Engineering Economics lecture 01 - Ch 01
- 1. ENGINEERING ECONOMIC DECISION CHAPTER 1 Department of Industrial and Systems Engineering LECTURE NOTES ENGINEERING ECONOMIC ANALYSIS ISE 307
- 2. ROLE OF ENGINEERING ECONOMIC ANALYSIS 2 Engineering economy is the specialized study of financial and economic aspects of industrial decision making. Companies have realized the importance of having engineers who are familiar with the financial aspects of decision making. Universities have responded and are producing engineers who have knowledge of engineering economic principals and methodologies.
- 3. ROLE OF ENGINEERING ECONOMIC ANALYSIS 3 During the 1970s and 1980s many engineers were promoted to the level of managers due to their contribution towards the development of successful product lines. These engineers were very knowledgeable, efficient and productive when it came to product design, manufacturing process, quality control and maintenance and capital machinery installation issues. But, when it came to personnel and human resource management, interest factors, cost benefit analysis, comparison of alternatives, sensitivity analysis and inflation, income taxes, depreciation, replacement cost analysis
- 4. EXAMPLES OF ENGINEERING ECONOMIC ANALYSIS 4 Engineering economic analysis focuses on costs, revenues, and benefits that occur at different times. For example, when civil engineer designs a road, or a dam, or a building, the construction costs occur in the near future; but the benefits to users begin only when construction is finished and then continue for a long time. In fact nearly everything that engineers design calls for spending money in the design and building stages, and only after completion revenues or benefits occur – usually for years. Thus the economic analysis of costs, benefits, and revenues occurring over time is called engineering economic analysis.
- 5. ENGINEERING ECONOMIC ANALYSIS IS USED TO ANSWER MANY DIFFERENT QUESTIONS. 5 Which engineering projects are worthwhile? Has the mining or petroleum engineer shown that the mineral or oil deposit (in a region with an abundance of oil wells extracting petroleum (crude oil) or mineral from below ground) is worth developing? Which engineering projects should have a higher priority? Has the industrial engineer shown which factory improvement projects should be funded with available dollars? How should the engineering project be designed? Has the mechanical or electrical engineer chosen the most economical motor size? Has the civil or mechanical engineer chosen the best thickness for insulation?
- 6. ENGINEERING ECONOMIC ANALYSIS IS USED TO ANSWER MANY DIFFERENT QUESTIONS. 6 How to achieve long-term financial goals: How much should you save each month to buy a house, retire, or fund have a trip around the world? Is going to graduate school a good investment? – Will your additional earnings in later years balance the cost of attending and lost income while in graduate school? How to compare different ways to finance purchases: Is it better to finance your car purchase by using the dealer’s low interest rate loan or borrowing money from your bank? How to make short – and Long – term investment decisions: Should you buy a 1- or 2- semester parking pass? Is a higher salary better than stock options?
- 7. WHAT IS ENGINEERING ECONOMY? 7 The objective of engineering economy is to familiarize and develop the commercial and financial knowledge of engineers. Engineers are the people who are familiar with all the technicalities of machinery and production therefore they are the best judges of the useful lives of an asset and they also have the technical knowledge to calculate the number of units a proposed plant would produce when operational. Engineers can recommend quality control check points and they can introduce cost effective measures more effectively. Engineers are able to give the precise break up of all variable and fixed costs relating to each marginal unit produced. In order to perform all these functions with the ultimate objective of making a profit for the organization it is necessary for engineers to have some know how of financial analysis and evaluation methodologies. Engineering economy focuses on those economic and financial aspects which affect the decision making capacity of the
- 8. WHAT IS ENGINEERING ECONOMY? 8 Engineers are called upon to analyze and select the most economical alternative among several design alternatives. Engineers often play a major role in investment decisions based on the analysis and design of new products or processes. Decisions made by the engineer during the engineering phase of a product’s development determine the majority of the costs of manufacturing the product.
- 9. SOME EXAMPLES 9 Business Environment: A small manufacturing company needs to buy a forklift truck for material handling. Two different brands, say A and B, are being considered. Which truck should be bought? The decision will probably be based on minimization of cost. Non-profit Organizations: A project for widening a two lane highway to four lanes is being considered by the county board. A four lane highway may reduce the traffic accident rate but is expected to lower property values in the immediate neighborhood of the highway. Should the proposed highway be built? The county board must weigh the relative benefit of lower accident rates against the possible loss in value of homes as well as the construction cost. Individuals: A new college graduate needs a new car. Should this new car be bought or leased? Methods from engineering economy can be used for determining the best choice.
- 10. SOME EXAMPLES 10 Physical Environment: Engineers produce products and services depending on physical laws. Physical efficiency takes the form: System output(s) Physical (efficiency) = ------------------------- System input(s) Economic Environment: Much less of a quantitative nature is known about economic environments -- this is due to economics being involved with the actions of people, and the structure of organizations. Satisfaction of the physical and economic environments is linked through production and construction processes. Engineers need to manipulate systems to achieve a balance in attributes in both the physical and economic environments, and within the bounds of limited resources.