Engineering Economic Analysis CHAPTER 1 1

What is Engineering Economy? Engineering economy involves the financial and economic evaluation of projects. is the study of industrial economics and economic and financial factors that influence industry. includes the study of accounting practices for manufacturing concerns. 2

 Engineers are familiar with all the technicalities of machinery and production, therefore they are the best judges of the useful lives of an asset have the technical knowledge to calculate the number of units a plant would produce  In today’s competitive world, it is essential that engineers should practice financial project analysis for engineering projects and make rational decisions. 3

Engineering economy deals with justification and selection of projects.  In business environments, decisions are justified using monetary criteria such as “profit”.  Therefore, all engineers should know methods and tools used in evaluating projects. 4

 The purpose of engineering economy is to expose all engineering students to the methods which are widely used for evaluating projects. Even though, engineering economy deals mostly with selection of projects in business environment, the tools and methods can be used by individuals and by non- profit organizations such as government, hospitals, and charitable organizations. 5

EXAMPLES 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. 6

Non-profit Organizations:  A project for widening a two lane highway to four lanes is being considered by the city 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 city board must weigh the comparative benefit of lower accident rates against the possible loss in value of homes as well as the construction cost. 7

Engineering Economics Overview Rational Decision-Making Process Economic Decisions Predicting Future Role of Engineers in Business Large-scale engineering projects Types of strategic engineering economic decisions 8

Rational Decision-Making Process 1. Recognize a decision problem 2. Define the goals or objectives 3. Collect all the relevant information 4. Identify a set of feasible decision alternatives 5. Select the decision criterion to use 6. Select the best alternative 9

Which Car to Lease? Saturn vs. Honda

Predicting the Future Estimating a Required investment Forecasting a product demand Estimating a selling price Estimating manufacturing cost Estimating a product life 12

Role of Engineers in Business

Two Factors in Engineering Economic Decisions 14 The factors of time and uncertainty are the defining aspects of any engineering economic decisions

Summary  The term engineering economic decision refers to all investment decisions relating to engineering projects.  Many companies have a specialized project analysis division that actively searches for  new ideas,  new projects,  ventures. 15

 Once project ideas are identified, they are typically classified as (types of Strategic Engineering Economic Decesions) (1) service or quality improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product and product expansion (5) cost reduction. 16

 This classification system allows management to address key questions. Can the existing plan be used to achieve new production levels? Does the firm have the capital to undertake this new investment? Does new proposal justify the recruitment of new technical personnel? Answers to these questions help firms screen out proposals that are not feasible 17

Fundamental Principles in Engineering Economics A nearby dollar is worth more than a distant dollar All that counts is the differences among alternatives Marginal revenue must exceed marginal cost Additional risk is not taken without the expected additional return 18

19 Your Goal –Save $2M at the age of 65 Your current age: 20 years old Amount of savings desired: $2 million Interest earned on your savings: 5% Required monthly savings: $987

20 Monthly Savings Required (to save $2M at age 65) Starting Age Required Monthly Savings at Varying Interest Rates 5%7%10%12%15% 20$987$527$190$93$31 30$1,760$1,110$527$311$136 40$3,358$2,469$1,507$1,064$617 50$7,483$6,310$4,825$4,003$2,998

21 What’s an Engineering Degree Worth in 2008? Source: National Association of Colleges and Employers, Summer 2008 MajorsAverage Starting Salary Chemical Engineering$63,165 Computer Engineering$60,416 Electrical Engineering$56,910 Industrial Engineering$57,456 Mechanical Engineering$57,009 Civil Engineering$51,632 For any engineering graduate, it is not difficult to set aside $200 each month from his or her salary.