Introduction to Introduction to

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Sep. 4, 1997

Engineering economy relates or applies many concepts from economics, mathematics, finance, accounting, statistics, and management to the evaluation of engineering systems or projects. In the design of engineering systems, the engineer will always have to compare and evaluate different alternatives.

Engineering economy provides the principles, concepts, techniques, and methods by which alternatives can be compared and analyzed.

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Industry

Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role

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Industry

Defense

Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role

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Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital RoleIndustry

Defense

Transportation

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Industry

Defense

Transportation

Health Care

Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role

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Industry

Defense

Transportation

Health Care

Personal Finance

Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role

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Engineering Economy ??Engineering Economy ??

Economic aspects of engineering

Systematic evaluation of the costs & benefits of proposed technical projects

Principles for analyzing alternative use of cooperation's resources (capital, personnel, asset, etc.)

Assessing economic merits of alternative uses of personal funds

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Examples of Engineering Examples of Engineering EconomyEconomy

Choose the best design for a bridge

Select the most suitable robot for a welding operation on an automotive assembly line

Make a recommendation about whether jet airplanes for a delivery service should be purchased or leased

Consider the choice between reusable and disposable food container.

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Engineering Economy Engineering Economy PrinciplesPrinciples Principle 1 - Develop the Alternatives

Principle 2 - Focus on the differences

Principle 3 - Use a consistent viewpoint

Principle 4 - Use a common unit of measure

Principle 5 - Consider all relevant criteria

Principle 6 - Make uncertainty explicit

Principle 7 - Revisit your decisions

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Engineering Economy Engineering Economy Process Process

I. Define the Problem

Suppose that a company has the problem of making money:

The problem is to increase revenues while reducing costs

The problem is to maintain revenues while reducing costs

The problem is an accounting system that provides distorted cost information

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Engineering Economy Engineering Economy ProcessProcess

II. Develop Alternatives

III. Compare and Select the Preferred Alternative Considering nonmonetary factors if

there is any; safety, employee satisfaction, company reputation, etc.

IV. Monitor Performance and Post-evaluate Results comparing actual results achieved with

the previously estimated outcomes.

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ExampleExample

Your car was wrecked !! Wholesaler offers you $2,000 for the

car "as is."

Insurance company's claims adjuster estimates that there is $2,000 in damages to your car.

Insurance company mails you a check for $1,000 after deductible. Wrecked car has 58,000 miles.

You need a car immediately, what should you do?

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I. Define ProblemI. Define Problem

Find the best way Find the best way of getting a car !!of getting a car !!

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II. Explore AlternativesII. Explore Alternatives1. Sell the wrecked car for $2,000 to the wholesaler and

spend this money, the $1,000 insurance check, and all of your $7,000 life savings on a newer car. Total amount paid out of savings is $7,000, and the car will have 28,000 miles.

2. Spend the $1,000 insurance check and $1,000 of savings to fix the car. Total amount paid out of savings is $1,000, and the car will have 58,000 miles.

3. Spend the $1,000 insurance check and $1,000 of savings to fix the car, then sell the car for $4,500. Spend the $4,500 plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,500, and the car will have 28,000 miles.

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II. Explore AlternativesII. Explore Alternatives4. Give the car to a mechanic, who will repair it for $1,100

($1,000 insurance and $100 of your savings) but will take an additional month of repair time, and rent a car for that time at $400/month (paid out of savings). Total amount paid out of savings is $500, and the car will have 58,000 miles.

5. Same as 4, but then sell the car for $4,500 and use this money plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,000, and the car will have 28,000 miles.

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III. Alternative analysisIII. Alternative analysis

View point: owner of the car

Unit of measure: $

????

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III. Alternative analysisIII. Alternative analysis1. Alternative 1 is eliminated.

Car value = $10,000, savings = 0.

2. Alternative 2 is eliminated.

Car value = $4,000, savings = $6,000.

3. Alternative 3 is eliminated.

Car value = $10,000, savings = $500.

4. Alternative 4 would be a good alternative, provided that the risk of a poor repair job is judged to be small. Car value = $4,000, savings = $6,500.

5. Alternative 5 is the alternative accepted.

Car value = $10,000, savings = $1,000.

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Make Uncertainty Explicit Make Uncertainty Explicit If the original car is repaired and kept, there is a

possibility that it would have a higher frequency of breakdowns (based on personal experience). If a cheaper repair facility is used, the chance of a later breakdown is even greater (based on personal experience).

The newer car purchased may be too expensive, based on the additional price paid (which is at least $6,000/30,000 miles = 20 cents per mile).

The newer car may also have been in an accident and could have a worse repair history than the presently owned car.

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Revisit Your Decisions Revisit Your Decisions

The newer car turned out after being "test driven" for 20,000 miles to be a real beauty. Mileage was great, and no repairs were needed. The systematic process of identifying and analyzing alternative solutions to this problem really paid off!

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