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Lecturer Week 3
Dr. Syed Faiz Ahmed
Fundamentals of Engineering Economics
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Engineering Economic Decisions
Rational Decision- making
Process
The Engineer’s Role in
Business
Types of Strategic
Engineering Economic
Decisions
Fundamental Principles in
Engineering Economics Bose Corporation
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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
• Fundamental Principles in Engineering Economics
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Flow Chart 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
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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
Need a car
Want mechanical security
Gather technical as well as financial data
Choose between Saturn and Honda
Want minimum total cash outlay
Select Honda
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Planning Investment
Marketing
Profit Manufacturing
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Getting an Idea: (Necessity is the mother of invention)
What are the market demands
What are necessities.
How we can make people life more comfortable.
Setting Design Goals & Objectives:
How to fulfill market demands
Keep things simple
Location
Product shape easy Or more attractive
Keep product cost low.
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Evaluate Design Alternatives:
How to comply Goals & Objective
Selection of method & materials
Gauging Product Cost:
Set optimal price
Do Survey
Bulk quantity production calculation
Environmental Issues
Green Energy
Pollution Free
Recycle / reusability
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Engineering decisions
Perfect Design
Long life
Very High Quality
Economics Decisions
Cost effective
high profit
Engineering Economics Decisions.
Low cost high profit
Good looking but cheap
No need to design for very long time.
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Estimating a Required investment
Forecasting a product demand
Estimating a selling price
Estimating a manufacturing cost
Estimating a product life
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Create & Design
• Engineering Projects
Evaluate
• Expected
Profitability
• Timing of
Cash Flows
• Degree of
Financial Risk
Analyze
• Production Methods
• Engineering Safety
• Environmental Impacts
• Market Assessment
Evaluate
• Impact on
Financial Statements
• Firm’s Market Value
• Stock Price
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Present
Future Past
Engineering Economy Accounting
Evaluating past performance Evaluating and predicting future events
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The factors of time and uncertainty
are the defining aspects of any
engineering economic decisions
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Requires a large sum of investment
Takes a long time to see the financial outcomes
Difficult to predict the revenue and cost streams (Remember Cash flow discussed earlier)
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Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
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Service Improvement How many more jeans would Levi need to sell to justify
the cost of additional robotic tailors?
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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.
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Now is the time to replace the old machine?
If not, when is the right time to replace the old equipment?
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Shall we build or acquire a new facility to meet the increased demand?
Is it worth spending money to market a new product?
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Should a company buy equipment to perform an operation now done manually?
Should spend money now in order to save more money later?
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Types of Strategic Engineering Economic Decisions in Service Sector
Commercial / Public Transportation
Logistics and Distribution
Healthcare Industry
Electronic Markets (TV, Radio Newspapers)
Financial Engineering (loans and etc…)
Retails (discounts / promossions)
Hospitality and Entertainment
Customer Service and Maintenance
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Manufacturing
(14%)
Service sector
(80%)
Healthcare (14%)
Agriculture (2%)
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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
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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
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Today 6-month later
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Option Monthly
Fuel
Cost
Monthly
Maintena
nce
Cash
outlay at
signing
Monthly
payment
Salvage
Value at
end of
year 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
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Irrelevant items in decision making
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Manufacturing cost
Sales revenue Marginal
revenue
Marginal
cost
1 unit
1 unit
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Investment Class Potential
Risk
Expected
Return
Savings account
(cash)
Low/None 1.5%
Bond (debt) Moderate 4.8%
Stock (equity) High 11.5%
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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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