Faculty of Applied Engineering and Urban Planning Civil Engineering Department Engineering Economy Lecture 1 Week 1 2 nd Semester 20015/2016 Chapter 1 Making Economic Decisions

Why the Engineering economy important to any engineer?

Decision Making * Decision making is a major aspect of everyday life. Individuals, households, and firms face daily problems * Tools for analyzing and solving the economic problems faced by engineers are needed. * Knowledge of the decision making process and of the tools used to make comparisons between competing alternatives leads to better decisions. * Complex problems can be broken down to produce sensible solutions.

Classification of Eng. Economy Problems Simple Problems Can be analyzed in one’s head without extensive analysis Do I take a taxi, bus, walk, or ride a bicycle to come to school? How often should I eat lunch at cafeteria? Intermediate Problems (Main subject of this course!!!) They are sufficiently important to justify serious thought and action They can’t be worked in one’s head; must be organized The economic aspects are significant component in the analysis leading to a decision Complex Problems Represent a mixture of economic, political, and social elements. Selection of a president of a country. Building a nuclear power plant.

Examples of engineering economic analysis * Focus on costs, revenues, and benefits that occur at different times All engineer designs call for spending money. * Decisions concerning the following questions may be made with the help of economic analysis : - Which projects are worthwhile? - Which projects should have higher priority? - How the project should be designed? - How to achieve long-term financial goals? - How to compare different ways to finance purchases? - How to make short and long-term financial decisions?

* Questions or issues of non-monetary factors for engineers to consider: - Maintaining an eye-pleasing view - Meeting customer expectations consistently - Maximization of employee satisfaction - - Maintaining flexibility to meet changing demand - Maintenance of a desired public image - Leveling cyclic fluctuations in production - Improvement of safety in operations - Reduction of pollutants

The Decision Making Process 1. Recognize the problem 2. Define goal or objective 3. Assemble relevant data 4. Identify feasible alternatives 5. Select decision criterion 6. Construct a model 7. Predict alternative outcomes 8. Choose best alternative 9. Audit the result

Decision Making Process 1- Recognize the problem You and a group of friends need a place to live in this semester 2- Define the Goal or Objective To find a nice apartment that is not too expensive. 3- Assemble Relevant Data You need information on rent, utilities, apartment age, parking, travel time to campus, travel time to shopping, the neighborhood, other amenities provided (banking, entertainment, etc.). 4- Identify Feasible Alternatives Use the Yellow Pages, information from friends, apartment finding services, information from University, the local newspaper, and my personal experience, to look for apartments.

Decision Making Process 5- Select Criterion to Determine the Best Alternative Most important is rent plus utilities cost. You should also be concerned about travel time to campus, and kind of neighborhood apartment in. 6- Construct the model Make a spreadsheet. The rows will be the apartment choices, the columns the evaluation criteria. Then try to fill in the interactions between the apartments and the criteria. This includes determining cash flows for engineering economic analysis!!! 7- Predict Outcomes of Each Alternative Fill in the estimated costs for the spreadsheet and rate the amenities, travel time, etc.

Decision Making Process 8- Choose the Best Alternative You do not have to choose the cheapest apartment. For a little bit more, you can get a nicer neighborhood, and maybe a shorter walk to campus. 9- Audit the Results Did you make a good choice? After living in apartment you selected for six months, are you very happy with your choice!

Example Bad news – your brother just wrecked his car! - An automobile wholesaler offers him $2,000 for the car “as is.” - His insurance company estimates that there is $2,000 of damage to his car. - He has a collision insurance with a $1,000 deductibility provision. - The insurance company can fix the car right away in a repair shop belonging to this company. Otherwise, insurance company can mail him a check for $1, If repaired, the wrecked car can be sold for $4, The odometer reading on the wrecked car is 58,000 miles. - Your brother can buy a newer car for $10,000 with an odometer reading of 28,000 miles. - A discount repair shop can repair it for $1,100 but requires 1 month. - A car rental for one month is $ You brother has $7,000 in savings.

Solution Alternatives 1. Don`t repair, sell now, and buy new car: Cash flow = $1K + $2K - $10K = -$7K 2. Repair at insurance shop, sell, and buy the newer car: Cash flow = -$1K + $4.5K - $10K = -$6.5K 3. Repair at discount shop, rent a car, sell, and buy the newer car: Cash flow = $1K - $1.1K - $0.4+ $4.5K - $10K = -$6.0K 4. Repair at insurance shop, and keep your car: Cash flow = -$1K 5. Repair at discount shop, rent a car, then keep your car: Cash flow = $1K - $1.1K - $0.4 = -$0.5K NOTE: Keep in mind other non-monetary factors such as mileage, repair shop reliability, investment opportunity for savings etc.

The Role of Engineering Economic Analysis * Assists in making decisions where: - the decision is sufficiently important that serious thought and effort is required. - careful analysis requires that the decision variables be carefully organized and the consequences be understood. - economic issues are a significant component of the analysis leading to a decision. * The following standards should always be considered: - Minimize costs. - Ensure the gains of winners exceed the losses of losers. - Maximize profit or sales. - Minimize project completion time. - Improve the distribution of income or wealth. - Minimize negative environmental consequences.

Thank you

Next Class Read Chapter 1 of textbook Try to do some of the problems at end of Chapter 1 Next time we’ll learn cost types and cost estimating