engineering economic decisions - engineering economics
DESCRIPTION
Engineering EconomicsTRANSCRIPT
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Engineering Economics
Engineering Economic Decisions
by Lê Thanh Tùng
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Road MapThe Rational-Decision-Making Process
• How Do We Make Typical Personal Decisions?
• How Do We Approach an Engineering Design Problem?
• What Makes Economic Decisions Different from Other Design Decisions?
The Engineer’s Role in Business
• Making Capital-Expenditure Decisions
• Large-Scale Engineering Economic Decisions
• Impact of Engineering Projects on Financial Statements
Types of Strategic Engineering Economic Decisions
Fundamental Principles in Engineering Economics
Summary
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How Do We Make Typical Personal Decisions?
• You need to buy a new car for your family. What are the steps you will do?
• Each group has 120 seconds to formulate your steps.
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How Do We Make Typical Personal Decisions?
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
7. Monitor and evaluate the decision
Logical steps to follow in making a decision
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How Do We Approach an Engineering Design Problem?
• What most distinguishes engineering from science?– Engineering: design and development– Science: understanding the world as it is
• Decisions made during the engineering design phase of a product's development determine the majority of the costs of manufacturing that product
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What Makes Economic Decisions Different from Other Design Decisions?
• Difference: types of decisions typically encountered in engineering design
• The design is time invariant• Economic evaluation are not necessarily time
invariant.• Economic decisions based on:
– the best information available– thorough understanding of the uncertainties in the
forecasted data
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Road MapThe Rational-Decision-Making Process
• How Do We Make Typical Personal Decisions?
• How Do We Approach an Engineering Design Problem?
• What Makes Economic Decisions Different from Other Design Decisions?
The Engineer’s Role in Business
• Making Capital-Expenditure Decisions
• Large-Scale Engineering Economic Decisions
• Impact of Engineering Projects on Financial Statements
Types of Strategic Engineering Economic Decisions
Fundamental Principles in Engineering Economics
Summary
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Engineer’s Role in Business
• Engineers participate in a variety of decision-making processes, ranging from manufacturing and marketing to financing decisions.
• Our focus: to various economic decisions related to engineering projects
– engineering economic decisions
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Making Capital-Expenditure Decisions
• Acquisition of equipment: capital expenditure• Need to estimate the profits (cash flows)• Inaccurate estimate of asset needs: serious
consequences– invest too much: incur unnecessarily heavy
expenses– too little: also harmful
• Loose market share• Cost to regain customers
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Large-Scale Engineering Economic Decisions
• More complex
• More significant to the company
• Erroneous forecast of product demand can have serious consequences
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Impact of Engineering Projects on Financial Statements
• Engineers must also understand the business environment– generate profits– strengthen the firm's overall financial position
• Market value of a company: – not profits per se, but rather cash flows– Available cash that determines the future
investments and growth of the firm
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Road MapThe Rational-Decision-Making Process
• How Do We Make Typical Personal Decisions?
• How Do We Approach an Engineering Design Problem?
• What Makes Economic Decisions Different from Other Design Decisions?
The Engineer’s Role in Business
• Making Capital-Expenditure Decisions
• Large-Scale Engineering Economic Decisions
• Impact of Engineering Projects on Financial Statements
Types of Strategic Engineering Economic Decisions
Fundamental Principles in Engineering Economics
Summary
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![Page 13: Engineering Economic Decisions - Engineering Economics](https://reader033.vdocument.in/reader033/viewer/2022061109/545074c0b1af9f4c648b470d/html5/thumbnails/13.jpg)
Types of Strategic Engineering Economic Decisions
• service or quality improvement,
• new products or product expansion
• equipment and process selection
• cost reduction
• equipment replacement
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Road MapThe Rational-Decision-Making Process
• How Do We Make Typical Personal Decisions?
• How Do We Approach an Engineering Design Problem?
• What Makes Economic Decisions Different from Other Design Decisions?
The Engineer’s Role in Business
• Making Capital-Expenditure Decisions
• Large-Scale Engineering Economic Decisions
• Impact of Engineering Projects on Financial Statements
Types of Strategic Engineering Economic Decisions
Fundamental Principles in Engineering Economics
Summary
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Fundamental Principles in Engineering Economics
Four principles of engineering economics:
1.A nearby dollar is worth more than a distant dollar
2.All that counts is the differences among alternatives
3.Marginal revenue must exceed marginal cost
4.Additional risk is not taken without the expected additional return
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Example of Engineering Economic Problem
• You wrecked your car!• You ruled out any other forms of transportation.• A wholesaler offers $2,000 for the wrecked car and $4,500 if it is repaired. • The car has a mileage standing of 58,000 miles.• Your insurance company offers you $1,000 to cover the cost of the
accident.• To repair the car costs $2,000.• A newer second-hand car costs $10,000 with a mileage standing 28,000
miles.• A part-time technician offers to repair the car for $1,100, but it takes one
month. • In the meanwhile you will need to rent a car for $400 per month.• What should you do?
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Engineering Economic Analysis Procedure
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.
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Example of Engineering Economic Problem
• No panic! Follow the engineering economic principles.
• Step 1. Define the problem.– the problem: you need a car.
• Step 2. Develop alternatives.– A1: sell wrecked car then buy the newer car.– A2: repair the car.– A3: repair the car, then sell it, and then buy the
newer one.
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Example of Engineering Economic Problem
– A4: Let the part-time technician repair it and then keep the car.
– A5: Let the part-time technician repair the car, and then sell it to buy the newer one.
• Step 3. Estimate the cash flows.– A1: -7,000 (Get the newer car)
• 2,000: for the wrecked car • 1,000: from insurance company• -10,000: buy new car
– A2: -$1,000. (Keep the old car).• 1,000: from insurance company• -2,000: to repair
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Example of Engineering Economic Problem
– A3: -$6,500. (Get the newer car).• 1,000: from insurance company• -2,000: to repair• 4,500 sell repaired car• -10,000: buy new car
– A4: -$500. (Keep the old car).• 1,000: from insurance company• -1,100: to repair buy part-time mechanic• -400: to rent a car in one month
– A5: -$6,000. (Get the newer car).• -500: Option A4• 4,500 sell repaired car• -10,000: buy new car
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Example of Engineering Economic Problem
• Step 4. Use a consistent criterium. Dollar value in your perspective.
• Step 5. Compare the alternatives.– A1: $10,000-$7,000=$3,000.– A2: $4,500-$1,000=$3,500.– A3: $10,000-$6,500=$3,500.– A4: $4,500-$500=$4,000.– A5: $10,000-$6,000=$4,000.
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Example of Engineering Economic Problem
• Step 6. Consider uncertainties and decide.– Choose A5!
• Step 7. Monitor and evaluate the decision.– Road test the newer car, and confirm your decision.
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Engineering Economic Analysis Procedure
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.
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Summary
• Place of engineers in a firm
• "engineering economic decision“– all investment decisions– evaluation of costs and benefits making a
capital investment
• The five main types of engineering economic decisions
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Any Question?
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