lecture # 1 foundation

Lecture # 1

Foundation

1-1 Dr. A. Alim

Chemical Process Economics II

Foundation of engineering economy.

Interest / Time value of money:

Compounding factors.

Gradient factors.

Effects of inflation.

Nominal and effective interest rates.

Variable interest rates.

1-2 Slide Sets to accompany Blank & Tarquin, Engineering

Economy, 7th Edition, 2012

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved


Analysis of cost estimation:

Money business cycle

Capital costs.

Product costs.

Depreciation and Depletion.

Taxes and Economic Value Added (EVA).

Disposal of Assets.





Analysis of profitability: Measures of profitability. Investment alternatives - PW and AW. IRR and incremental analysis. Replacement / Retention. Public sector projects Breakeven analysis

Optimization. Systems with no constraints: One variable and multivariable. Systems with constraints: Linear and nonlinear programming.





Variation and Decision Making Under Risk:

Sensitivity analysis.

Decision Trees.

Certainty, risk and uncertainty.

Expected value analysis (EV).

Random variables / sampling.

Probability distribution functions.




What is Engineering Economy and why it

is important to study?

Engineering designs must satisfy:

- Technical feasibility : the solution obeys the laws of

nature and science.

- Technical efficiency: best solution should generate least

waste, consumes least energy,..etc.

In addition to technical requirements, there are always

economic requirements:

- Economic feasibility: solutions proposed must not

exceed budget limits.

- Economic efficiency: The most economical of many

alternatives should be selected. 1-6 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering


Engineering Economy

Every technical solution has financial consequences.

Engineering economic analysis determines whether a proposed solution is

financially viable.

Will it pay?

Is this the minimum cost solution?

Will it generate an acceptable return?

Three major types of engineering economic decisions:

Profit enhancing programs

Cost control programs

Public improvement programs.

1-7 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering


Engineering Economic Decisions

Profit Enhancing Programs: projects designed to generate revenues. New product development

New product acquisition

Product/service capacity expansion

Improved customer service




Cost Control Programs: projects designed to generate savings. Improving efficiency

Streamlining operations

Eliminating waste / Reducing costs

Reducing liabilities




Public Improvement Programs: government entities also make capital expenditures. Increased public satisfaction

Increased public safety

Improved infrastructure



Investment Categories

New business New products or services.

Expansion Capacity increase.

Replacement Replacement/Retention decision.

Abandonment Eliminating products, services, or capacity.



Investment Decisions

Invest Releases funds to start a project

Do Not Invest Eliminates the project from further consideration

Wait (Delay) Time to gather information about the future can aid in

decision-making



The Decision Making Process

1. Understand the problem – define objectives

2. Collect relevant information

3. Define the set of feasible alternatives

4. Identify the criteria for decision making

5. Evaluate the alternatives and apply

sensitivity analysis and risk potential.

6. Select the “best” alternative

7. Implement the alternative and monitor

results




The Decision Making Process

Successful application of decision making

process requires:

* Technical ability, good understanding of

fundamentals of engineering economics.

* Strict adherence to codes of ethics.



Ethics – Different Levels

Universal morals or ethics – Fundamental

beliefs: stealing, lying, harming or murdering

another are wrong

Personal morals or ethics – Beliefs that an

individual has and maintains over time; how a

universal moral is interpreted and used by

each person

Professional or engineering ethics – Formal

standard or code that guides a person in work

activities and decision making




Code of Ethics for Engineers All disciplines have a formal code of ethics. National Society of

Professional Engineers (NSPE) maintains a code specifically for

engineers; many engineering professional societies have their own code




In this course, you will learn:

The fundamentals of engineering economy (time

value of money, interest, economic equivalence)

To perform the 7-steps in the economic decision

making process

To financially evaluate engineering projects under

certainty, risk, uncertainty, and multiple options

Numerous methods in which to determine the best

choice from a feasible set with multi-attributes

To solve a variety of problems dealing with capital

investments 1-17 Slide Sets to accompany Blank & Tarquin, Engineering



You will appreciate:

The basics of making a capital investment decision.

The risk associated with capital investments.

The level at which most companies invest.

The “globalization” of our world, as companies

make investments all over the world in various

currencies.

The entire decision-making process.




lecture # 1 foundation

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