System Engineering & Economy Analysis Lecturer Maha Muhaisen College of Applied Engineering& Urban Planning

Course outline Introduction to making economic decision Interest and equivalence Present worth analysis Cash flow analysis Rate of return Deprecation Cost benefit analysis Risk, and uncertainly Sensitivity analysis

Grading Research Projects & homework30 % Midterm Exam.30 % Final Exam.40%

Resources 1. “Engineering Economic analysis”, by Donald G. Newnan., Ted G. Eschenbach, & J.P. Lavelle. “Civil and Environmental Systems Engineering”, Charles S. Revelle, Earl Whitlatch, Jeff WrightCharles S. RevelleEarl WhitlatchJeff Wright 1. Class Notes and Handouts 2. Course material will be made available through the web site

Introduction

Engineering Engineers provide answers. –Ability to solve problems or take advantage of opportunities through the application of science. Must meet certain criteria. –Technical feasibility/efficiency: meet or exceed specifications. –Economic feasibility/efficiency: meet budgets and return.

Engineering Economy Every technical solution has financial consequences. Engineering economic analysis determines whether a proposed solution is financially viable. –Will it pay? –Is this the minimum cost solution? –Will it generate an acceptable return?

Engineering Economic Decisions Profit Enhancing Programs: projects designed to generate revenues. –New product development –New product acquisition –Product/service capacity expansion –Improved customer service

Engineering Economic Decisions Cost Control Programs: projects designed to generate savings. –Improving efficiency –Streamlining operations –Eliminating waste –Reducing liabilities

Engineering Economic Decisions Public Improvement Programs: government entities also make capital expenditures. –Increased public satisfaction –Increased public safety –Improved infrastructure

Investment Categories Expansion –Products, services, capacity can expand –Often requires choice of technology Replacement –Technology selection –Outsourcing versus in-house choice Abandonment –Eliminating products, services, or capacity

Investment Decisions Invest –Releases funds to start a project Do Not Invest –Eliminates the project from further consideration Wait (Delay) –Time to gather information about the future can aid in decision-making

Making an Economic Decision 1Problem or opportunity recognition and definition 2Generation of Solution Alternatives 3Development of Feasible Solution Alternative Cash Flows and Information Gathering 4Evaluation of Solution Alternatives 5Selection and Implementation of Best Alternative 6Post-implementation Analysis and Evaluation

The Role of engineering Economic analysis Engineering economic analysis is most suitable for intermediate problems and economic aspects of complex problem, they have those qualities : 1) the problem is important enough to justify our giving it serious thought and effort. 2) careful analysis requires that we recognize the problem and all various consequences, and this is just too much to be done all at once. 3)the problem has economic aspects important in reaching a decision.

Engineering Design Decisions 1Problem or opportunity recognition and definition 2Generation of Solution Alternatives 3Assess the Feasibility of Each Approach. 4Selection of Best Alternative According to Technical and Economic Constraints 5Detailed Design, Testing, and Analysis. If Successful, Implement, Else, Goto 2. 6Post-implementation Analysis and Evaluation

Decisions in Design  The design process is generally embedded in the second step of the decision-making process.  Designs = Solution Alternatives  Design decisions are generally discipline specific.  But the economics surrounding design decisions are for all engineers.

Engineering Economic Decision Analysis Importance Companies must invest to grow. Companies must invest to improve. Investments cost (lots of) money! –Economic Analysis considers the economic viability of each and every investment project such that money is made, not lost.

Engineering Economic Decision Analysis Difficulty Investments carry risk. Money spent now for expected savings or returns in the future. –As future is uncertain, so are returns or savings. –Money spent can be lost. If too often, could lead to bankruptcy. While economics are paramount, many other factors influence decision.

Why YOU, the Engineer? Those who generate solutions are most intimate with the details and best suited to analyze them financially. To be heard, engineers must be able to speak financially: –It is generally assumed that the engineering solution will work -- must justify financially. –Understanding the financials will help you move up the corporate ladder. –This analysis provides the link to other departments, such as accounting and finance.

In this course, you will learn: The fundamentals of engineering economy (time value of money, interest, economic equivalence) To perform the economic decision making process –To financially evaluate engineering projects under certainty, risk, uncertainty, and multiple options –Numerous methods in which to determine the best choice from a feasible set with multi-attributes To solve a variety of problems dealing with capital investments

Engineering economic analysis is used to answer many different questions : 1.Which engineering projects are worthwhile ? 2.Which engineering project should give higher priority? 3.How should the engineering project be design? Engineering economic analysis can also used to answer questions that are personally important : 1How to achieve long-term financial goal. 2How to compare different ways to finance purchases. 3How to make short and long term investment decision.