & Process SelectionHow do you choose between the Plastic SMC and the Steel sheet stock for an auto body panel?The choice of material will dictate the manufacturing process for an automotive body panel as well as manufacturing costs.


Contemporary Engineering Economics, 4th edition, 2007*3. Equipment Replacement ProblemNow is the time to replace the old machine?If not, when is the right time to replace the old equipment?


Contemporary Engineering Economics, 4th edition, 2007*4. New Product and Product ExpansionShall we build or acquire a new facility to meet the increased demand?Is it worth spending money to market a new product?


Contemporary Engineering Economics, 4th edition, 2007*5. Cost ReductionShould a company buy equipment to perform an operation now done manually?Should spend money now in order to save more money later?


Contemporary Engineering Economics, 4th edition, 2007*Fundamental Principles of Engineering EconomicsPrinciple 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 taken without the expected additional return


Contemporary Engineering Economics, 4th edition, 2007*Principle 1: A nearby dollar is worth more than a distant dollar

Today6-month later


Contemporary Engineering Economics, 4th edition, 2007*Principle 2: All it counts is the differences among alternativesIrrelevant items in decision making

OptionMonthly Fuel CostMonthly MaintenanceCash outlay at signingMonthly paymentSalvage Value at end of year 3Buy$960$550$6,500$350$9,000Lease$960$550$2,400$5500


Contemporary Engineering Economics, 4th edition, 2007*Principle 3: Marginal revenue must exceed marginal costManufacturing costSales revenueMarginal revenueMarginal cost1 unit1 unit


Contemporary Engineering Economics, 4th edition, 2007*Principle 4: Additional risk is not taken without the expected additional return

Investment ClassPotential RiskExpected ReturnSavings account (cash)Low/None1.5%Bond (debt)Moderate4.8%Stock (equity)High11.5%


Contemporary Engineering Economics, 4th edition, 2007*SummaryThe term engineering economic decision refers to any investment decision related to an engineering project.The five main types of engineering economic decisions 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 time and uncertainty are the defining aspects of any investment project.


Lecture No1

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