EGN 3615 — Spring 12 ENGINEERING ECONOMICS WITH SOCIAL AND GLOBAL IMPLICATIONS 1

2 2 Engineering Economics Economic Decisions Cost & Estimating Interest & Equivalence Time Value of Money Present Worth Annual Equivalent Rate-of- Return Best Alternative Depreciation After-tax

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4  Types of Problems  Role of Engineering Economic Analysis  Problem-Solving / Decision-Making Process  Ethical Dimensions in Engineering Decision-Making Chapter Outline

5 5 Learning Objectives Distinguish between simple and complex problems Understand the role and purpose of engineering economic analysis Apply problem-solving /decision making process Solve simple problems associated with engineering decision-making process Understand ethical dimension of decision-making

6 This course develops the tools to properly analyze and solve the economic problems that are commonly faced by engineers. Making Economic Decisions

7 The problems are often not isolated from each other. People are Surrounded by Problems Which career to pursue? What level of preparation is required for the career chosen? Where may the preparation be obtained? How to get up and get to class?

8 Decisions concerning these opportunities may be arrived at with the help of economic analysis. Organizations Have Opportunities Do we make part A or B today? Should we use a drilling or boring machine? Should we purchase a boring machine? When must we replace the drilling machine? Would a mechanized or computerized drilling machine be the preferred alternative? Where do we locate machinery in the plant?

9 Simple Intermediate Complex Problem Difficult Levels

10 A Sea of Problems - I Simple Problems Can often be solved in one’s head without extensive analysis. Examples: Should I pay cash or use my credit card? Do I buy a semester parking pass or use the parking meters? Shall we replace a burned-out motor?

11 A Sea of Problems - II Intermediate Problems Must be organized and analyzed Have significant economic aspects Are primarily economic Are the principal subject of this course Are generally adequately solved with single-criteria decision making Examples: Should I buy or lease a new apartment? Which type of equipment should the company purchase? Shall I buy or lease my next car? Which equipment should be selected for a new assembly line?

12 Complex Problems Such problems represent a mixture of 3 elements: economic, political and humanistic Complex problems are beyond the scope of this course from a decision-making criteria point of view, but the economic aspects of complex problems will be discussed Examples: Feasibility study of a new automobile plant Planning for new highways Such problems represent a mixture of 3 elements: economic, political and humanistic A Sea of Problems - III

13 Engineering Economic Analysis Key Questions: Which engineering projects are worthwhile? Which projects should have higher priority? How the project should be designed? How to achieve long-term financial goals? How to compare different ways to finance purchases? How to make short and long-term financial decisions?

14 Examples of Engineering Economic Analysis A company plans to design a building Construction cost occurs in the near future Benefits to users begin when construction is finished Economic analysis of cost, benefits and revenues occurring over time is an engineering economic analysis

15 1. Recognize Problem 2. Define the Goal or Objective 3. Assemble Relevant Data 4. Identify Feasible Alts 7. Predict Each Alt’s Outcomes 8. Choose the Best Alternative 9. Audit the Result Overall Mission / Objectives 5. Select the Criterion 6. Construct a Model 9-Step Decision-Making Process

16 9. Audit the Results Compare the results of changes to the predictions to assure that the chosen alternative was implement as planned and the results are as expected. Fix deviations from planned changes. Make sure prediction errors are not repeated. Identify added opportunities. Audits promote realistic economic analysis and implementation.

17  Reality vs. prediction  Learn from mistakes  Replacement analysis 9. Audit the Results

18 Work a Problem Example: Moving to a new apartment. 1. Recognize the problem My contract is about to end, I have to make a decision to move or renew the contract for the next year. 2. Define the goal or objective Find a place to stay during the next year while studying at USF

19 3. Assemble relevant data Am I alone or with family Selection of Roommates Rent price, move in fee Amenities or Services Pet friendly Distance from school Distance from the mall, principal stores, etc Work a Problem Example: Moving to a new apartment.

20 4. Identify Feasible Alternatives Do not move Move to a cheaper apartment but far from school (need a car, buy a parking permit, near to the mall, I can save time) Move to a expensive apartment but near USF campus (can walk, bike, use USF Bull Runner but need to adjust my schedule to the bus schedule) Work a Problem Example: Moving to a new apartment.

21 5. Select the criterion to Determine the best alternative Minimize the expenditure of money Minimize the time to go to school Work a Problem Example: Moving to a new apartment.

22 6. Construct the model 7. Predict the outcomes for each alternative Compare alternatives in equivalent units (e.g., money) 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 USF. Maybe I’ll choose Apartment B.” Work a Problem Example: Moving to a new apartment.

23 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!! Work a Problem Example: Moving to a new apartment.

24  The concept of distinguishing between right and wrong in decision-making.  Ethics includes: Establishing systems of beliefs and moral obligations Defining values and fairness Determining duty and guidelines for conduct Ethics in Engineering Economic Analysis

25 Ethics in Engineering Economic Analysis  Focused on how well and how honestly the decision- making process is conducted – the data, method of analysis, recommendations, and follow-up  Recognize ethical issues exist and make them an explicit part of decision-making process

26 Code of Ethics National Soc. of Professional Eng. Engineers, in the fulfillment of their professional duties, shall: Hold paramount the safety, health, and welfare of the public. Perform services only in areas of their competence. Issue public statements only in an objective and truthful manner. Act for each employer or client as faithful agents or trustees. Avoid deceptive acts. Conduct themselves honorably, responsibly, ethically, and lawfully so as to enhance the honor, reputation, and usefulness of the profession. (

27 Ethical Dimensions in Engineering Decision-Making Decision Process StepExample Ethical Lapses 1. Recognize the problem “Looking the other way”, or ignoring the problem due to bribes or fear of retribution 2. Define goals/objectives Favoring one group of stakeholders by focusing on their objective 3. Collect relevant dataUsing faulty or inaccurate data 4. Identify feasible alts.Leaving legitimate alts out of consideration 5. Select criterion to determine best alt Considering only monetary consequences when other significant consequences exist

28 Ethical Dimensions in Engineering Decision-Making Decision Process StepExample Ethical Lapses 6. Construct a modelUsing a short time horizon that favors one alt over another 7. Predict alt’s outcomes Using optimistic estimates for one alt and pessimistic ones for the other alts 8. Choose the best altChoosing an inferior alt, one that is unsafe, adds unnecessary cost for user, harms the environment 9. Audit the resultHiding past mistakes

29 Recap Distinguish between simple and complex problems Understand the role and purpose of engineering economic analysis Apply problem-solving / decision making process Solve simple problems associated with engineering decision-making process Understand ethical dimension of decision- making

30 Assignment: Read Chapters 1 and 2 End of Chapter 1