1、Engineering Economy,Lecture:XXXXXXX,About our course,Structure of the Course,Fundamentals of Engineering EconomyIntroduction to Engineering Economy Cost Concepts and Design Economics Money-Time Relationships and EquivalenceBasic Topics in Engineering EconomyApplication of Money-Time RelationshipsCom
2、paring Alternative Depreciation and Income TaxesCost Estimation TechniquesPrice Changes and Exchange RatesReplacement AnalysisDealing with Uncertainty Additional TopicsEvaluating Projects with the Benefit-Cost-Ratio MethodEngineering Economy Studies in Investor-Owned UtilitiesProbabilistic Risk Anal
3、ysisCapital Financing and Allocation Dealing with Multi-attributed Decision,INTRODUCTION TO ENGINEERING ECONOMY,CHAPTER 1,Introduction to Engineering Economy,WHAT IS ECONOMICS ?,The study of how limited resources is used to satisfy unlimited human wants. The study of how individuals and societies ch
4、oose to use scarce resources that nature and previous generations have provided.,The efforts, skills, and knowledge of people which are applied to the production process,All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied t
5、o the production process,Real Capital (Physical Capital )Tools, buildings, machinery - things which have been produced which are used in further productionFinancial CapitalAssets and money which are used in the production processHuman CapitalEducation and training applied to labor in the production
6、process,Resource,Land,Labor,Capital,What is engineering,Engineering is the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the
7、benefit of mankind.,Engineering Economy involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable, solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term cost, and they mu
8、st also:,What is engineering economy,The perspective that ultimate economy is a primary concern to the engineer and the availability of sound techniques to address this concern differentiate this aspect of modern engineering practice from that of the past.,Pioneer: 1887, Arthur M. Wellington, civil
9、engineer latter part of nineteenth century; addressed role of economic analysis in engineering projects; area of interest: railroad building.(The Economic Theory of Railway Location),1930, Eugene Grant published the first edition of his textbook. (Principles of Engineering Economy ),1942, Woods and
10、DeGarmo wrote the first edition of this book, later titled Engineering Economy,Principles,Develop the alternatives,Focus on the differences,Use a Consistent Viewpoint,Make Uncertainty Explicit,Consider All Relevant Criteria,Use a Common Unit of Measure,Revisit Your Decisions,Develop the alternatives
11、,The final choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.,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 decis
12、ion.,The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective).,Use a Consistent Viewpoint,Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and
13、 comparison of alternatives.,Use a Common Unit of Measure,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 measurem
14、ent or made explicit in a descriptive manner.,Consider All Relevant Criteria,Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.,Make Uncertainty Explicit,Revisit Your Decisions,Improved decision mak
15、ing 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.,An engineering economy study is accomplished using a structured procedure and mathematical modeling techniques. Th
16、e economic results are then used in a decision situation that involves two or more alternatives and normally includes other engineering knowledge and input.,Engineering Economy Process,Problem recognition, definition, and evaluation,Development of the feasible alternatives,Development of prospective
17、 outcomes,Selection of a decision criterion,Analysis and comparison of the alternatives,Selection of the preferred alternative,Performance monitoring and post-evaluation of results,Step1. Problem Definition,Problem formulation should be viewed from system perspective.The boundary or extent of the si
18、tuation needs to be carefully defined, thus establishing the elements of the problem and what constitutes its environmentParticularly important.,Step2. Development of Alternatives,PurposesSearching for potential alternativesScreening them to select a smaller group of feasible alternatives for detail
19、ed analysis and further analysisMethodsClassical brainstormingNominal group technique,Step3. Development of Prospective Outcomes,MonetaryCash flowNon-monetarySafetyTimeEmployees satisfactionProductivityEnvironmental requirement.etc.,Step4. Selection of a Decision Criterion,Maximize profitMinimize co
20、stUncertainty involved ?,Step5. Analysis and Comparison of Alternatives,Based on cash flow estimatesTo get reasonable accurate forecasts of cash flowInflation, deflation, exchange rate,Step6. Selection of the Preferred Alternative,Based on the decision criteriaAnalysis techniquesConsistent,Step.7 Pe
21、rformance Monitoring and Post-evaluation of Results,Learn how to do better analysesCompare the actual results estimatesDifferencesRecordFeedbacks,Example1-1.,The management team of a small furniture-manufacturing company is under pressure to increase profitability in order to get a much needed loan
22、from the bank to purchase a more modern pattern-cutting machine. One proposed solution is to sell waste wood chips and shaving to a local charcoal manufacturer instead of using them to fuel space heaters for the companys office and factory areas:Define the companys problem. Next ,reformulate the pro
23、blems in creative ways.Develop at least one potential alternative for your reformulated problems in part (a). (Do not concern yourself with feasibility at this point.),Solution,A. The companys problem appears to be that revenues are not sufficiently covering cost. Several reformulations can be posed
24、:1.The problem is to increase revenues while reducing costs.2.The problem is to maintain revenues while reducing costs.3. The problem is an accounting system that provides distorted cost information4.The problem is that the new machine is really not needed (and hence there is no need for a bank loan
25、)B. Based only on reformulation1, an alternative is to sell wood chips and shavings as long as increased revenue exceeds extra expenses that may be required to heat the buildings. Another alternative is to discontinue the manufacture of specialty items and concentrate on standardized, high-volume pr
26、oducts. Yet another white-collar support services with other small firms in the area by contracting with a local company involved in providing these services.,Example1-2,Bad news: you have just wrecked your car! You need another car immediately because you have decided that walking, riding a bike, a
27、nd taking a bus are not acceptable. An automobile wholesaler offers you $2,000 for your wrecked car “as is” . Also, your insurance companys claims adjuster estimates that these is $2,000 in damages to your car. Because you have collision insurance with a 1,000 deductibility provision, the insurance
28、company mails you a check for 1,000. The odometer reading on your wrecked car is 58,000 miles. What should you do? Use the seven-step procedure from the table, to analyze your situation. Also identify which principles accompany each step.,Solution,Step1-Define the Problem Your basic problem is that
29、you need transportation. Further evaluation leads to the elimination of walking, riding a bicycle, and taking a bus as a feasible alternatives.Step2-Develop Your Alternatives Your problem has been reduced to either replacing or repairing your automobile. The alternatives would appear to be:Sell the
30、wrecked car for $2,000 to the wholesaler and spend this money, the $1,000 insurance check, and all of your $7,000 savings account on a newer car. The total amount paid out of your savings account is $7000, and the car will have 28,000 miles of prior use.Spend the $1,000 insurance check and $1,000 of
31、 savings to fix the car. The total amount paid out of your savings is $1,000, and the car will have 58,000 miles of prior use.,3. Spend the $1,000 insurance check and $1,000 of your savings to fix the car, and then sell the car for $4,500. Spend the $45,000, plus $5,500 of additional savings to buy
32、the newer car. The total amount paid out of savings is $6,500, and the car will have 28,000 miles.4. Give the car to a part-time mechanic, who will repair it for $1,100($1,000 insurance and $100 of your savings), but will take an additional month of repair time. You will also have to rent a car for
33、that time at $400/month (paid out of savings). The total amount paid out of savings is $500, and the car will have 58,000 miles on the odometer.5. Same as Alternative 4, but you then sell the car for $4,500 and use this money plus $5,500 of additional savings to buy the newer car. The total amount p
34、aid out of savings is $6,000, and the newer car will have 28,000 miles of prior use.,Cash flow of each alternatives,savings account:,Assumptions,The less reliable repair shop in Alternatives 4 and 5 will not take longer than an additional month to repair the car.Each car will perform at a satisfacto
35、ry operating condition (as it was originally intended) and will provide the same total mileage before being sold or salvaged.Interest earned on money remaining in savings is negligible.,1. Alternative 1 varies from all others because the car is not to be repaired at all but merely sold. This elimina
36、tes the benefit of the $500 increase in the value of the car when it is repaired and then sold. Also this alternative leaves no money in your savings account. There is a cash flow of -$8,000 to gain a newer car valued at $10,000.2. Alternative 2 varies from Alternative 1 because it allows the old ca
37、r to be repaired. Alternative 2 differs from alternatives 4 and 5 because it utilizes a more expensive ($500 more) and less risky repair facility. It also varies from alternatives 3 and 5 because the car will be kept. The cash flow is -$2,000 and the repaired car can be sold for $4,500.,Step 3-Estim
38、ate the cash flow of each alternatives,3. Alternative 3 gains an additional $500 by repairing the car and selling it to buy the same car as in Alternative 1. The cash flow is -$7,500 to gain the newer car valued at $10,000.4.Alternative 4 uses the same idea as Alternative 2, but involves a less expe
39、nsive repair shop. The repair shop is more risky in the quality of its end product, but will only cost $1,100 in repairs and $400 in an additional months rental of car. The cash flow is -$1500 to keep the older car valued at $4,500.5. Alternative 5 is the same as Alternative 4, but gains an addition
40、al $500 by selling the repaired car and purchasing a newer car as in Alternative 1 and 3. The cash flow is -$7,000 to obtain the newer car valued at $10,000.,Step 4-Select a Criterion,It is very important to use a consistent viewpoint and a common unit of measure in performing this step. The viewpoi
41、nt in this situation is yours. The value of the car to the owner is its market value ($10,000 for the newer car and $4,500 for the repaired car). Hence, the dollar is used as the consistent value against which everything is measured. This reduces all decisions to a quantitative level, which can than
42、 be reviewed later with qualitative factors that may carry their own dollar value.,Step 5-Analyze and Compare the Alternatives,Alternative 1 is eliminated, because Alternative 3 gains the same end result and would also provide the car owner with $500 more cash. This is experienced with no change in
43、the risk to the owner (Car value=$10,000,savings=0,total worth=$10,000).Alternative is a good alternative to consider, because it spends the least amount of cash, leaving $6,000 in the bank. Alternative 2 provides the same end result as alternative 4, but cost $500 more to repair. Therefore, alterna
44、tive 2 is eliminated. (Car value=$4,500,savings=$6,000,total worth=$10,500).Alternative 3 is eliminated, because alternative 5 also repairs the car but at a lower out of savings cost ($500 difference car) and both alternative 3 and 5 have the same end result of buying the new car. (Car value=$10,000
45、,savings=500,total worth=$10,500).Alternative 4 is a good alternative, because it saves $500 by using a cheap repair facility, provided that the risk of a poor repair job is judged to be small. (Car value=$4,500,savings=6,500,total worth=$11,000).Alternative 5 repairs the car at a lower cost ($500 c
46、heaper) and eliminates the risk of breakdown by selling the car to someone else at an additional $500 gain. (Car value=$10,000,savings=$1,000,total worth=$11,000).,Step-6 Select the Best Alternative,When performing this step of the procedure, you should make uncertainly explicit. Among the uncertain
47、ties that can be found in this problem, the following are the most relevant to the decision. If the original car is repaired and kept, there is a possibility that it would have a higher frequency of breakdowns (based on personal experience) if a cheaper repair facility is used, the chance of a later
48、 breakdown is even greater (based on personal experience) . Buying a newer car will use up most of your savings. Also the newer car purchased may be too expensive, based on the additional price paid (which is at least $6,000/30,000) miles =20 cent per mile). Finally, the newer car may also have been
49、 in an accident and could have a worse repair history than the presently owned car. Based on the information in all previous steps, alternative 5 was actually chosen.,Step 7- Monitor the Performance of Your Choice,This step goes hand-in hand with Principle 7. The newer car turned out after being “test driven” for 20,000 miles to be a real beauty. Mileage was great, and no repairs were needed. The systematic process of identifying and analyzing alternative solutions to this problem really paid off.,
