Engineering Economics

(HM421)

Making Economic Decisions

Chapter 1
Making Economic Decisions
- Chapter Outcome

Distinguish between simple and complex problems.

Discuss the role and purpose of engineering
economic analysis.
Describe the steps in the economic decision
making process with examples.
Select appropriate economic criteria for use with
different type of problems.
Solve simple problems associated with engineering
decision making.

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 What is Engineering?

Engineering is the discipline, art, and profession of

acquiring and applying scientific, mathematical,
economic, social, and practical knowledge to design and
build structures, machines, devices, systems, materials
and processes that safely realize improvements to the
lives of people.

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 Economics

Economics is the social science that analyzes

the production, distribution,
and consumption of goods and services.

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Engineering Economics

Engineering economics, previously known

as engineering economy, is a subset of economics for
application to engineering projects.

Engineers seek solutions to problems, and the economic

viability of each potential solution is normally
considered along with the technical aspects.

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 Engineering Economy

Engineering Economy is about making decisions

 It is based on the systematic evaluation of the costs and

benefits of proposed technical projects

The principles and methodology of engineering

economy are utilized to analyze alternative uses of
financial resources, particularly in relation to the
physical assets and the operation of an organization

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 Problems Classification
Simple
Intermediate
Complex

Simple Problems:
Can be analyzed in one’s head without extensive analysis
 Do I buy a semester parking pass, or buy a bicycle?
 How often should I eat out?
 Should I pay cash or use my credit card?
These are pretty simple questions, and good solutions do
not require much time or effort.

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 Problems Classification
Intermediate Problems:
Must be organized and analyzed
Are sufficiently important to justify serious thought and
action
Have significant economic aspects
Are primarily economic
Are the principal subject of this course
Assume an economic situation in equilibrium
Are generally adequately solved with single-criteria
decision making

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 Problems Classification
Intermediate Problems Examples:

Shall I lease or buy my next car?

Which equipment should be selected for a new assembly
line?
Which materials should be used as roofing, sides, and
structural support for a new building?
Shall I buy a 1 or 2 semester parking pass?

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 Problems Classification
Complex Problems:

Represent a mixture of economic, political, and

humanistic elements
Selection of a president in USA
Building a nuclear power plant?

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 Engineering Economic Analysis
Engineering economic analysis focuses on costs,
revenues, and benefits that occur at different times.

Engineering economic analysis is an appropriate

technique for seeking a solution of a problem meeting
this criteria

1. The problem is important enough to justify our giving

it serious thought and effort.
2. The problem can’t be worked in one’s head.
3. The problem has economic aspects important in
reaching a decision.
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 Engineering Economic Analysis
Which engineering projects are worthwhile?

Which projects should have higher priority?

How the project should be designed?

How to achieve long-term financial goals?

How to compare different ways to finance purchases?

How to make short and long-term financial decisions?

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 Engineering Economic Analysis

Examples of Non-Monetary Factors:

Meeting customer expectations consistently

Maximization of employee satisfaction

Maintaining flexibility to meet changing demand

Maintenance of a desired public image

Leveling cyclic fluctuations in production

Improvement of safety in operations

Reduction of pollutants
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 The Decision Making Process
1. Recognize problem;
2. Define the goal or objective;
3. Assemble relevant data;
4. Identify feasible alternatives;
5. Select criterion to determine the best alternative;
6. Construct a model;
7. Predict each alternative’s outcomes or consequences;
8. Choose the best alternative; and
9. Audit the result.

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 The Decision Making Process
1. Recognize the problem
 “I need a place to live this semester.”
2. Define the Goal or Objective
 “I’ll find a nice apartment that is not too expensive.”
3. Assemble Relevant Data
 “I need information on rent, utilities, apartment age, parking,
driving time to UMT, driving time to shopping, the
neighborhood, other amenities provided (swimming, table
tennis, etc.).”
4. Identify Feasible Alternatives
 “I’ll use the Yellow Pages, information from friends,
apartment finding services, information from UMT, the local
newspaper, and my personal experience, to look for
apartments.”
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 The Decision Making Process
5. Select Criterion to Determine the Best Alternative
 “Most important is rent plus utilities cost. I’m also very
concerned about driving time to UMT, and the kind of
neighborhood the apartment is in.”
6. Construct the model
 “I’ll make a spreadsheet. The rows will be the apartment
choices, the columns the evaluation criteria. Then I’ll try to
fill in the interactions between the apartments and the
criteria.”
 This includes determining cash flows for engineering
economic analysis!!!
7. Predict Outcomes of Each Alternative
 “I’ll fill in the estimated costs for the spreadsheet and rate the
amenities, driving time, etc.”
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 The Decision Making Process
8. Choose the Best Alternative
 “Apartment C looks cheapest, but I don`t like the
neighborhood. If I pay $50 more per month for Apartment B I
get a nicer neighborhood, and a 15-minute drive to UMT.
Maybe I’ll choose Apartment B.”
9. Audit the Results
 “Did I make a good choice”
 “After living in Apartment B for six months, I am very happy
with my choice!”
 But this certainly isn’t the case every time!!

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The Decision Making Process
Examples:

 Example 1-1
 Example 1-2
 Example 1-3
 Example 1-4

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 Making Economic Decisions
- Summary
Donald G. Newnan, et al., “Engineering Economic
Analysis,” 9th Edition, Oxford University Press (Read
Chapter No 1)

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