Engineering Economy: Applying Theory to Practice 3rd

1. 1 Engineering Economy: Applying Theory to Practice 3rd Chapter 1: Making Economic Decisions

2. Ch 1 Econ. Dec. 2 Making Economic Decisions Engineering economy � define & examples Decision-making principles Decision-making process Decision-making in reality Ethics & decision-making Role of engineering economy Operational economics & cost definitions

3. Ch 1 Econ. Dec. 3 Engineering & Engineering Economy Engineering projects High costs to build, buy, & produce Benefits, revenues, reduced costs over 5 to 50+ years Minimizing cost & maximizing value over time Wellington (1887): engineering is the art of doing well with one dollar what any bungler can do with two after a fashion

4. Ch 1 Econ. Dec. 4 What is Engineering Economy? Time value of money $1 today worth more than $1 next year or in 10 years $0 ? $1 ? $1-10 Engineering economy formulas account for time value of money P = F / (1 + i)N

5. Ch 1 Econ. Dec. 5 Example Applications Which engineering design choice? Longer life at a higher cost Higher cost but more benefits Which engineering projects? Can�t fund all projects � industrial & public Personal Retirement, buying a house, �

6. Ch 1 Econ. Dec. 6 Principles for Decision Making Use common measure for consequences ($s) $0 and $20 cannot be added together Can�t compare hours of overtime with number of items completed � unless both in $ terms Include consequences that cannot be measured Completing projects early, shipping products sooner, improving product quality Estimates or engineering judgment

7. Ch 1 Econ. Dec. 7 Principles for Decision Making (cont�d.) Consider only differences between alternatives Ignore sunk costs � past What you paid 2 years ago for your computer Engineering design often has only costs Benefits of dry, warm interior do not depend on which column spacing, roof material, � Adopt systems viewpoint Firm�s bottom line not just a department�s All citizens not just the ones who benefit

8. Ch 1 Econ. Dec. 8 Principles for Decision Making (cont�d.) Use common planning horizon Different materials have different lives Stainless steel vs. brass pump Asphalt shingles vs. metal roofing Must compare over same time horizon Address uncertainty Engineering economy is about the future Future is unavoidably uncertain Use sensitivity analysis & probabilities

9. Ch 1 Econ. Dec. 9 Decision-Making Process Define problem Too broad ? too difficult Too narrow ? better solutions missed Choose objective Not just cheap now Maximize PW Effectiveness = doing right thing Efficiency = doing right way

10. Ch 1 Econ. Dec. 10 Decision-Making Process(cont�d.) Identify alternatives As many as possible (brainstorming) Better alternatives more valuable than better analysis Evaluate consequences All Systems view

11. Ch 1 Econ. Dec. 11 Decision-Making Process(cont�d.) Select Minimize life-cycle costs not first costs Include non-quantitative objectives Implement Faster if involve stakeholders earlier Audit (reward is learning)

12. Ch 1 Econ. Dec. 12 Decision Making is a Process Theory ? decision maker selects Reality often ? analyst decides Which alternatives considered? What objectives measured? What information presented? How presented?

13. Ch 1 Econ. Dec. 13 Real World Environment for Decision Making Non-linear process: feedback loops & simultaneous activities Iterative modeling ? spreadsheets One decision in continuing stream Communication skills are crucial Analysis ? paper, action ? results Politics matter

14. Ch 1 Econ. Dec. 14 Ethics and Decision-MakingNSPE Code of Ethics Points Engineers shall: Hold paramount safety, health, & welfare of public Perform services only where competent All public statements shall be objective & truthful Act for each employer or client as faithful agents or trustees Avoid deceptive acts Conduct themselves honorably, responsibly, ethically, & lawfully to enhance profession�s honor, reputation, & usefulness

15. Ch 1 Econ. Dec. 15 Example Ethical LapsesExhibit 1.7

16. Ch 1 Econ. Dec. 16 Common Situations with Ethical Concerns Gaining knowledge & building trust vs. favors for influence Cost, quality, & functionality tradeoffs Environmental concerns Safety & cost Firm�s priorities & globalization

17. Ch 1 Econ. Dec. 17 Role of Engineering Economy Doesn�t matter $s too small Time too short (operational economics) Dominates decision-making Money often key criteria & time > 1 year One factor in decision ? Multiple objectives Time value of money, other quantifiables, irreducibles Money, risk, flexibility/robustness

18. Ch 1 Econ. Dec. 18 Operational Economics FedEx & bid arrives on time vs. first class stamp & not Renting a car with limited vs. unlimited miles Overtime vs. a 2nd shift or another hire

19. Ch 1 Econ. Dec. 19 Cost Concepts Recurring vs. non-recurring Life cycle cost Fixed vs. variable Average = total cost / # units Marginal = cost for 1 more unit Incremental = cost for N more units Direct = cost for labor & material Indirect = cost for electricity, insurance, maintenance Overhead = allocated cost for sales, admin, & mgmt.

20. Ch 1 Econ. Dec. 20 PP1.1 Average, Marginal, & Incremental Costs Cost like marginal tax table 1st 100 cost $50 each even if buy more Purchasing 400 items Average cost = Marginal cost for 401st = Incremental cost for next 200 = Average cost = (100*50 + 300*45)/400 = $46.25 Marginal cost of 401st = $45 Incremental cost of another 200 = (100*45 + 100*40) = $8500Average cost = (100*50 + 300*45)/400 = $46.25 Marginal cost of 401st = $45 Incremental cost of another 200 = (100*45 + 100*40) = $8500

21. Ch 1 Econ. Dec. 21 PP1.1 Solution Average cost = (100*50 + 300*45)/400 = $46.25 Marginal cost of 401st = $45 Incremental cost of next 200 = (100*45 + 100*40) = $8500

22. Ch 1 Econ. Dec. 22 Summary of Making Economic Decisions Engineering economy � define & examples Decision-making principles Decision-making process Decision-making in reality Role of engineering economy Operational economics & cost definitions