Chapter 1: What Is Engineering Economics? 1

A subset of engineering that requires a technical economic analysis, with a goal of deciding which course of action best meets a technical performance criteria and uses scarce capital in a prudent manner. To be a subject to study the theories and techniques of maximizing an efficiency of the usage of the Efficiency= Output Input  Definition of EE Engineering Economics To be defined as a subject of a decision science for a real investment project such as a purchase of machineries & equipments, a process improvement, and a development of a new process & product. 2

Identify a problem Determine all possible alternatives Obtain data necessary to analyze Evaluate economically all the alternatives Cutting a steel pannel Steel saw Electric saw Automatic cutting euqipment Initial investment cost Operating expenses Profit, etc. Post Audit NPV AW IRR To post audit the project currently being implemented  Capital Budgeting Process 3

Feasibility Study Market Analysis Analyze 1. a market characteristics 2. A supply_demand 3. A market share 4. Estimate demand in future Prod. Tech Analysis Examine 1. Product Characteristics 2. Man-power plan 3. Establish a production plan 4. Estimate a product cost Financial Analysis 1. Estimate a required capital 2. Analyze an in-outcome 3. Prepare financial statements 4. Analyze a cash flows 4. Evaluate profitability  Engineering Economics as Decision Science 4

Analysis oriented with a cash flow Investment : a series of actions to take to get more utility of wealth in the future by sacrifycing a current utility of wealth (Traits: uncertainty, irreversibility, and flexibility of investment timing) Sources of Fund i) equity: stocks ii) liability: bonds and term-loan Economic Investment Decision-Making : Engineering Projects A final decision about a firm’s investment is made in a stock market  A Theoretical Evolution of EE 5

Engineering and Economics

 The Right Aptitude of An Investment Appraiser Agreement 16Trillion won (without a heavy work for Han & Nakdong) 8Tri 350bil won , million ton 24hours Disagreement 50Trillion won (add up the extra costs) 3Tri 665.4Bill won million ton 72hours Issues 1.Construction Cost 2.Income of an aggregate sale 3.B/C ratio 4.Creation of Jobs 5.A canal traffic 6.transportation hours 7

 A Historical Background of EE  Sumer Period in Methopotamia, Babylon and Assiria(3,000~600 B.C.) (A main transaction was for silver and grains. The silver was used for a provincial government and the grains were used for a central government. The maximum annual interest rates were fixed at 33.33% and 20% for the grains and silver, respectively)  Fibonacci introduced the Arabic numbers to Europe in 1202 with a compound interest rate.  Pacioli published his book in 1494 and suggested some problems regarding to a simple and compound interest rate.  Jean Trenchant first published the interest tables in 1558 in France. (The interest tables were used to calculate the value of a loan with which the cash in and outflows were obviously transacted.)  Wellington first used the interest tables and present value method to economically evaluate the real investment project for installing a railroad in  Pennel(1914), Deventer(1915), Goldman(1920), Fisher(1915), Grant(1930)  EE Committee(1936), The Engineering Economist(1955 by Lesser at SIT

9  Prin. 1: The value of 10,000 won today be equivalent to the value of 20,000won tomorrow.  Prin. 2: Consider only the differences in the cash flows.  Prin. 3: A marginal income must be greater than a marginal cost.  Prin. 4: Risk is accompanied with Return.  4 Principles of EE 9

 Investment must be exploited to maximize the quality of human beings’ life as much as possible  Investment is not a linkage to simply transfer one’s income to other’s 10