chapter 1 making economic decisions 1
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Copyright Oxford University Press 2009
Chapter 1
Making Economic Decisions
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Types of Problems
Role of Engineering Economic Analysis
Problem-Solving / Decision-MakingProcess
Ethical Dimensions in Engineering
Decision-Making
Chapter Outline
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Distinguish between simple and complexproblems
Understand the role and purpose of engineering
economic analysis Apply problem-solving / decision making
process
Understand ethical dimension of decision-
making Solve simple problems associated with
engineering decision-making process
Learning Objectives
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In 2005, only 11 hybrid vehicle models in U.S.(~1% of auto sale)
By 2012, 52 hybrid vehicles will be available(~4.2% U.S. market) predicted by J.D. Power& Assoc.
Design Concerns: Engine power and
acceleration, fuel mileage, refuels, safety,maintenance, fuel distribution, environmentalissues, ethical issues,
Vignette: Alternative Fuel Vehicles
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What marketplace dynamics drive or suppressthe development of alternative fuel vehicles?
Develop a list of concerns and questions that
customers might have regarding the conversionto alternative fuel vehicles. Which are economicand which are non-economic factors?
Are there any ethical aspects to the conversion to
alternative fuel vehicles?
Vignette: Alternative Fuel Vehicles
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This course develops the tools to properlyanalyze and solve the economic problems thatare commonly faced by engineers.
Making Economic Decisions
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Simple Problems
Should I buy metro-rail pass or pay every time?
Should our company pay the vendor cash or credit?
Intermediate Problems
Should I buy or lease my next car?
Which CNC machine should the company purchase?
Complex Problems Feasibility study of a new automobile plant.
Planning for new highways.
A Sea of Problems
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A systematic tool for comparing alternatives bytheir economic merits. Most suitable forproblems
With importance, that require organized analysis ofthe economic aspects
Could apply to Product/Process Design,Purchase of Capital Equipment, Selection ofProjects, Investment, and many other decision-making processes.
Role ofEngineering Economic Analysis
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1. Recognize Problem / Opportunity
2. Define Goals/Objectives
3. Assemble Relevant Data
4. Identify Feasible Alts
7. Predict Alts Outcomes
8. Choose the Best Alt.9. Audit the Results
Overall Mission/ Objectives
5. Select the Criterion
6. Construct a Model
Decision-Making Process
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Decision-Making Process1. Recognize Problem / Opportunity
Needs for New Products, Processes, orFacilities
Improvement of Products, Processes, or
Facilities (TQM, CI)
SWOT (Strengths, Weaknesses, Opportunities,and Threats) Analysis
Investment/Financing
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Decision-Making Process2. Define Goals/Objectives
General or specific goals
Systems perspective
Limiting factors Multiple goals
Conflicting goals
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Decision-Making Process3. Assemble Relevant Data
Importance of Data Collection Relevance of Information Dollar Amount and Time Horizon
Sources of Information Financial Accounting System Cost Accounting Records Market Research
Quotations Economic Indicators Other Published Information
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Example 1-1Assemble Relevant Data
Vast information What is relevant?
From whos viewpoint? From the Manager of Shipping Dept. Alt. 1 $793.00 /30,000 copies (Printing Dept.) vs. Alt. 2 $688.00 /30,000 copies (Comm. Printer)
From General Manager Alt. 1 $793.50 / mo (Printing Dept.) vs. Alt. 2 ($793.50 - $294.00) + 688.50 / mo (Comm.
Printer)
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Decision-Making Process3. Assemble Relevant Data
Financial Consequences (Costs & Benefits):
Market Consequences: has established prices
Extra-Market Consequences: prices could beassigned by indirect means
Intangible Consequences: social impacts,environmental impacts, etc.
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Decision-Making Process4. Identify Feasible Alternatives
Include as many as possible alternatives:
Do-nothing option
Simple solutions
Bounded rationality Number of alternatives
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Decision-Making Process5. Select the Criterion
Multiple criteria
Conflicting criteria
Integrating criteria Most common criterion Maximize profit
Category Economic Criterion
Fixed input Maximize the benefits or other outputs
Fixed output Minimize the costs or other inputs
Neither inputnor output fixed
Maximize the profits (Value of outputs cost of inputs)
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Decision-Making Process6. Construct Models
Real systems and models
A model describes the interrelationships amongthe relevant data and predicts the outcomes ofvarious alternatives.
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Decision-Making Process7. Predict Alternatives Outcomes
Comparable outcomes
Single criterion
Single composite criterion
Risk and uncertainty
Search for more information (loop)
Modification of alternatives (loop)
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Decision-Making Process8. Choose Best Alternative(s)
Selection criterion
Other intangible considerations
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Decision-Making Process9. Audit the Results
Reality vs. prediction
Learn from mistakes
Replacement analysis
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Ethics
The concept of distinguishing between right andwrong in decision-making.
Ethics includes:
Establishing systems of beliefs and moral obligations
Defining values and fairness
Determining duty and guidelines for conduct
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Code of EthicsNational Soc. of Professional Eng.
Engineers, in the fulfillment of their professional duties, shall:
1. Hold paramount the safety, health, and welfare of thepublic.
2. Perform services only in areas of their competence.
3. Issue public statements only in an objective and truthfulmanner.
4. Act for each employer or client as faithful agents ortrustees.
5. Avoid deceptive acts.6. Conduct themselves honorably, responsibly, ethically,
and lawfully so as to enhance the honor, reputation, andusefulness of the profession. (http://www.nspe.org/ethics/eh1-code.asp)
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Ethical Dimensions inEngineering Decision-Making
Decision Process Step Example Ethical Lapses
1. Recognize the problem Looking the other way , or not torecognize the problem due to bribes orfear of retribution
2. Define goals/objectives Favoring one group of stakeholders byfocusing on their objective
3. Assemble relevant data Using faulty or inaccurate data
4. Identify feasible alts. Leaving legitimate alts out ofconsideration
5. Select criterion todetermine best alt
Considering only monetary consequenceswhen other significant consequences exist
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Ethical Dimensions inEngineering Decision-Making
Decision Process Step Example Ethical Lapses
6. Construct a model Using a short horizon that favors one altover another
7. Predict alts outcomes Using optimistic estimates for one alt andpessimistic ones for the other alts
8. Choose the best alt Choosing an inferior alt, one that isunsafe, adds unnecessary cost for user,harms the environment
9. Audit the result Hiding past mistakes
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Ethics inEngineering Economic Analysis
How well and how honestly the decision-makingprocess is conducted the data, method ofanalysis, recommendations, and follow-up
Recognize ethical issues exist and make them anexplicit part of decision-making process
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Decision-Making for CurrentCosts
If results of the decision occur in a veryshort period of time, costs and benefits
can be added up quickly. Using suitable economic criterion, the
best alt can be identified.
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Decision-Making for CurrentCosts
Example 1-2
Linear Programming Model
Minimize $3.00X + $4.40YSubject to: (0.25)X + (0.40)Y u 0.31
X + Y = 1
X, Yu
0where X = portion from 1st source of material
Y = portion from 2nd source of material
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Example 1-3Decision-Making for Current Costs
Concept of Sunk Cost
Only the remaining production is considered
Is the assumption of other costs asvariable reasonable?
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Example 1-4Decision-Making for Current Costs
Intangible constraint
The thickness of wall space
Further study Trade-off between insulation and energy cost
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