Introduction to.

Sep. 4, 1997 r Engineering economy relates or applies many concepts from economics, mathematics, finance, accounting, statistics, and management to the evaluation of engineering systems or projects. In the design of engineering systems, the engineer will always have to compare and evaluate different alternatives. r Engineering economy provides the principles, concepts, techniques, and methods by which alternatives can be compared and analyzed.

Sep. 4, 1997  Industry Various Areas Engineering Economy Plays Vital Role

Sep. 4, 1997  Industry  Defense Various Areas Engineering Economy Plays Vital Role

Sep. 4, 1997 Various Areas Engineering Economy Plays Vital Role  Industry  Defense  Transportation

Sep. 4, 1997  Industry  Defense  Transportation  Health Care Various Areas Engineering Economy Plays Vital Role

Sep. 4, 1997  Industry  Defense  Transportation  Health Care  Personal Finance Various Areas Engineering Economy Plays Vital Role

Sep. 4, 1997 Engineering Economy ??  Economic aspects of engineering  Systematic evaluation of the costs & benefits of proposed technical projects  Principles for analyzing alternative use of cooperation's resources (capital, personnel, asset, etc.)  Assessing economic merits of alternative uses of personal funds

Sep. 4, 1997 Examples of Engineering Economy  Choose the best design for a bridge  Select the most suitable robot for a welding operation on an automotive assembly line  Make a recommendation about whether jet airplanes for a delivery service should be purchased or leased  Consider the choice between reusable and disposable food container.

Sep. 4, 1997 Engineering Economy Principles  Principle 1 - Develop the Alternatives  Principle 2 - Focus on the differences  Principle 3 - Use a consistent viewpoint  Principle 4 - Use a common unit of measure  Principle 5 - Consider all relevant criteria  Principle 6 - Make uncertainty explicit  Principle 7 - Revisit your decisions

Sep. 4, 1997 Engineering Economy Process I. Define the Problem Suppose that a company has the problem of making money:  The problem is to increase revenues while reducing costs  The problem is to maintain revenues while reducing costs  The problem is an accounting system that provides distorted cost information

Sep. 4, 1997 Engineering Economy Process II. Develop Alternatives III. Compare and Select the Preferred Alternative  Considering nonmonetary factors if there is any; safety, employee satisfaction, company reputation, etc. IV. Monitor Performance and Post-evaluate Results  comparing actual results achieved with the previously estimated outcomes.

Sep. 4, 1997Example Your car was wrecked !! * Wholesaler offers you $2,000 for the car "as is." * Insurance company's claims adjuster estimates that there is $2,000 in damages to your car. * Insurance company mails you a check for $1,000 after deductible. Wrecked car has 58,000 miles. * You need a car immediately, what should you do?

Sep. 4, 1997 I. Define Problem Find the best way of getting a car !! Find the best way of getting a car !!

Sep. 4, 1997 II. Explore Alternatives 1. Sell the wrecked car for $2,000 to the wholesaler and spend this money, the $1,000 insurance check, and all of your $7,000 life savings on a newer car. Total amount paid out of savings is $7,000, and the car will have 28,000 miles. 2. Spend the $1,000 insurance check and $1,000 of savings to fix the car. Total amount paid out of savings is $1,000, and the car will have 58,000 miles. 3. Spend the $1,000 insurance check and $1,000 of savings to fix the car, then sell the car for $4,500. Spend the $4,500 plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,500, and the car will have 28,000 miles.

Sep. 4, 1997 II. Explore Alternatives 4. Give the car to a mechanic, who will repair it for $1,100 ($1,000 insurance and $100 of your savings) but will take an additional month of repair time, and rent a car for that time at $400/month (paid out of savings). Total amount paid out of savings is $500, and the car will have 58,000 miles. 5. Same as 4, but then sell the car for $4,500 and use this money plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,000, and the car will have 28,000 miles.

Sep. 4, 1997 III. Alternative analysis View point: owner of the car Unit of measure: $ ? ?

Sep. 4, 1997 III. Alternative analysis 1. Alternative 1 is eliminated. Car value = $10,000, savings = Alternative 2 is eliminated. Car value = $4,000, savings = $6, Alternative 3 is eliminated. Car value = $10,000, savings = $ Alternative 4 would be a good alternative, provided that the risk of a poor repair job is judged to be small. Car value = $4,000, savings = $6, Alternative 5 is the alternative accepted. Car value = $10,000, savings = $1,000.

Sep. 4, 1997 Make Uncertainty Explicit r If the original car is repaired and kept, there is a possibility that it would have a higher frequency of breakdowns (based on personal experience). If a cheaper repair facility is used, the chance of a later breakdown is even greater (based on personal experience). r The newer car purchased may be too expensive, based on the additional price paid (which is at least $6,000/30,000 miles = 20 cents per mile). r The newer car may also have been in an accident and could have a worse repair history than the presently owned car.

Sep. 4, 1997 Revisit Your Decisions r The newer car turned out after being "test driven" for 20,000 miles to be a real beauty. Mileage was great, and no repairs were needed. The systematic process of identifying and analyzing alternative solutions to this problem really paid off!

Sep. 4, 1997 END