An Intro to Engineering Economy

INDE-Eng. Economy

Ch1: Introduction to Engineering Economy

By: Magdy Akladios, PhD, PE, CSP, CPE, CSHM

Course Objectives
Our aim is to understand:
The power of money
How to make it How to save it How to spend it

Achievements dont occur without a price The basic economic decision of any design is based on whether its benefits exceed its costs

WHAT IS ECONOMICS?
The study of how Limited Resources is used to satisfy unlimited human a ts wants. The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

Resources
1. Land 2. Labor 3. Capital

1. LAND
All gifts of nature, such as:
Water. Air. Minerals. Sunshine. Plant and tree growth. The land itself which is applied to the production process. Etc.

2. LABOR The efforts, skills, and knowledge of people which are applied to the production process.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

3. CAPITAL
Real Capital (Physical Capital ) Financial Capital Human Capital

Real Capital
Or Physical Capital such as:
Tools Buildings Machinery things which have been produced which are used in further production

Financial Capital
Assets and money which are used in the production process

Dollar Bills

$$$$$$$$$$$$$$$$$

By: Dr. Magdy Akladios

An Intro to Engineering Economy

Human Capital
Education and training applied to labor in the production process

Average Salary
PhD: Masters Degree: B.S.: High School Diploma: h h l l $81,778 $60,826 $43,782 $23,594 $

Why Engineering Economy?

Ultimate economy is a concern to engineers Sound techniques to address this concern are available Engineering economy enables an engineer to make sound economic decisions

By: Dr. Magdy Akladios

An Intro to Engineering Economy

Examples of economic Decisions

Paper of plastic? 87-Octane or 93? Lease or buy a vehicle? Pay off a house in 5, 15, or 30-years? ff h

The weekly scam: Credit Cards

Suppose you owe $1,100 on your credit card Annual Percentage Rate (APR) = 18% Your minimum Monthly payment = $19.80
This will take you 10 years to pay it off Total interest paid = $1,276

An extra $10 payment/month

This will allow you to pay it off in 4.5 years Total interest paid = $509.20

Origins of Engineering Economy

Pioneer: Arthur M. Wellington Civil Engineer Latter part of 19th Century He dd H addressed role of economic analysis i d l f i l i in engineering projects Area of interest: railroad building Followed by other contributors who emphasized techniques depending on financial and actuarial mathematics.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

Engineering Economy and the Design Process

An engineering economy study is accomplished using:
a structured procedure, and mathematical modeling techniques. techniques

The economic results are then used in a decision situation that involves two or more alternatives, and normally includes other engineering knowledge and input.

Ultimate Aim
1. Survival 2. Maximize wealth 3. Minimize cost

Types of Business Organizations

1. Proprietorships 2. Partnerships 3. Corporations

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An Intro to Engineering Economy

How to Make Decisions?

Principles of Economic Decision Making

1. 2. 3. 4. 5. 6. 7. Develop the Alternatives Focus on the Differences USE a Consistent Viewpoint Use a Common Unit of Measure f Consider all Relevant Criteria Make Uncertainty Explicit Revisit your Decisions

1. Develop the Alternatives

The final choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

2. Focus on the Differences

Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.

3. USE a Consistent Viewpoint

The prospective outcomes of the alternatives, economic and other, should b d th h ld be consistently developed from a defined viewpoint (perspective).

4. Use a Common Unit of Measure

Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier th ibl ill k i the analysis and comparison of alternatives.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

5. Consider all Relevant Criteria

Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

6. Make Uncertainty Explicit

Uncertainty is inherent in projecting (or estimating) the future outcomes of the f t t f th alternatives and should be recognized in their analysis and comparison.

7. Revisit your Decisions

Improved decision making results from an adaptive process; to the extent practicable, the i iti l th initial projected j t d outcomes of the selected alternative should be subsequently compared with actual results achieved.

By: Dr. Magdy Akladios

An Intro to Engineering Economy

Engineering Economy and the Design Process

An engineering economy study is accomplished using:
a structured procedure, and mathematical modeling techniques. techniques

The economic results are then used in a decision situation that involves two or more alternatives, and normally includes other engineering knowledge and input.

ENGINEERING ECONOMIC ANALYSIS PROCEDURE (7-Steps) 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.

An example
You wrecked your car (w/58,000 miles) Price as-is = $2,000 Insurance check = $2,000 Deductible = $1,000 Amount you have in savings = $7,000 Could fix car immediately for $2,000 Could fix car in 1 month for $1,100 (will need to rent a temp for $400 (total cost = $1,500) Value of fixed car = $4,500 New car price = $10,000 (w/28,000 miles)

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An Intro to Engineering Economy

Solution
Use the 7-step economic procedure to select the best possible alternative Step 1: Define problem
Need transportation

Step 2: Develop alternatives

Alt 1:
Sell old car as is for: $2,000 Get money from insurance: $1,000 Add money from savings: $7,000 Buy newer car w/28,000 miles

Result of alternative 1:
Total value = Car worth $10,000 + $0 in savings = $10,000 Mileage = 28,000 miles

Step 2: Develop alternatives

Alt 2:
Get money from insurance: Add money from savings: Fix old car w/58,000 $1,000 $1,000

Result of Alt 2:
Total value = Car worth $4,500 + $6,000 in savings = $10,500 Mileage = 58,000 miles

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An Intro to Engineering Economy

Step 2: Develop alternatives

Alt 3:
Get money from insurance: Add money from savings: Add money from savings: Fix old car w/58,000 and sell it for w/58 000 Buy newer car w/28,000 miles $1,000 $1,000 $5,500 $4.5K $4 5K

Result of Alt 3:
Total value = Car worth $10,000 + $500 in savings = $10,500 Mileage = 28,000 miles

Step 2: Develop alternatives

Alt 4:
Get money from insurance: $1,000 Add money from savings: $100 Rent temp car: $400 Fix old car w/58,000 in 1 month

Result of Alt 4:
Total value = Car worth $4,500 + $6,500 in savings = $11,000 Mileage = 58,000 miles

Step 2: Develop alternatives

Alt 5:
Get money from insurance: $1,000 Add money from savings: $100 Rent temp car: $400 Fix old car w/58,000 in 1 month ld / 8 000 h Sell old car for $4.5K Add $5.5K from savings Buy newer car for $10K

Result of Alt 5:
Total value = Car worth $10,000 + $1,000 in savings = $11,000 Mileage = 28,000 miles

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An Intro to Engineering Economy

Final Comparison
Alt 1 2 3 4 5 Net Value $10,000 $ , $10,500 $10,500 $11,000 $11,000 Mileage 28,000 58,000 , 28,000 58,000 28,000

Obviously, Alt 5 is the best value w/least mileage

Another Example
You are buying a house Options:
15-yr mortgage with 5% financing 30 yr mortgage with 7% financing 30-yr

An Example
Problem:
You are considering ordering a Pizza delivery

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An Intro to Engineering Economy

Your options
1. Papa Jones:
1 Thick 20 square pizza Two toppings Cost: $15 + 5% Tax + $1.50 Delivery $1 50 1-3/4 Thick 20 dia round pizza Two toppings Cost: $17.25 + 5% Tax + $0 Delivery

2. Dominos:

Requirements
1. Apply the 7 principals of engineering economy 2. 2 What is the better value for your money (Hint: minimize cost/unit volume)

1: Develop the alternatives

Alternative 1 is to order from Papa Jones Alternative 2 is to order from Domino s Dominos

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An Intro to Engineering Economy

2: Focus on the differences

Delivery time Taste preferences Quality of ingredients Cost

3: Use a consistent view point:

Principal Your view point as a customer?, or The Pizza shop owners?, or owners? The drivers of the Pizza shops?

4: Use a common unit of measure:

$$, or Volume of pizza, or Area of pizza

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An Intro to Engineering Economy

5: Consider all relevant criteria:

Principal Other criteria of selection include toppings Delivery time Etc.

6: Make uncertainty explicit:

Principal Uncertainty about actual delivery time vs. advertised time, and other conditions of the sale, etc. ,

7: Revisit your decision:

After you have consumed the pizza, it is important to keep the following in mind when you are ready to order y y your next pizza:
Satisfaction Taste Actual delivery time Etc.

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An Intro to Engineering Economy

Solution: Minimizing cost

Papa Jones:
20 X 20 X 1 = 400 in3 Cost = $15 (1.05) + $1.50 = $17.25 C t/ i 3 = $17 25/400 = $0.043 Cost/ in $17.25/400 $0 043

Dominos:
X 102 X 1.73 = 550 in3 Cost = $15 (1.05) + $0 = $18.11 Cost/ in3 = $18.11/550 = $0.033

Therefore, order from Dominos

Fundamental Principles of Engineering Economy

Fundamental Principles of Engineering Economy

1. A nearby penny is worth a distant dollar 2. All that counts are the difference among alternatives 3. 3 Marginal revenue must exceed marginal cost 4. Additional risk is not taken without the expected additional return

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An Intro to Engineering Economy

Investing Tips
Source: Growth Stock Watch (Feb 2005)

Investment Rules of Thumb

1. Invest for the long term 2. Buy potential AND current value 3. Dont put all your investment eggs in one basket

How do you choose stock? Follow the 5-Star status system

1. Minimum 2-1 current ration (current assets/current liabilities) 2. Minimal or no long-term debt 3. Niche-oriented 3 Niche oriented product or service 4. Annual growth rate of over 20% 5. Quality management

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An Intro to Engineering Economy

If you already own stock: Average UP/Double DOWN

1. When Stock goes UP

2. When Stock goes DOWN

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