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Topic 1 Introduction To Engineering Economy

This document provides an introduction to engineering economy. It discusses rational decision making processes, types of engineering economic decisions, and key principles of engineering economics. Engineering economic decisions involve predicting the future costs and benefits of large engineering projects over time under uncertainty. The document outlines different types of strategic decisions in manufacturing and service sectors, such as equipment selection, new product development, and cost reduction.

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Dave Harrison Flores
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430 views

Topic 1 Introduction To Engineering Economy

This document provides an introduction to engineering economy. It discusses rational decision making processes, types of engineering economic decisions, and key principles of engineering economics. Engineering economic decisions involve predicting the future costs and benefits of large engineering projects over time under uncertainty. The document outlines different types of strategic decisions in manufacturing and service sectors, such as equipment selection, new product development, and cost reduction.

Uploaded by

Dave Harrison Flores
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Introduction to Engineering

Economy
Engineering Economics
Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic
decisions
Rational Decision-Making Process

1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion
to use
6. Select the best alternative
Which Car to Lease?
Saturn vs. Honda
1. Recognize a decision  Need a car
problem
2. Define the goals or
objectives  Want mechanical
3. Collect all the relevant security
information  Gather technical as well
4. Identify a set of feasible as financial data
decision alternatives  Choose between
5. Select the decision Saturn and Honda
criterion to use  Want minimum total
6. Select the best alternative cash outlay
 Select Honda
Financial Data Required to Make an Economic
Decision
Engineering Economic Decisions

Manufacturing Profit

Planning Investment

Marketing
Predicting the Future
 Estimating a Required
investment
 Forecasting a product
demand
 Estimating a selling
price
 Estimating a
manufacturing cost
 Estimating a product
life
Role of Engineers in Business

Create & Design

• Engineering Projects

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on


• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
Accounting Vs. Engineering Ecom.

Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy


Past Future
Present
Two Factors in Engineering
Economic Decisions

The factors of time and uncertainty


are the defining aspects of any
engineering economic decisions
A Large-Scale Engineering Project
 Requires a large sum
of investment
 Takes a long time to
see the financial
outcomes
 Difficult to predict the
revenue and cost
streams
Types of Strategic Engineering
Economic Decisions in
Manufacturing Sector
 Service Improvement
 Equipment and Process Selection
 Equipment Replacement
 New Product and Product Expansion
 Cost Reduction
Service Improvement
 How many more jeans would Levi need to sell to justify
the cost of additional robotic tailors?
Equipment & Process Selection

 How 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.
Which Material to Choose?
Equipment Replacement Problem
 Now is the time to
replace the old
machine?
 If not, when is the right
time to replace the old
equipment?
New Product and Product Expansion
 Shall we build or
acquire a new facility to
meet the increased
demand?
 Is it worth spending
money to market a new
product?
Example - MACH 3 Project
 R&D investment: $750
million
 Product promotion through
advertising: $300 million
 Priced to sell at 35% higher Gillette’s MACH3
than Sensor Excel (about Project
$1.50 extra per shave).
 Question 1: Would
consumers pay $1.50 extra
for a shave with greater
smoothness and less
irritation?
 Question 2: What would
happen if the blade
consumption dropped more
than 10% due to the longer
blade life of the new razor?
Cost Reduction
 Should a company buy
equipment to perform
an operation now done
manually?
 Should spend money
now in order to save
more money later?
Types of Strategic Engineering Economic
Decisions in Service Sector

 Commercial Transportation
 Logistics and Distribution
 Healthcare Industry
 Electronic Markets and Auctions
 Financial Engineering
 Retails
 Hospitality and Entertainment
 Customer Service and Maintenance
Example - 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
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 taken
without the expected additional return
Principle 1: A nearby dollar is worth
more than a distant dollar

Today 6-month later


Principle 2: All it counts is the
differences among alternatives
Option Monthly Monthly Cash Monthly Salvage
Fuel Maintena outlay at payment Value at
Cost nce signing end of
year 3

Buy $960 $550 $6,500 $350 $9,000

Lease $960 $550 $2,400 $550 0

Irrelevant items in decision making


Principle 3: Marginal revenue must
exceed marginal cost

Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue
Principle 4: Additional risk is not
taken without the expected additional
return
Investment Class Potential Expected
Risk Return

Savings account Low/None 1.5%


(cash)

Bond (debt) Moderate 4.8%


Stock (equity) High 11.5%
Summary
 The term engineering economic decision
refers to all investment decisions relating to
engineering projects.
 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.

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