ENGINEERING ECONOMIC DECISION CHAPTER 1

Outline Role of Engineering Economy. What is Engineering Economy? Why is the study of Engineering Economy Important to Engineers? What Makes Economic Decisions Different from Other Design Decision? Types of Strategic Engineering Economic Decisions. Fundamental Principles in Engineering Economics.

Role of Engineering Economy Engineering economy is the specialized study of financial and economic aspects of industrial decision making. Companies have realized the importance of having engineers who are familiar with the financial aspects of decision making. Universities have responded and are producing engineers who have knowledge of engineering economic principals and methodologies.

During the 1970s and 1980s many engineers were promoted to the level of managers due to their contribution towards the development of successful product lines. These engineers were very knowledgeable, efficient and productive when it came to product design, manufacturing process, quality control and maintenance and capital machinery installation issues.

But, when it came to personnel and human resource management, interest factors, cost benefit analysis, comparison of alternatives, sensitivity analysis and inflation, income taxes, depreciation, replacement cost analysis risk and uncertainty in decision making, engineers were often left in the middle.

What is Engineering Economy? Engineering economy involves the financial and economic evaluation of manufacturing projects. In short, economic decision making for engineering systems is called engineering economy. This definition may seem restricted to engineering projects and systems only, engineering economy however is also the study of industrial economics and the economic and financial factors which influence industry. The objective of engineering economy is to familiarize and develop the commercial and financial knowledge of engineers.

Engineers are the people who are familiar with all the technicalities of machinery and production therefore they are the best judges of the useful lives of an asset and they also have the technical knowledge to calculate the number of units a proposed plant would produce when operational. Engineers can recommend quality control check points and they can introduce cost effective measures more effectively. Engineers are able to give the precise break up of all variable and fixed costs relating to each marginal unit produced.

In order to perform all these functions with the ultimate objective of making a profit for the organization it is necessary for engineers to have some know how of financial analysis and evaluation methodologies. Engineering economy focuses on those economic and financial aspects which affect the decision making capacity of the engineer.

Why is the study of Engineering Economy Important to Engineers? Engineers are called upon to analyze and select the most economical alternative among several design alternatives. Engineers often play a major role in investment decisions based on the analysis and design of new products or processes. Decisions made by the engineer during the engineering phase of a product’s development determine the majority of the costs of manufacturing the product.

Typical Decision Making Process

What Makes Economic Decisions Different from Other Design Decisions? Economic decisions involve predicting, or forecasting product sales, product selling price, and various costs overt future time frame. Such forecasts are never completely accurate. A prediction or forecast made today is likely to be different than one made in future. Engineering design outcomes are often time invariant. Economic decisions have to be based on best information available at time of decision with understanding of uncertainties in forecasted data.

Two Factors in Engineering Economic Decisions The factors of time and uncertainty are the defining aspects of any engineering economic decisions

Types of Strategic Engineering Economic Decisions New products of product expansion. Equipment and process selection. Cost reduction – lower operating costs. Equipment replacement. Service of quality improvement.

Producing Ethanol from Stalks Would the cost of producing ethanol be sufficiently competitive with gasoline to justify its production?

Evaluating Two Different Manufacturing Processes

Fundamental Principles in Engineering Economics An earlier dollar is worth more than a later dollar. All that counts is the difference among alternatives. Marginal revenue must exceed marginal cost. Additional risk is not taken without additional return.