1 ECGD3110 Systems Engineering & Economy

2 Lecture 1 Introduction to Engineering Economics

3 Presentation Outline Introduction Introduction Purpose Purpose Objective Objective Examples of daily life applications Examples of daily life applications Basic issues Basic issues The Decision-Making Procedure The Decision-Making Procedure Principles Governing the Engineering Economy Procedure Principles Governing the Engineering Economy Procedure Projects within Organizations Projects within Organizations

4 Introduction Engineering Economics is the discipline concerned with the economic aspects of engineering, and involves the systematic evaluation of the costs and benefits of proposed technical and business projects. Engineering Economics is the discipline concerned with the economic aspects of engineering, and involves the systematic evaluation of the costs and benefits of proposed technical and business projects. The principles and methodology of engineering Economics are crucial to the daily management of private companies, government agencies, and nonprofit organizations. The principles and methodology of engineering Economics are crucial to the daily management of private companies, government agencies, and nonprofit organizations. They are used to assist with decision making in situations such as selecting among alternative engineering designs, public works projects, replacement of assets, and in assessing the economic merits of alternative uses of your personal funds. They are used to assist with decision making in situations such as selecting among alternative engineering designs, public works projects, replacement of assets, and in assessing the economic merits of alternative uses of your personal funds.

5 Purpose Purpose Dealing with economic analysis and evaluation of engineering projects Dealing with economic analysis and evaluation of engineering projects

6Objective Implementation of systematic evaluation of costs and benefits of engineering projects in order to: - Decide whether or not to carry out a project - - Choose among independent projects, i.e., capital budgeting - Choose between alternative technologies for a project

7 Examples of daily life applications Examples of daily life applications Purchase/rental of automobiles Economics of home rental/rehabilitation/building Personal investments

8 Basic issues Basic issues - Identification and quantification of life-cycle benefits and costs of project or project alternatives - Analysis of time value of money - Effects of depreciation, taxes, inflation and uncertainty - For a single project, do benefits exceed costs by a sufficient enough margin? - private firms: easier to determine - public projects: more difficult

9 Basic issues - For selection among several alternatives - comparison of relative benefits and costs - selection among mutually exclusive projects - selection among independent projects (capital budgeting)

10 A. Scientific Approach Cause- effect relationship Understand Explore Suggest The Decision-Making Process

11 The Decision-Making Process B. Practitioner operational Approach 1. Problem definition Problem tree for baseline conditions Indicators based 2. Set up Objectives Planning horizon Needs assessment Objective Tree (SMART) Indicators based 3. Development of Possible Alternatives

12 The Decision-Making Process 4. Analysis and Comparison the Alternatives Develop decision or evaluation criteria (sustainability based) - Criteria includes social, economic/financial, environmental and institutional factors Quantification of life-cycle costs and benefits for each alternative

13 The Decision-Making Process 5. Selection of the Preferred Alternative(s) and decision making 6. Implementation of recommended solution 7. Performance Monitoring, Post-evaluation and feedback

14 Categories of Decision making process Decision making under certainty in which the data are known deterministically Decision making under certainty in which the data are known deterministically Decision making under risk in which the data can be described by probability distributions. Decision making under risk in which the data can be described by probability distributions. Decision making under uncertainty in which the data cannot be assigned weights that represent their degree of relevance in the decision process. Decision making under uncertainty in which the data cannot be assigned weights that represent their degree of relevance in the decision process.

15 Principles Governing the Engineering Economy Procedure  Define goals and objectives  Develop alternatives  Focus on the differences  Use a consistent viewpoint  Use a common unit of measure  Consider all relevant criteria  Make uncertainty explicit  Revisit your decisions

16 Projects within Organizations Projects form part of the overall organizational planning process as shown on the diagram Projects play a major role in implementing organizational strategy Vision Mission ProjectsProgramsStrategy Sector Goal(s) Objectives