Lecture No1_Engineering Economic Decisions.pdf

Lecture No.1Chapter 1Chapter 1

Contemporary Engineering EconomicsCopyright © 2010

1Contemporary Engineering Economics 5th edition, (c) 2010

What is All about an EngineeringWhat is All about an Engineering Economic Decision?

Learning ObjectivesAn overview of a variety of engineeringAn overview of a variety of engineering economic decision problems.Understanding the term “engineering economic decision.”Understanding the fundamental principles of engineering economicsengineering economics. 

2Contemporary Engineering Economics 5th edition, (c) 2010

R l f E i i B iRole of Engineers in BusinessCreate & DesignCreate & Design

• Engineering Projects

EvaluateAnalyze Evaluate

• Expected Profitability• Timing of Cash Flows

• Production Methods• Engineering Safety• Environmental Impacts• Market Assessment

• Impact on Financial Statements• Firm’s Market Value• Stock PriceCash Flows

• Degree ofFinancial Risk

• Market Assessment Stock Price

3Contemporary Engineering Economics 5th edition, (c) 2010

Engineering Economic Profit

ManufacturingProfit

ManufacturingEconomic Decisionsl f hPlan for the 

acquisition of equipment (capital expenditure) that will 

PlanningPlanningp )enable the firm to design and produce products 

i ll

Investment

Marketing

Investment

Marketingeconomically etingeting

Contemporary Engineering Economics 5th edition, (c) 2010 4

What Makes Engineering EconomicWhat Makes Engineering Economic Decisions Difficult?Estimating a Required investment

F i dForecasting a product demand

Estimating a selling priceEstimating a selling price

Estimating a manufacturing costg

Estimating a product life

5Contemporary Engineering Economics 5th edition, (c) 2010

Accounting Vs. Engineering Economy

Evaluating past performance Evaluating and predicting future events

E i i EAccounting

PresentFuturePast

Engineering EconomyAccounting

6

Present

Contemporary Engineering Economics 5th edition, (c) 2010

Common Types of StrategicCommon Types of Strategic Engineering Economic Decisions

Equipment or process selection

Equipment replacement decisionsEquipment replacement decisions

New product and product expansion

C t d tiCost reduction

Improvement in service or quality

7Contemporary Engineering Economics 5th edition, (c) 2010

Fundamental Principles of EngineeringFundamental Principles of Engineering Economics

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 returnexpected additional return 

8Contemporary Engineering Economics 5th edition, (c) 2010

Principle 1: A nearby dollar is worth morePrinciple 1: A nearby dollar is worth more than a distant dollar

Today 6-month later

9Contemporary Engineering Economics 5th edition, (c) 2010

P i i l 2 All it t i th diffPrinciple 2: All it counts is the differences among alternatives

Option Monthly Fuel Cost

Monthly Maintenance

Cash outlay at signing

Monthly payment

Salvage Value at end ofnce signing end of year 3

Buy $960 $550 $6,500 $350 $9,000y , ,

Lease $960 $550 $2,400 $550 0

I l t it i d i i kiIrrelevant items in decision making

10Contemporary Engineering Economics 5th edition, (c) 2010

P i i l 3 M i l t dPrinciple 3: Marginal revenue must exceed marginal cost

Marginal cost

Manufacturing cost

cost

1 unit

Sales revenueMarginal revenue1 unit

11Contemporary Engineering Economics 5th edition, (c) 2010

P i i l 4 Additi l i k i t t kPrinciple 4: Additional risk is not taken without the expected additional return

Investment Class Potential 

Risk

Expected 

Returns etu

Savings account (cash)

Low/None 1.5%(cash)

Bond (debt) Moderate 4 8%Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

12Contemporary Engineering Economics 5th edition, (c) 2010

T F t i E i i E iTwo Factors in Engineering Economic Decisions

• Time• Time

• Uncertainty

13Contemporary Engineering Economics 5th edition, (c) 2010