1. 1 Introduction to Engineering Spring 2007 Lecture 10: Engineering Economics

2. 2 Review Plotting 3d Plotting More MatLab Programming

3. 3 Review - Plots MATLAB has many functions and commands that can be used to create various types of plots.

4. 4 Outline What is the role of economics? Cost Factors Definition of Terms

5. 5 What is the role of economics?

6. 6 Philosophical Questions Why do we design products? What is the purpose of business? Why do you want to be an engineer?

7. 7 Profit The purpose of Product Development is to produce a good or service that a customer will pay a sufficient price for to assure a profit. Gross Profit=Price - Direct Cost Net Profit= Gross profit - allocated expenses To assure a profit, companies act to produce products that can command the highest prices and cost the least to make

8. 8 Key Questions Which engineering projects are worthwhile? Which projects should have higher priority? How should the project should be designed? How can we achieve our long-term financial goals? How can we compare different ways to finance purchases? How do we make short and long-term financial decisions?

9. 9 Non-Monetary Factors Consistently meeting customer expectations Maximization of employee satisfaction Maintaining flexibility to meet changing demand Maintenance of a desired public image Leveling cyclic fluctuations in production Improvement of safety in operations Reduction of pollutants

10. 10 Engineering Economics Deals with the concepts and techniques of analysis useful in evaluating the worth of systems, products, and services in relation to their costs It is used to answer many different questions Which engineering projects are worthwhile? Has the mining or petroleum engineer shown that the mineral or oil deposits is worth developing? Which engineering projects should have a higher priority? Has the industrial engineer shown which factory improvement projects should be funded with the available dollars? How should the engineering project be designed? Has civil or mechanical engineer chosen the best thickness for insulation?

11. 11 Rational Decision Making 1 1. Recognize the problem “I need a place to live this term.” 2. Define the Goal or Objective “I’ll find a nice apartment that is not too expensive.” 3. Assemble Relevant Data “I need information on rent, utilities, apartment age, parking, driving time to UF, driving time to shopping, the neighborhood, other amenities provided (swimming, table tennis, etc.).” 4. Identify Feasible Alternatives “I’ll use the Yellow Pages, information from friends, apartment finding services, information from UF, the local newspaper, and my personal experience, to look for apartments.”

12. 12 Rational Decision Making 2 5. Select Criterion to Determine the Best Alternative “Most important is rent plus utilities cost. I’m also very concerned about driving time to UF, and the kind of neighborhood the apartment is in.” 6. Construct the model “I’ll make a spreadsheet. The rows will be the apartment choices, the columns the evaluation criteria. Then I’ll try to fill in the interactions between the apartments and the criteria.” This includes determining cash flows for engineering economic analysis!!! 7. Predict Outcomes of Each Alternative “I’ll fill in the estimated costs for the spreadsheet and rate the amenities, driving time, etc.” 8. Choose the Best Alternative “Apartment C looks cheapest, but I don`t like the neighborhood. If I pay $50 more per month for Apartment B I get a nicer neighborhood, and a 15-minute drive to UF. Maybe I’ll choose Apartment B.”

13. 13 Rational Decision Making 3 9. Audit the Results “Did I make a good choice” “After living in Apartment B for six months, I am very happy with my choice!” But this certainly isn’t the case every time!!

14. 14 Example Bad news – you just wrecked your car! An automobile wholesaler offers you $2,000 for the car “as is.” Your insurance company estimates that there is $2,000 of damage to your car. The insurance company can fix the car right away in a repair shop belonging to this company. Because you have collision insurance with a $1,000 deductibility provision, the insurance company mails you a check for $1,000. The odometer reading on your wrecked car is 58,000 miles. Additional Information: You have $7,000 in savings. You can buy a newer car for $10,000 with an odometer reading of 28,000 miles. After repairing the wrecked car, it can be sold for $4,500. A discount repair shop charges $1,100 and requires 1 month. A car rental for one month is $400.

15. 15 What do you do? Alternatives Buy newer car. Sell now, but don`t repair: Cash flow = $3,000 - $10,000 = -$7,000 Repair now. Sell, and buy the newer car: Cash flow: = -$1,000 + $4,500 - $10,000 = -$6,500 Repair at discount shop. Sell and buy the newer car: Cash flow: = -$100 + $4,500 - $10,000 = -$5,600 Repair now. Keep your car. Cash flow: = -$1,000 Repair at discount shop.Rent a car, then keep your car. Cash flow: = -$100 - $400 = -$500 NOTE: Don’t forget factors such as mileage, repair shop reliability, investment opportunity for your savings et.

16. 16 Cost Factors

17. 17 Product Lifetime Four phases Development Manufacturing Maintenance Disposal

18. 18 Cost Bearer Who pays the costs during the lifetime? Company pays the cost Customer pays the cost

19. 19 Simple Cost Estimate Cost involves more than just the price of the components in the design The factors which influence the total cost of a system are: the cost of the design effort, c D - the R&D the cost of manufacturing, c M - includes the number and price of the components the support costs, c S - maintenance/repair/technical support... The net “lifetime” cost c T of a system when N copies are produced can be approximated by: c T = + c M + c S cDcD N

20. 20 Simple Cost Example 1 REQUIREMENT REQUIREMENT: Design an add-on board to a $2000 computer which is to cost no more than $500 Costs R&D: $100,000 Support: $100/device $50 for the PCB and connectors 50 IC chips at an average price of $2 per chip Total Cost ( for a small run of 1000 boards) c T = + 150 + 100 = $350 per board 100,000 1000

21. 21 Simple Cost Analysis II REQUIREMENT: Design device X which sells for $500 or less at a profit of $10 per device Costs: Estimated R&D: $10,000 Estimated Support: $200/device 20 chips at $2 per chip $50 for the circuit board $100 for the power supply Question: What is the price of X if 100 are to be produced? R&D10000/100$ 100 Support$ 200 Parts$ 190 Profit$ 10 Total$500

22. 22 Definition of terms

23. 23 MARR 1 When a business or government agency decides to invest in a project they have to weigh: The amount they expect to earn from the project against, The amount they could earn by investing the money elsewhere Economists refer to this as an “opportunity cost” In order to invest in a project, it must provide a minimum acceptable rate of return (MARR)

24. 24 MARR 2 The minimum acceptable rate of return depends on the amount of risk the investor is willing to accept It can vary significantly, depending on the investors’ objectives The minimum acceptable rate of return becomes the interest rate used in the time value of money calculations

25. 25 Time Value of Money The basic idea behind the concept of the time value of money is: $1 received today is worth more than $1 in the future OR $1 received in the future is worth less than $1 today WHY? Because interest can be earned on the money

26. 26 Possible Quiz Remember that even though each quiz is worth only 5 to 10 points, the points do add up to a significant contribution to your overall grade If there is a quiz it might cover these issues: What is MARR What are the four phases of a products lifetime? What is the concept of the time value of money?