Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Engineering Economic Decisions Lecture No. 1 Chapter 1 Contemporary Engineering Economics, 6 th ed. Copyright © 2016

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved What Is an Engineering Economic Decision? Role of engineers in business Understanding the term “engineering economic decision” An overview of a variety of engineering economic decision problems Understanding the fundamental principles of engineering economics

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Role of Engineers in Business Create and Design Engineering Projects Evaluate Expected Profitability Timing of Cash Flows Degree of Financial Risk Analyze Production Methods Engineering Safety Environmental Impacts Market Assessment Evaluate Impact on Financial Statements Firm’s Market Value Stock Price

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Engineering Economic Decisions Plan for the acquisition of equipment (capital expenditure) that will enable the firm to design and produce products economically PlanningInvestmentManufacturingMarketingProfit

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved What Makes Engineering Economic Decisions Difficult? Estimating a required investment Forecasting a product demand Estimating a selling price Estimating a manufacturing cost Estimating a product life

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Accounting Vs. Engineering Economy Present Future Past Engineering Economy Accounting Evaluation of past performance Evaluation and prediction of future events

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Common Types of Strategic Engineering Economic Decisions Equipment or process selection Equipment replacement decisions New products and product expansion Cost reduction Improvement in service or quality Design decisions

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Fundamental Principles of Engineering Economics Principle 1: A dollar earned today is worth more than a dollar earned in the future. Principle 2: The only thing that matters is the difference between alternatives. Principle 3: Marginal revenue must exceed marginal cost. Principle 4: Additional risk is not taken without the expected additional return.

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Principle 1: A dollar earned today is worth more than a dollar earned in the future. $100 today $110 one year later $121 two years later Interest rate = 10%

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Principle 2: The only thing that matters is the difference between alternatives. Option Monthly fuel cost Monthly maintenance Cash outlay at signing Monthly payment Salvage value at end of year 3 Buy $960$550$6,500$350$9,000 Lease $960$550$2,400$5500 Irrelevant items in decision-making

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Principle 3: Marginal revenue must exceed marginal cost. Manufacturing cost Sales revenue Marginal revenue Marginal cost 1 unit

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Principle 4: Additional risk is not taken without the expected additional return.

Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Two Factors in Engineering Economic Decisions Time Uncertainty