(c) 2001 Contemporary Engineering Economics 1. “Engineering is the profession in which a knowledge of the mathematical and natural sciences gained by of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind". The Accreditation Board for Engineering and Technology (ABET)

(c) 2001 Contemporary Engineering Economics 2. Determine the role of engineering economyDetermine the role of engineering economy in the decision making process in the decision making process Identify what is needed to successfullyIdentify what is needed to successfully perform an engineering economy perform an engineering economy Understanding Financial Statement andUnderstanding Financial Statement and Net Worth Net Worth Using Ratios to make decisions Using Ratios to make decisions

(c) 2001 Contemporary Engineering Economics 3. Physical and Economic Components of an Engineering System

(c) 2001 Contemporary Engineering Economics 4. Why Engineering Economy is Important to Engineers Engineers “Design” Engineers must be concerned with the economic aspects of designs and projects they recommend and performEngineers must be concerned with the economic aspects of designs and projects they recommend and perform AnalysisAnalysis DesignDesign SynthesisSynthesis

(c) 2001 Contemporary Engineering Economics 5. Engineers must work within the realm of economics and justification of engineering projectsEngineers must work within the realm of economics and justification of engineering projects Work with limited funds (capital)Work with limited funds (capital) Capital is not unlimited – rationedCapital is not unlimited – rationed Capital does not belong to the firmCapital does not belong to the firm Belongs to the Owners of the firm Belongs to the Owners of the firm Capital is not “free”…it has a “cost” Capital is not “free”…it has a “cost”

(c) 2001 Contemporary Engineering Economics 6. Definition ENGINEERING ECONOMY IS INVOLVED WITH THE FORMULATION, ESTIMATION, AND EVALUATION OF ECONOMIC OUTCOMES WHEN ALTERNATIVES TO ACCOMPLISHED A DEFINED PURPOSE ARE AVAILABLE.

(c) 2001 Contemporary Engineering Economics 7. Another way to define.. ENGINEERING ECONOMY IS INVOLVED WITH THE APPLICATION OF DEFINED MATHEMATICAL RELATIONSHIPS THAT AID IN THE COMPARISON OF ECONOMIC ALTERNATIVES

(c) 2001 Contemporary Engineering Economics 8. Knowledge of Engineering Economy will have a significant impact on you, personally. Make proper economic comparisons In your profession Private sector Public sector In your personal life

(c) 2001 Contemporary Engineering Economics 9. Role of Engineering Economy in Decision Making Remember: People make decisions – not “tools” Engineering Economy is a set of tools that aid in decision making – but will not make the decision for you Engineering economy is based mainly on estimates of future events – must deal with the future and risk and uncertainty

(c) 2001 Contemporary Engineering Economics 10 Rational Decision-Making Process 1.Recognize a decision problem 2.Define the goals or objectives 3.Collect all the relevant information 4.Identify a set of feasible decision alternatives 5.Select the decision criterion to use 6.Select the best alternative

(c) 2001 Contemporary Engineering Economics 11 Which Car to Lease? 1.Recognize a decision problem 2.Define the goals or objectives 3.Collect all the relevant information 4.Identify a set of feasible decision alternatives 5.Select the decision criterion to use 6.Select the best alternative Need a car Want mechanical security Gather technical as well as financial data Choose between Gen 2 and Honda Want minimum total cash outlay Select Gen 2

(c) 2001 Contemporary Engineering Economics 12 For Engineering Activities..? 1.Recognize a decision problem 2.Define the goals or objectives 3.Collect all the relevant information 4.Identify a set of feasible decision alternatives 5.Select the decision criterion to use 6.Select the best alternative –Cost, financing method and interest rate, annual operating costs, income tax deductions – purchase or lease – PW, FW, ROR, Benefit/Cost ratio, Payback period, Capitalized cost – Sensitivity analysis

(c) 2001 Contemporary Engineering Economics 13 Engineering Economic Decisions Planning Investment Marketing Profit Manufacturing

(c) 2001 Contemporary Engineering Economics 14 Predicting the Future Required investment Forecasting product demand Estimating selling price Estimating manufacturing cost Estimating product life

(c) 2001 Contemporary Engineering Economics 15 Role of Engineers in Business Participate in a variety of decision-making processes, ranging from manufacturing, through marketing, to financing decisions Plan for the acquisition of equipment Design products from the concept to shipping

(c) 2001 Contemporary Engineering Economics 16 A Large-Scale Engineering Project Requires a large sum of investment Takes a long time to see the financial outcomes Difficult to predict the revenue and cost streams

(c) 2001 Contemporary Engineering Economics 17 Types of Strategic Engineering Economic Decisions Equipment and Process Selection Equipment Replacement New Product and Product Expansion Cost Reduction Service Improvement Public Works Cost Effectiveness

(c) 2001 Contemporary Engineering Economics 18 Equipment & Process Selection How do you choose between Plastic SMC and Steel sheet stock for the auto body panel? The choice of material will dictate the manufacturing process for the body panel as well as manufacturing costs.

(c) 2001 Contemporary Engineering Economics 19 Which Material to Choose?

(c) 2001 Contemporary Engineering Economics 20 Equipment Replacement Now is the time to replace the old machine? If not, when is the right time to replace the old equipment?

(c) 2001 Contemporary Engineering Economics 21 New Product and Product Expansion Shall we build or acquire a new facility to meet the increased demand? Is it worth spending money to market a new product? Gillette’s MACH3 Project

(c) 2001 Contemporary Engineering Economics 22 Cost Reduction Should a company buy equipment to perform an operation now done manually? Should spend money now in order to save more money later?

(c) 2001 Contemporary Engineering Economics 23 Service Improvement How many more jeans would Levi need to sell to justify the cost of additional robotic tailors?

(c) 2001 Contemporary Engineering Economics 24 Understanding Financial Statements Accounting: The Basis of Decision-Making Net Worth: How well am I doing? Financial Status for Businesses Using Ratios to Make Business Decisions

(c) 2001 Contemporary Engineering Economics 25 Accounting – The Language of Business

(c) 2001 Contemporary Engineering Economics 26 Financial Status for Business

(c) 2001 Contemporary Engineering Economics 27 Why Do Engineers Need to Understand the Financial Statements?

(c) 2001 Contemporary Engineering Economics 28 Accounting Equation Assets Liabilities Owners’ Equity Assets = Liabilities + Owners’ Equity

(c) 2001 Contemporary Engineering Economics 29 The Balance Sheet – Dell Computer Co.

(c) 2001 Contemporary Engineering Economics 30 Income Statement – Dell Computer Co.

(c) 2001 Contemporary Engineering Economics 31 Cash Flow Statement Tells how much cash a company’s business generates or uses and contains clues to how healthy earnings are Cash used to buy or received from selling stock, assets, and businesses, plus capital expenditures. Cash from or paid to outsiders—such as banks or stockholders Lists cash at the beginning and end of the period covered by the filing, plus the change in cash.

(c) 2001 Contemporary Engineering Economics 32 Key Summary of Dell’s Financial Statements

(c) 2001 Contemporary Engineering Economics 33 Key Summary Continued

(c) 2001 Contemporary Engineering Economics 34 Using Financial Ratios

(c) 2001 Contemporary Engineering Economics 35 Debt Ratio What It Measures: The extent to which a form uses debt financing How You Compute: The ratio of total debt to total assets

(c) 2001 Contemporary Engineering Economics 36 Time-Interest-Earned Ratio What It Measures: The ability of the firm to meet its annual interest payments How You Compute: The ratio of earnings before interest and taxes (EBIT) to interest charges

(c) 2001 Contemporary Engineering Economics 37 Current Ratio What It Measures: The extent to which the claims of short-term creditors are covered by assets How You Compute:The ratio computed by dividing current assets by current liabilities

(c) 2001 Contemporary Engineering Economics 38 Quick (Acid Test) Ratio What It Measures: The firm’s ability to pay off short-term obligations without relying on the sale of inventories. How You Compute: This ratio is computed by deducting inventories from current assets and dividing the remainder by current liabilities.

(c) 2001 Contemporary Engineering Economics 39 Asset Management Analysis A set of ratios which measure how effectively a firm is managing its assets Inventory turnover ratio Days sales outstanding ratio Total assets turnover ratio

(c) 2001 Contemporary Engineering Economics 40 Inventory Turnover What It Measures: How effectively a firm is managing its inventories. How You Compute: This ratio is computed by dividing sales by inventories

(c) 2001 Contemporary Engineering Economics 41 Days Sales Outstanding What It Measures: The average length of time the firm must wait after making a sale before receiving payment (also known as, average collection period) How You Compute: The ratio computed by dividing accounts receivables by average sales per day

(c) 2001 Contemporary Engineering Economics 42 Total Asset Turnover What It Measures: How effectively the firm uses its plant and equipment in generating its sales How You Compute: The ratio computed by dividing sales by total assets

(c) 2001 Contemporary Engineering Economics 43 Profitability Analysis A set of ratios which show the combined effects of liquidity, asset management, and debt on operating results Profit margin on sales Return on total assets Return on common equity

(c) 2001 Contemporary Engineering Economics 44 Profit Margin on Sale How It Measures: the profit per dollar of sales How You Compute: Computed by dividing net profit after taxes by sales

(c) 2001 Contemporary Engineering Economics 45 Return on Common Equity What It Measures: The rate of return on common stockholders’ investment How You Compute: The ratio of net income after taxes to common equity

(c) 2001 Contemporary Engineering Economics 46 Market Trend Analysis A set of ratios that relate the firm’s stock price to its earnings and book value per share P/E ratio Market/book ratio

(c) 2001 Contemporary Engineering Economics 47 Price/Earnings Ratio What It Measures: The dollar amount investors will pay for $1 of current earnings How You Compute: The ratio of the price per share to earnings per share

(c) 2001 Contemporary Engineering Economics 48 Market/Book Ratio What It Measures: Indicates how investors regard the company – a higher ratio indicates that investors are willing to bet a higher return on investment How You Compute: The ratio of a stock’s market price to its book value