01 Ch1-Intro to Eng Econ

8/4/2019 01 Ch1-Intro to Eng Econ

http://slidepdf.com/reader/full/01-ch1-intro-to-eng-econ 1/19

An Intro to Engineering Economy

By: Dr. Magdy Akladios

INDE-Eng. Economy

By: Magdy Akladios, PhD, PE, CSP, CPE, CSHM

Ch1: Introduction to EngineeringEconomy

Course Objectives

• Our aim is to understand:

• The power of money

• How to make it

• How to save it

• How to spend it

• Achievements don’t occur without a price

• The basic economic decision of any design isbased on whether “its benefits exceed itscosts”

WHAT IS ECONOMICS?

• The study of how Limited Resources

is used to satisfy unlimited human

wants.• The study of how individuals and

societies choose to use scarceresources that nature and previousgenerations have provided.





Resources

1. Land

2. Labor3. Capital

1. LAND1. LAND

• All gifts of nature, such as:

•Water.

•Air.

• All gifts of nature, such as:

•Water.

•Air.

•Minerals.

•Sunshine.

•Plant and tree growth.

•The land itself which is applied to the

production process.•Etc.

•Minerals.

•Sunshine.

•Plant and tree growth.

•The land itself which is applied to the

production process.•Etc.

2. LABOR2. LABOR

The efforts,skills, andThe efforts,skills, and

people which areapplied to theproductionprocess.

people which areapplied to theproductionprocess.





3. CAPITAL3. CAPITAL

• Real Capital (Physical Capital )

• Financial Capital

•

• Real Capital (Physical Capital )

• Financial Capital

•

• Or Physical Capital such as:

• Tools

• Buildings

• Or Physical Capital such as:

• Tools

• Buildings

Real Capital

• Machinery

• things which have been produced which areused in further production

• Machinery

• things which have been produced which areused in further production

Dollar Bills• Assets and moneywhich are used in the

• Assets and moneywhich are used in the

Financial Capital

$$$$$$$$$$$$$$$$$





• Education and trainingapplied to labor in theproduction process

• Education and trainingapplied to labor in theproduction process

Human Capital

Average Salary

• PhD: $81,778

• Masters’ Degree: $60,826

• B.S.: $43,782

• High School Diploma: $23,594

Why Engineering Economy?Why Engineering Economy?

• Ultimate economy is a concern to

engineers

• Ultimate economy is a concern to

engineers• Sound techniques to address this

concern are available

• Engineering economy enables anengineer to make sound economicdecisions

• Sound techniques to address thisconcern are available

• Engineering economy enables anengineer to make sound economicdecisions





Examples of economic Decisions

• Paper of plastic?

• 87-Octane or 93?• Lease or buy a vehicle?

• Pay off a house in 5, 15, or 30-years?

The weekly scam: Credit Cards

• Suppose you owe $1,100 on your credit card

• Annual Percentage Rate (APR) = 18%

• Your minimum Monthly payment = $19.80

• This will take you 10 years to pay it off

• Total interest paid = $1,276

• An extra $10 payment/month

• This will allow you to pay it off in 4.5 years

• Total interest paid = $509.20

Origins of Engineering EconomyOrigins of Engineering Economy

• Pioneer: Arthur M. Wellington

• Civil Engineer

• Latter part of 19

th

Century

• Pioneer: Arthur M. Wellington

• Civil Engineer

• Latter part of 19

th

Century• He a resse ro e o econom c ana ys s nengineering projects

• Area of interest: railroad building

• Followed by other contributors whoemphasized techniques depending on financialand actuarial mathematics.

• He a resse ro e o econom c ana ys s nengineering projects

• Area of interest: railroad building

• Followed by other contributors whoemphasized techniques depending on financialand actuarial mathematics.





Engineering Economy and theDesign ProcessEngineering Economy and theDesign Process

• An engineering economy study is

accomplished using:• a structured procedure, and



.

• The economic results are then used in adecision situation that involves two ormore alternatives, and normally includesother engineering knowledge and input.

.


Ultimate Aim

1. Survival

2. Maximize wealth

3. Minimize cost

Types of Business Organizations

1. Proprietorships

2. Partnerships

3. Corporations





How to Make Decisions?

Principles of Economic Decision Making

1. Develop the Alternatives

2. Focus on the Differences

3. USE a Consistent Viewpoint

4. Use a Common Unit of Measure

5. Consider all Relevant Criteria

6. Make Uncertainty Explicit

7. Revisit your Decisions

1. Develop the Alternatives1. Develop the Alternatives

The final choice(decision) is amongalternatives.

The final choice(decision) is amongalternatives.

need to beidentified and thendefined forsubsequentanalysis.

need to beidentified and thendefined forsubsequentanalysis.





2. Focus on the Differences2. Focus on the Differences

Only the differences in expected

future outcomes among thealternatives are relevant to their

Only the differences in expected

future outcomes among thealternatives are relevant to their

considered in the decision.

considered in the decision.

3. USE a Consistent Viewpoint3. USE a Consistent Viewpoint

The prospectiveoutcomes of thealternatives, economic

The prospectiveoutcomes of thealternatives, economican o er, s ou econsistently developedfrom a definedviewpoint

(perspective).

an o er, s ou econsistently developedfrom a definedviewpoint

(perspective).

4. Use a Common Unit of Measure4. Use a Common Unit of Measure

Using a common unit of measurement to enumerate as

many of the prospective outcomes

Using a common unit of measurement to enumerate as

many of the prospective outcomesas possi e wi ma e easier t eanalysis and comparison of alternatives.

as possi e wi ma e easier t eanalysis and comparison of alternatives.





5. Consider all Relevant Criteria5. Consider all Relevant Criteria

Selection of a preferred alternative

(decision making) requires the use of a criterion (or several criteria).

Selection of a preferred alternative

(decision making) requires the use of a criterion (or several criteria).

the outcomes enumerated in themonetary unit and those expressedin some other unit of measurementor made explicit in a descriptivemanner.

the outcomes enumerated in themonetary unit and those expressedin some other unit of measurementor made explicit in a descriptivemanner.

6. Make Uncertainty Explicit6. Make Uncertainty Explicit

Uncertainty isinherent in projecting(or estimating) the

Uncertainty isinherent in projecting(or estimating) theu ure ou comes o e

alternatives andshould be recognizedin their analysis and

comparison.

u ure ou comes o ealternatives andshould be recognizedin their analysis and

comparison.

7. Revisit your Decisions7. Revisit your Decisions

Improved decisionmaking results from anadaptive process; to

the extent practicable,

Improved decisionmaking results from anadaptive process; to

the extent practicable,e n a pro ec eoutcomes of theselected alternativeshould besubsequentlycompared with actualresults achieved.

e n a pro ec eoutcomes of theselected alternativeshould besubsequentlycompared with actualresults achieved.





Engineering Economy and theDesign ProcessEngineering Economy and theDesign Process





.


.


ENGINEERING ECONOMIC ANALYSIS PROCEDURE(7-Steps)ENGINEERING ECONOMIC ANALYSIS PROCEDURE(7-Steps)

1. Problem recognition, formulation, andevaluation.

2. Development of the feasible alternatives.

3. Development of the cash flows for each

1. Problem recognition, formulation, andevaluation.

2. Development of the feasible alternatives.

3. Development of the cash flows for eachalternative.

4. Selection of a criterion ( or criteria).

5. Analysis and comparison of the alternatives.

6. Selection of the preferred alternative.

7. Performance monitoring and post-evaluation

results.

alternative.

4. Selection of a criterion ( or criteria).

5. Analysis and comparison of the alternatives.

6. Selection of the preferred alternative.

7. Performance monitoring and post-evaluation

results.

An example

• You wrecked your car (w/58,000 miles)

• Price “as-is” = $2,000

• Insurance check = $2,000

• Deductible = 1 000 • Amount you have in savings = $7,000

• Could fix car immediately for $2,000

• Could fix car in 1 month for $1,100 (willneed to rent a temp for $400 (total cost =$1,500)

• Value of fixed car = $4,500

• New car price = $10,000 (w/28,000 miles)





Solution

• Use the 7-step economic procedure toselect the best possible alternative

•

• Need transportation

Step 2: Develop alternatives

• Alt 1:

• Sell old car as is for: $2,000

• Get money from insurance: $1,000

• Add money from savings: $7,000

• Buy newer car w/28,000 miles

• Result of alternative 1:

• Total value = Car worth $10,000 + $0 in savings =$10,000

• Mileage = 28,000 miles


• Alt 2:


• ,

• Fix old car w/58,000

• Result of Alt 2:

• Total value = Car worth $4,500 + $6,000in savings = $10,500







• Alt 3:• Get money from insurance: $1,000



• , .

• Buy newer car w/28,000 miles

• Result of Alt 3:• Total value = Car worth $10,000 + $500 in savings

= $10,500



• Alt 4:


• Add money from savings: $100

• Rent temp car: $400

• Fix old car w/58,000 in 1 month

• Result of Alt 4:

• Total value = Car worth $4,500 + $6,500 in savings= $11,000



• Alt 5:• Get money from insurance: $1,000

• Add money from savings: $100

• Rent temp car: $400• Fix old car w/58,000 in 1 month

• Sell old car for $4.5K

• Add $5.5K from savings

• Buy newer car for $10K

• Result of Alt 5:• Total value = Car worth $10,000 + $1,000 in

savings = $11,000






Final Comparison

Alt Net Value Mileage1 $10,000 28,000

2 $10,500 58,000

3 $10,500 28,000

4 $11,000 58,000

5 $11,000 28,000

Obviously, Alt 5 is the best value w/leastmileage

Another Example

• You are buying a house

• Options:

• 15-yr mortgage with 5% financing

• -

An Example

• Problem:

• You are considering ordering a Pizza delivery





Your options

1. Papa Jones:• 1” Thick

• 20” square pizza

• Two toppings

• .

2. Domino’s:• 1-3/4” Thick

• 20” dia round pizza

• Two toppings

• Cost: $17.25 + 5% Tax + $0 Delivery

Requirements

1. Apply the 7 principals of engineering economy

. money (Hint: minimize cost/unitvolume)

1: Develop the alternatives

• Alternative 1 is to order from PapaJones

• ’





2: Focus on the differences

• Delivery time• Taste preferences

• Cost

3: Use a consistent view point:

• Principal Your view point as acustomer?, or

• ,

• The drivers of the Pizza shops?

4: Use a common unit of measure:

• $$, or

• Volume of pizza, or





5: Consider all relevant criteria:

• Principal Other criteria of selectioninclude toppings

•

• Etc.

6: Make uncertainty explicit:

• Principal Uncertainty about actualdelivery time vs. advertised time,and other conditions of the sale, etc.

7: Revisit your decision:

• After you have consumed the pizza,it is important to keep the following

in mind when you are ready to orderyour next pizza:

• Satisfaction

• Taste

• Actual delivery time

• Etc.





Solution: Minimizing cost

• Papa Jones:

• 20” X 20” X 1” = 400 in3

• Cost = $15 (1.05) + $1.50 = $17.25

• Cost n = 17.25 400 = 0.043

• Domino’s:

• π X 102” X 1.73” = 550 in3

• Cost = $15 (1.05) + $0 = $18.11

• Cost/ in3 = $18.11/550 = $0.033

• Therefore, order from Domino’s

Fundamental Principles ofEngineering Economy

Fundamental Principles ofEngineering Economy

1. A nearby penny is worth a distant dollar

2. All that counts are the difference amongalternatives

. arg na revenue mus excee marg nacost

4. Additional risk is not taken without theexpected additional return





Investing Tips

Source: Growth Stock Watch (Feb 2005)

Investment Rules of Thumb

1. Invest for the long term

2. Buy potential AND current value

3. Don’t put all your investment eggs in

ow o you c oose stocFollow the 5-Star status system

1. Minimum 2-1 current ration (currentassets/current liabilities)

2. Minimal or no long-term debt

. c e-or en e pro uc or serv ce

4. Annual growth rate of over 20%

5. Quality management




If you already own stock:Average UP/Double DOWN

1. When Stock goes UP

2. When Stock goes DOWN

01 Ch1-Intro to Eng Econ

Documents

Transcript of 01 Ch1-Intro to Eng Econ