Presentation on theme: "Engineering Economics Analysis Dr. Nabeel Yousef"— Presentation transcript:
1 Engineering Economics Analysis Dr. Nabeel Yousef Engineering Economic DecisionsEngineering Economics Analysis Dr. Nabeel Yousef
2 Outline Decision making process Engineer’s role in business Types of strategic engineering economic decisionsFundamental Principles in Engineering Economics
3 Why Engineering Economy is Important 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.
4 Engineering Economics Analysis It is used to answer many different questionsWhich engineering projects are worthwhile?ExamplesWhich engineering projects should have a higher priority?How should the engineering project be designed?
5 Personal Decision Making Small decision or big decisionEstablish a goal (buying (house, car, TV, etc.))Establish your objectives (economical car)Find alternativesIdentify decision criteriaEvaluate feasible alternativesSelect best alternative
6 Decision Making Process Define the problem.Define goals and objectivesCollect relevant information.Define feasible alternatives and make realistic estimates.Identify decision making criteria.Evaluate alternatives.Select the best alternative.Implement the solution and monitor results.
7 Performing a StudyAny problem, must have alternative solutions (Each problem will have at least one alternative solution– DO NOTHING)Identify AlternativesEstimate the cash flows for the alternativesAnalyze the cash flow for each alternativeTo analyze alternatives must have:Concept of the time value of $$An Interest RateSome measure of economic worthEvaluate and weighSelect, implement, and monitorDefine problemIdentify AlternativesSelect & ImplementEstimate Cash FlowEvaluateAnalyze Cash Flow W/interest
8 Decision Making Process Production Engineering Example Define the problemDefine Goal and objectivesCollect all the relevant informationDefine feasible alternativeIdentify decision making criteriaEvaluate alternativesSelect the best alternativeImplement the solution and monitor results (and celebrate!!).Milling machine has stopped workingReplace machine ASAP.Milling machine costs and specificationsReplace milling machine (3 different models), or repair milling machineCost (economic), functionalityCompare costs and functionality of alternativesReplace with modelProcess capability, the SPC, and a party!
9 Decision Making Process Water System (Large Scale Example) Define the problemDefine goal and objectivesCollect all the relevant informationDefine feasible alternativeIdentify decision making criteriaEvaluate alternativesSelect the best alternativeImplement the solution and monitor results (and celebrate!!).Increasing population requires expanding water productionIncrease Water ProductionExpected population growth, production water cost sNew well field, expand existing plant,new plantCost (economic), politicalCompare costs and politics of alternativesExpand existing plantMedia tour of expanded plant, pump age and water production cost measures
10 Which Car to Lease? Saturn vs. Honda Recognize a decision problemDefine the goals or objectivesCollect all the relevant informationIdentify a set of feasible decision alternativesSelect the decision criterion to useSelect the best alternativeNeed a carWant mechanical securityGather technical as well as financial dataChoose between Saturn and HondaWant minimum total cash outlaySelect Honda
11 Economic DecisionsEconomic decisions has to be based on best information available at the time of taking the decision while design is based on physical informationIn economical decisions we should understand the uncertainties in the forecasted dataEconomical decisions are not necessarily time constant
12 Engineer’s Role in Business DesignEngineers participate in decision making processes ranging from manufacturing and marketing to financing and economical decisionsEngineers 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)InvestmentManufacture
13 Engineer’s Role in Business Engineers has to justify production of large scale projects with large amount of money and long period of timeEngineers has to consider the impact of a project on the overall financial strength and position of the companyEvaluating and predicting future eventsCreate and design Engineering ProjectsAnalyze (production methods, engineering safety, environmental impacts, market assessment)Evaluate (Expected profitability, timing of cash flows, degree of financial risk)Evaluate (Impact on financial statements, firm’s market value, stock price)Engineering EconomyFuture
14 A Large-Scale Engineering Project Requires a large sum of investmentTakes a long time to see the financial outcomesDifficult to predict the revenue and cost streams
15 Predicting the Future Estimating a Required investment Forecasting a product demandEstimating a selling priceEstimating a manufacturing costEstimating a product life
16 Two Factors in Engineering Economic Decisions The factors of time and uncertainty are the defining aspects of any engineering economic decisions
17 Types of Strategic Engineering Economic Decisions 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))
18 Service ImprovementHow 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 Equipment & Process Selection 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.
22 Equipment Replacement Problem Now is the time to replace the old machine?If not, when is the right time to replace the old equipment?
23 New Product and Product Expansion Shall we build or acquire a new facility to meet the increased demand?Is it worth spending money to market a new product?
24 Example - MACH 3 Project Gillette’s MACH3 Project R&D investment: $750 millionProduct promotion through advertising: $300 millionPriced 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 MACH3Project
25 Cost ReductionShould a company buy equipment to perform an operation now done manually?Should spend money now in order to save more money later?
26 Fundamental Principles of Engineering Economics Principle 1: A nearby dollar is worth more than a distant dollarPrinciple 2: All it counts is the differences among alternativesPrinciple 3: Marginal revenue must exceed marginal costPrinciple 4: Additional risk is not taken without the expected additional return
27 Principle 1: A nearby dollar is worth more than a distant dollar Today6-month later
28 Principle 2: All it counts is the differences among alternatives OptionMonthly Fuel CostMonthly MaintenanceCash outlay at signingMonthly paymentSalvage Value at end of year 3Buy$960$550$6,500$350$9,000Lease$2,400Irrelevant items in decision making
29 Principle 3: Marginal revenue must exceed marginal cost 1 unitManufacturing costMarginalrevenueSales revenue1 unit
30 Principle 4: Additional risk is not taken without the expected additional return Investment ClassPotentialRiskExpectedReturnSavings account (cash)Low/None1.5%Bond (debt)Moderate4.8%Stock (equity)High11.5%
31 SummaryThe 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.