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1 Engineering Economic Decisions.  Decision making process  Engineer’s role in business  Types of strategic engineering economic decisions  Fundamental.

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Presentation on theme: "1 Engineering Economic Decisions.  Decision making process  Engineer’s role in business  Types of strategic engineering economic decisions  Fundamental."— Presentation transcript:

1 1 Engineering Economic Decisions

2  Decision making process  Engineer’s role in business  Types of strategic engineering economic decisions  Fundamental Principles in Engineering Economics

3  Engineering Economy is a way to formulate, estimate and evaluate the economic outcomes of different alternatives.  Engineering Economy uses a collection of mathematical techniques that simplify economic comparison.  It is based on uncertainty, risk and estimates of the future.  People make decisions, but these tools can help formulate the problem and potential solutions. 3

4  It is used to answer many different questions ◦ Which engineering projects are worthwhile?  Examples ◦ Which engineering projects should have a higher priority?  Examples ◦ How should the engineering project be designed?

5  Small decision or big decision  Establish a goal (buying (house, car, TV, etc.))  Establish your objectives (economical car)  Find alternatives  Identify decision criteria  Evaluate feasible alternatives  Select best alternative 5

6 1. Define the problem. 2. Define goals and objectives 3. Collect relevant information. 4. Define feasible alternatives and make realistic estimates. 5. Identify decision making criteria. 6. Evaluate alternatives. 7. Select the best alternative. 8. Implement the solution and monitor results. 6

7 7 Any problem, must have alternative solutions (Each problem will have at least one alternative solution– DO NOTHING) Identify Alternatives Estimate the cash flows for the alternatives Analyze the cash flow for each alternative To analyze alternatives must have: – Concept of the time value of $$ – An Interest Rate – Some measure of economic worth Evaluate and weigh Select, implement, and monitor Define proble m Identify Alternatives Estimate Cash Flow Analyze Cash Flow W/interest Evaluate Select & Implement

8 1. Define the problem 2. Define Goal and objectives 3. Collect all the relevant information 4. Define feasible alternative 5. Identify decision making criteria 6. Evaluate alternatives 7. Select the best alternative 8. Implement the solution and monitor results (and celebrate!!). 8 Milling machine has stopped working Replace machine ASAP. Milling machine costs and specifications Replace milling machine (3 different models), or repair milling machine Cost (economic), functionality Compare costs and functionality of alternatives Replace with model 320179 Process capability, the SPC, and a party!

9 1. Define the problem 2. Define goal and objectives 3. Collect all the relevant information 4. Define feasible alternative 5. Identify decision making criteria 6. Evaluate alternatives 7. Select the best alternative 8. Implement the solution and monitor results (and celebrate!!). 9 Increasing population requires expanding water production Increase Water Production Expected population growth, production water cost s New well field, expand existing plant, new plant Cost (economic), political Compare costs and politics of alternatives Expand existing plant Media tour of expanded plant, pump age and water production cost measures

10 1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. 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

11  Economic decisions has to be based on best information available at the time of taking the decision while design is based on physical information  In economical decisions we should understand the uncertainties in the forecasted data  Economical decisions are not necessarily time constant 11

12  Engineers participate in decision making processes ranging from manufacturing and marketing to financing and economical decisions  Engineers plan for the acquisition of equipment capital expenditure that will enable the firm to design and produce products economically (not to invest too much not too little) 12 Design Investment Manufacture

13  Engineers has to justify production of large scale projects with large amount of money and long period of time  Engineers has to consider the impact of a project on the overall financial strength and position of the company 13 Future Engineering Economy Evaluating and predicting future events

14  Requires a large sum of investment  Takes a long time to see the financial outcomes  Difficult to predict the revenue and cost streams

15  Estimating a Required investment  Forecasting a product demand  Estimating a selling price  Estimating a manufacturing cost  Estimating a product life

16 The factors of time and uncertainty are the defining aspects of any engineering economic decisions

17  Service or quality improvement (health care service)  New product or product expansion (Gillette SensorExcel and MACH3)  Equipment and process selection (selection of a lathe machine)  Cost reduction (a project that will attempt to lower firm’s operations cost)  Equipment replacement (replace warn-out or obsolete equipment (example large presses that produce metal to presses that produce plastic)) 17

18 Service Improvement How many more jeans would Levi need to sell to justify the cost of additional robotic tailors?

19 Example - Healthcare Delivery Which plan is more economically viable? Traditional Plan: Patients visit each service provider. New Plan: Each service provider visits patients : patient : service provider

20  How do you choose between the Plastic SMC and the Steel sheet stock for an auto body panel?  The choice of material will dictate the manufacturing process for an automotive body panel as well as manufacturing costs.

21

22  Now is the time to replace the old machine?  If not, when is the right time to replace the old equipment?

23  Shall we build or acquire a new facility to meet the increased demand?  Is it worth spending money to market a new product?

24  R&D investment: $750 million  Product promotion through advertising: $300 million  Priced to sell at 35% higher than Sensor Excel (about $1.50 extra per shave).  Question 1: Would consumers pay $1.50 extra for a shave with greater smoothness and less irritation?  Question 2: What would happen if the blade consumption dropped more than 10% due to the longer blade life of the new razor? Gillette’s MACH3 Project

25  Should a company buy equipment to perform an operation now done manually?  Should spend money now in order to save more money later?

26  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 return

27 Today6-month later

28 Option Monthly Fuel Cost Monthly Maintena nce Cash outlay at signing Monthly payment Salvage Value at end of year 3 Buy$960$550$6,500$350$9,000 Lease$960$550$2,400$5500 Irrelevant items in decision making

29 Manufacturing cost Sales revenue Marginal revenue Marginal cost 1 unit

30 Investment ClassPotential Risk Expected Return Savings account (cash) Low/None1.5% Bond (debt)Moderate4.8% Stock (equity)High11.5%

31  The term engineering economic decision refers to all investment decisions relating to engineering projects.  The five main types of engineering economic decisions are (1) service improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product and product expansion, and (5) cost reduction.  The factors of time and uncertainty are the defining aspects of any investment project.


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