INTRODUCTION TO ENGINEERING ECONOMY

1. CHAPTER 1 INTRODUCTION TO ENGINEERING ECONOMY

2. WHAT IS ECONOMICS ? 1) The study of how limited resources is used to satisfy unlimited human wants

3. WHAT IS ECONOMICS ? 2) The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided.

4. RESOURCE • LAND • LABOUR • CAPITAL

5. LAND All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process.

6. LABOR The efforts, skills, and knowledge of people which are applied to the production process.

7. CAPITAL • Real Capital (Physical Capital ) • Tools, buildings, machinery -- things which have been produced which are used in further production • Financial Capital • Assets and money which are used in the production process • Human Capital • Education and training applied to labor in the production process

9. The purpose of this course is to develop and illustrate the principles and methodology required to answer the basic economic question of any design: Do its benefits exceed its costs?

10. IDENTIFY THE LAND • IDENTIFY THE LABOR • IDENTIFY THE CAPITAL • And, do its benefit exceed its costs?

11. Engineering economy… involves the systematic evaluation of the economic merits of proposed solutions to engineering problems.

12. Engineering economic analysis can play a role in many types of situations. • Choosing the best design for a high-efficiency gas furnace. • Selecting the most suitable robot for a welding operation on an automotive assembly line. • Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased. • Determining the optimal staffing plan for a computer help desk. • Other examples?

13. Solutions to engineering problems must • promote the well-being and survival of an organization, • embody creative and innovative technology and ideas, • permit identification and scrutiny of their estimated outcomes, and • translate profitability to the “bottom line” through a valid and acceptable measure of merit.

14. Example In Kuala Lumpur, there are 310 traffic intersections that have been converted from incandescent lights to light-emitting diode (LED) lights. The study that led to this decision was conducted by sustainability manager of the city. The wattage used at the intersections has been reduced from 150 watts to 15 watts at each traffic light.

15. Example The resultant lighting bill has been lowered from $440,000 to $44,000 annually. The annual saving of $396,000 per year from the traffic light conversion more than paid $150,000 cost of installing the LED lights.

16. Solutions to engineering problems must • promote the well-being and survival of an organization, • embody creative and innovative technology and ideas, • permit identification and scrutiny of their estimated outcomes, and • translate profitability to the “bottom line” through a valid and acceptable measure of merit.

17. Engineering economy… involves the systematic evaluation of the economic merits of proposed solutions to engineering problems.

18. There are seven fundamental principles of engineering economy. • Develop the alternatives • Focus on the differences • Use a consistent viewpoint • Use a common unit of measure • Consider all relevant criteria • Make uncertainty explicit • Revisit your decisions

19. Example • Which Car to Lease?Saturn vs. Honda

20. Develop the alternative (1)

21. FOCUS ON THE DIFFERENCES Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.

22. Focus on the differences (2)

23. USE A CONSISTENT VIEWPOINT The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective).

24. USE A COMMON UNIT OF MEASURE Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives.

25. Use a common unit of measures (4)

26. CONSIDER ALL RELEVANT CRITERIA Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

27. Consider all relevant criteria (5) • Want mechanical security • Want minimum total cash outlay

28. MAKE UNCERTAINTY EXPLICIT Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.

29. MAKE UNCERTAINTY EXPLICIT (6) • Mechanical security is uncertainty. Probably need more research

30. Recognize a decision problem Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use 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 Which Car to Lease?Saturn vs. Honda

31. REVISIT YOUR DECISIONS Improved decision making results from an adaptive process; to the extent practicable, the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved.

32. Accounting Vs. E E Evaluating past performance Evaluating and predicting future events Accounting Engineering Economy Past Future Present