8/25/04 Valerie Tardiff and Paul Jensen Operations Research Models and Methods Copyright All rights reserved Engineering Economics

2 Questions What is engineering economics? Who cares about it? Why do engineers have to study it?

3 Money and Success This course has to do with money and success. Most of us want some measure of success in life. For better or for worse, money (and economics) has a lot to do with success.

4 Economics and Engineering Economics is a big part of an engineer's job. The engineer must translate scientific ideas in products and systems that better mankind. Ideas need to make sense economically and the engineer must be able to convince others that this is so. That is true of any organization that you might join upon graduation.

5 The Goal For-profit organizations have for goal to make money - now and in the future. Not-for-profit must remain financially sound. Both types must worry about money or they will probably cease to exist.

6 Economics and World Institutions

7 World: International trade, balance of payments, currency evaluation Federal, State and Local: Tax spending, GNP, distribution of resources, support of institutions, public welfare Organization: Revenues, costs, profit, return on investment, stock prices You: Salary, investments, savings, borrowing

8 Business Decisions are not Simple Product design Process design (inspection, operations, raw materials) Machine selection Facility design All decisions are interrelated. You can't make one without affecting many others. This is especially true when multiple products, periods, stages are involved.

9 The Question is: How do you operate in this environment? How does the organization you work for operate? Engineering economics is entirely involved with evaluating the comparison of alternatives that involve spending money in hopes of earning more.

10 Engineering Economic Analysis - Seven Steps 1. Recognize and formulate the problem. 2. Develop feasible alternatives. 3. Develop cash flows for each alternative. 4. Select a criterion (or criteria) for determining the preferred alternative. 5. Analyze and compare alternatives. 6. Select the preferred alternative. 7. Perform monitoring and post-evaluation.

11 Importance of Learning this Material The course is about decision making in the environment of an organization (business or government). The methods have applications to personal decisions as well.