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ECGD3110ECGD3110

Systems Engineering & EconomySystems Engineering & Economy

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Lecture 1Lecture 1

Introduction toIntroduction to

Engineering EconomicsEngineering Economics

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Presentation OutlinePresentation Outline IntroductionIntroduction PurposePurpose ObjectiveObjective Examples of daily life applicationsExamples of daily life applications Basic issuesBasic issues The Decision-Making ProcedureThe Decision-Making Procedure Principles Governing the Engineering Principles Governing the Engineering

Economy ProcedureEconomy Procedure Projects within OrganizationsProjects within Organizations

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Introduction Engineering Economics is the discipline concerned Engineering Economics is the discipline concerned

with the economic aspects of engineering, and with the economic aspects of engineering, and involves the systematic evaluation of the costs and involves the systematic evaluation of the costs and benefits of proposed technical and business projects.benefits of proposed technical and business projects.

The principles and methodology of engineering The principles and methodology of engineering Economics are crucial to the daily management of Economics are crucial to the daily management of private companies, government agencies, and private companies, government agencies, and nonprofit organizations.nonprofit organizations.

They are used to assist with decision making in They are used to assist with decision making in situations such as selecting among alternative situations such as selecting among alternative engineering designs, public works projects, engineering designs, public works projects, replacement of assets, and in assessing the economic replacement of assets, and in assessing the economic merits of alternative uses of your personal funds. merits of alternative uses of your personal funds.

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PurposePurpose

Dealing with economic analysis and evaluation of Dealing with economic analysis and evaluation of engineering projectsengineering projects

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ObjectiveObjective Implementation of systematic evaluation of

costs and benefits of engineering projects in order to:

- Decide whether or not to carry out a project- Choose among independent projects, i.e.,

capital budgeting

- Choose between alternative technologies for a project

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Examples of daily life applicationsExamples of daily life applications

Purchase/rental of automobiles

Economics of home rental/rehabilitation/building

Personal investments

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Basic issuesBasic issues

- Identification and quantification of life-cycle benefits and costs of project or project alternatives

- Analysis of time value of money

- Effects of depreciation, taxes, inflation and uncertainty

- For a single project, do benefits exceed costs by a sufficient enough margin?

- private firms: easier to determine

- public projects: more difficult

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Basic issuesBasic issues

- For selection among several alternatives

- comparison of relative benefits and costs

- selection among mutually exclusive projects

- selection among independent projects (capital budgeting)

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A. Scientific Approach

• Cause- effect relationship

Understand

Explore

Suggest

The Decision-Making Process

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The Decision-Making Process

B. Practitioner operational Approach1. Problem definition Problem tree for baseline conditions Indicators based

2. Set up Objectives Planning horizon Needs assessment Objective Tree (SMART) Indicators based

3. Development of Possible Alternatives

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The Decision-Making Process

4. Analysis and Comparison the Alternatives

Develop decision or evaluation criteria (sustainability based)- Criteria includes social, economic/financial, environmental and institutional factors

Quantification of life-cycle costs and benefits for each alternative

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The Decision-Making Process

5. Selection of the Preferred Alternative(s) and decision making

6. Implementation of recommended solution

7. Performance Monitoring, Post-evaluation and feedback

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Categories of Decision making process

Decision making under Decision making under certaintycertainty in in which the data are known which the data are known deterministicallydeterministically

Decision making under Decision making under riskrisk in which in which the data can be described by the data can be described by probability distributions.probability distributions.

Decision making under Decision making under uncertaintyuncertainty in which the data cannot be assigned in which the data cannot be assigned weights that represent their degree weights that represent their degree of relevance in the decision process.of relevance in the decision process.

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Principles Governing the Engineering Economy Procedure

Define goals and objectivesDevelop alternativesFocus on the differencesUse a consistent viewpointUse a common unit of measureConsider all relevant criteriaMake uncertainty explicitRevisit your decisions

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Projects within Organizations

Projects form part of the overall organizational planning process as shown on the diagram

Projects play a major role in implementing organizational strategy

Vision

Mission

ProjectsProgramsStrategy

Sector Goal(s)

Objectives