Presentation on theme: "L1: Engineering Economic Decisions"— Presentation transcript:
1 L1: Engineering Economic Decisions ECON 320 Engineering EconomicsMahmut Ali GOKCEIndustrial Systems EngineeringComputer Sciences
2 Lecture No.1 Chapter 1 Engineering Economic Decisions Rational Decision- making ProcessThe Engineer’s Role in BusinessTypes of Strategic Engineering Economic DecisionsFundamental Principles in Engineering EconomicsBose Corporation
3 Chapter Opening Story - Bose Corporation Dr. Amar Bose, a graduate of electrical engineering, an MIT professor, and Chairman of Bose Corporation.He invented a directional home speaker system that reproduces the concert experience.He formed Bose Corporation in 1964 and became the world’s No.1 speaker maker.He became the 288th wealthiest American in 2002 by Forbes magazine.
4 Engineering Economics Overview Rational Decision-Making ProcessEconomic DecisionsPredicting FutureRole of Engineers in BusinessLarge-scale engineering projectsTypes of strategic engineering economic decisions
5 Rational Decision-Making Process 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 alternative
6 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
7 Financial Data Required to Make an Economic Decision
9 Predicting the Future Estimating a Required investment Forecasting a product demandEstimating a selling priceEstimating a manufacturing costEstimating a product life
10 Role of Engineers in Business Create & DesignEngineering ProjectsEvaluateExpectedProfitabilityTiming ofCash FlowsDegree ofFinancial RiskEvaluateImpact onFinancial StatementsFirm’s Market ValueStock PriceAnalyzeProduction MethodsEngineering SafetyEnvironmental ImpactsMarket Assessment
11 Accounting Vs. Accounting Evaluating past performanceEvaluating and predicting future eventsAccountingEngineering EconomyPastFuturePresent
12 Two Factors in Engineering Economic Decisions The factors of time and uncertainty are the defining aspects of any engineering economic decisions
13 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
14 Types of Strategic Engineering Economic Decisions in Manufacturing Sector Service ImprovementEquipment and Process SelectionEquipment ReplacementNew Product and Product ExpansionCost Reduction
15 U.S. Gross Domestic Products (GDP) Manufacturing(14%)Service sector(80%)Healthcare (14%)Agriculture (2%)
16 1993 Employment distribution Industrial EmploymentIndustry1993 Employment distributionNational AverageProjected ChangeManufacturing12.6%-0.70%-7.2%Services30.5%60.0%39.0%Retail trade16.7%31.1%13.0%Financial8.0%26.8%6.3%Source: Bureau of Economic Analysis/Bureau of Labor Statistics
17 Types of Strategic Engineering Economic Decisions in Service Sector Commercial TransportationLogistics and DistributionHealthcare IndustryElectronic Markets and AuctionsFinancial EngineeringRetailsHospitality and EntertainmentCustomer Service and Maintenance
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.