INTRODUCTION TO ENGINEERING ECONOMY CHAPTER 1 $$ $$ INTRODUCTION TO ENGINEERING ECONOMY $$ $$

Introduction Technological and social environment are changing at a rapid rate. For example: TVPlasmaLCD Those technology for our benefit through design. (Ex: wireless technology) Do benefits exceed its cost? Value for money. Engineer should use knowledge to find new way of doing things economically

Price Reduction In Market 2009- RM 2,800 35% down 2010- RM 1,800 44% down 2011- RM 1,000 30% down ?? LCD TV 32” 2012- RM 700 ??

Competition Among Company Sharp Samsung LG Panasonic Sony Haier

WHAT IS ECONOMICS ? The study of how limited resources is used to satisfy unlimited human wants

LAND All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as well as the land itself which is applied to the production process.

LABOR The efforts, skills, and knowledge of people which are applied to the production process.

CAPITAL Real Capital (Physical Capital ) Financial Capital Tools, buildings, machinery -- things which have been produced which are used in further production Financial Capital Assets and money which are used in the production process Human Capital Education and training applied to labor in the production process

Origins of Engineering Economy The perspective that ultimate economy is a concern to the engineer and the availability of sound techniques to address this concern differentiate this aspect of modern engineering practice from that of the past.

Origins of Engineering Economy Pioneer: Arthur M. Wellington, civil engineer latter part of nineteenth century; addressed role of economic analysis in engineering projects; area of interest: railroad building

Engineering Economics Engineering economics deals with the method that enable one to take economics decisions towards minimizing costs or maximizing benefits (profit) to business organizations.

PRINCIPLES OF ENGINEERING ECONOMY 1. Develop the Alternatives; 2. Focus on the Differences; 3. Use a Consistent Viewpoint; 4. Use a Common Unit of Measure; 5. Consider All Relevant Criteria; 6. Make Uncertainty Explicit; 7. Revisit Your Decisions

DEVELOP THE ALTERNATIVES The final choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.

FOCUS ON THE DIFFERENCES Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.

USE A CONSISTENT VIEWPOINT The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective).

USE A COMMON UNIT OF MEASURE Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives. (Example: RM or percentage)

CONSIDER ALL RELEVANT CRITERIA Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

MAKE UNCERTAINTY EXPLICIT Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.

REVISIT YOUR DECISIONS Improved decision making results from an adaptive process; to the extent practicable, the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved.

ENGINEERING ECONOMY AND THE DESIGN PROCESS An engineering economy study is accomplished using a structured procedure and mathematical modeling techniques. The economic results are then used in a decision situation that involves two or more alternatives and normally includes other engineering knowledge and input.

Rational Decision Making Recognize the problem “I need a place to live this term.” Define the Goal or Objective “I’ll find a nice apartment that is not too expensive.” Assemble Relevant Data “I need information on rent, utilities, apartment age, parking, driving time to college, driving time to shopping, the neighborhood, other amenities provided (swimming, table tennis, etc.).” Identify Feasible Alternatives “I’ll use the Yellow Pages, information from friends, apartment finding services, information from broker, the local newspaper, and my personal experience, to look for apartments.”

Rational Decision Making 5. Select Criterion to Determine the Best Alternative “Most important is rent plus utilities cost. I’m also very concerned about driving time to college, and the kind of neighborhood the apartment is in.” Construct the model “I’ll make a spreadsheet. The rows will be the apartment choices, the columns the evaluation criteria. Then I’ll try to fill in the interactions between the apartments and the criteria.” This includes determining cash flows for engineering economic analysis!!! 26

Predict Outcomes of Each Alternative “I’ll fill in the estimated costs for the spreadsheet and rate the amenities, driving time, etc.” Choose the Best Alternative “Apartment C looks cheapest, but I don't like the neighborhood. If I pay $50 more per month for Apartment B I get a nicer neighborhood, and a 15-minute drive to college. Maybe I’ll choose Apartment B.”

Rational Decision Making Audit the Results “Did I make a good choice” “After living in Apartment B for six months, I am very happy with my choice!” But this certainly isn’t the case every time!! 28

ENGINEERING ECONOMIC ANALYSIS PROCEDURE 1. Problem recognition, formulation, and evaluation. 2. Development of the feasible alternatives. 3. Development of the cash flows for each alternative. 4. Selection of a criterion ( or criteria). 5. Analysis and comparison of the alternatives. 6. Selection of the preferred alternative. 7. Performance monitoring and post-evaluation results.

Example 1

Profit/year = Total rent – expenses 17,280-25,500= -8,220 b) Option 1: Raise the rent Option 2: Lower maintenance cost Option 3: Sell the apartment building Option 4: Abandon the building

Option 1: Raise the rent Annual loss= 8,220 So, month loss= 685 So, per house loss = 685/4= 171.25 Current rent is 360. Almost 50% increase

Option 2: Lower maintenance cost Annual loss= 8,220 So, month loss= 685 So, per house maintenance = 15,000/12= 312.5 Current rent is 360. Almost 50% increase

ACCOUNTING AND ENGINEERING ECONOMY STUDIES Modern cost accounting may satisfy any or all of the following objectives: 1. To determine the cost of products or services 2. To provide a rational basis for pricing goods or services 3. To provide a means for controlling expenditures 4. To provide information on which operating decisions may be based and the results evaluated