Transcript
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Contemporary Engineering Economics, 4th
edition, 2007 1
Engineering Economic
Decisions
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Copyright 2006
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Contemporary Engineering Economics, 4thedition, 2007 2
Chapter 1
Engineering Economic Decisions Rational Decision- making
Process
Role of Engineers in
Business What Makes the
Engineering EconomicDecision Difficult?
Types of StrategicEngineering EconomicDecisions
Fundamental Principles inEngineering Economics
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Contemporary Engineering Economics, 4thedition, 2007 3
Chapter Opening StoryGoogle Inc.
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Contemporary Engineering Economics, 4thedition, 2007 4
A Little Google History
1995 Developed in dorm room of Larry Page and Sergey Brin,
graduate students at Stanford University
Nicknamed BackRub
1998 Raised $25 million to set up Google, Inc.
Ran 100,000 queries a day out of a garage in Menlo Park
2005 Over 4,000 employees worldwide Over 8 billion pages indexed
Market value of $110 billion
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Rational Decision-Making Process
1. Recognize a decisionproblem
2. Define the goals orobjectives
3. Collect all the relevantinformation
4. Identify a set of feasibledecision alternatives
5. Select the decision criterionto use
6. Select the best alternative
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Contemporary Engineering Economics, 4thedition, 2007 6
Which Car to Lease?
Saturn vs. Honda
1. Recognize a decisionproblem
2. Define the goals orobjectives
3. Collect all the relevantinformation
4. Identify a set of feasibledecision alternatives
5. Select the decisioncriterion to use
6. Select the best alternative
Need a car
Want mechanicalsecurity
Gather technical as wellas financial data
Choose betweenSaturn and Honda
Want minimum totalcash outlay
Select Honda
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Contemporary Engineering Economics, 4thedition, 2007 7
Engineering Economic Decisions
Planning Investment
Marketing
ProfitManufacturing
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What Makes the Engineering Economic
Decision Difficult? - Predicting the Future
Estimating a Requiredinvestment
Forecasting a product
demand Estimating a selling
price
Estimating a
manufacturing cost Estimating a product
life
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Contemporary Engineering Economics, 4thedition, 2007 9
Create & Design
Engineering Projects
Evaluate
ExpectedProfitabilityTiming of
Cash FlowsDegree ofFinancial Risk
Analyze
Production MethodsEngineering SafetyEnvironmental ImpactsMarket Assessment
Evaluate
Impact onFinancial StatementsFirms Market Value
Stock Price
Role of Engineers in Business
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Present
FuturePast
Engineer ing EconomyAccount ing
Evaluat ing past performance Evaluat ing and predict ing future events
Accounting Vs. Accounting
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Contemporary Engineering Economics, 4thedition, 2007 11
Two Factors in Engineering
Economic Decisions
The factors of time and uncertaintyare the defining aspects of anyengineering economic decisions
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A Large-Scale Engineering Project
Requires a large sumof investment
Takes a long time to
see the financialoutcomes
Difficult to predict therevenue and cost
streams
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Types of Strategic Engineering
Economic Decisions in Manufacturing
Sector Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
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Service Improvement - Healthcare
Delivery
Which plan is moreeconomically viable?
Traditional Plan: Patients
visit each service provider.
New Plan: Each serviceprovider visits patients
: patient
: serv ice provider
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Equipment & Process Selection
How do you choose between the Plastic SMCand the Steel sheet stock for an auto bodypanel?
The choice of material will dictate themanufacturing process for an automotivebody panel as well as manufacturing costs.
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Equipment Replacement Problem
Now is the time toreplace the oldmachine?
If not, when is the righttime to replace the oldequipment?
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New Product and Product Expansion
Shall we build oracquire a new facility tomeet the increaseddemand?
Is it worth spendingmoney to market a newproduct?
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Example - MACH 3 Project
R&D investment: $750
million Product promotion through
advertising: $300 million
Priced to sell at 35% higherthan Sensor Excel (about
$1.50 extra per shave). Question 1: Would
consumers pay $1.50 extrafor a shave with greatersmoothness and lessirritation?
Question 2: What wouldhappen if the bladeconsumption dropped morethan 10% due to the longerblade life of the new razor?
Gillettes MACH3
Project
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Cost Reduction
Should a company buyequipment to performan operation now donemanually?
Should spend moneynow in order to savemore money later?
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Types of Strategic Engineering Economic
Decisions in Service Sector
Commercial Transportation
Logistics and Distribution
Healthcare Industry
Electronic Markets and Auctions
Financial Engineering
Retails
Hospitality and Entertainment
Customer Service and Maintenance
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U.S. Gross Domestic Products (GDP)
Manufactur ing
(14%)
Service secto r(80%)
Healthc are (14%)
Ag ricu lture (2%)
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Industrial Employment
Industry 1993Employmentdistribution
1983-94National
Average
1994-2005ProjectedChange
Manufacturing 12.6% -0.70% -7.2%
Services 30.5% 60.0% 39.0%
Retail trade 16.7% 31.1% 13.0%
Financial 8.0% 26.8% 6.3%
Source: Bureau of Econom ic Analysis/Bureau of Labo r Stat is t ics
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Fundamental Principles of Engineering
Economics
Principle 1: A nearby dollar is worth more
than a distant dollar
Principle 2: All it counts is the differences
among alternatives
Principle 3: Marginal revenue must
exceed marginal cost
Principle 4: Additional risk is not takenwithout the expected additional return
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Principle 1: A nearby dollar is worth
more than a distant dollar
Today 6-month later
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Principle 2: All it counts is the
differences among alternatives
Option MonthlyFuelCost
MonthlyMaintenance
Cashoutlay atsigning
Monthlypayment
SalvageValue atend ofyear 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
Irrelevant items in decision making
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Principle 3: Marginal revenue must
exceed marginal cost
Manufacturing cost
Sales revenueMarginal
revenue
Marginal
cost
1 unit
1 unit
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Principle 4:Additional risk is not
taken without the expected additional
returnInvestment Class Potential
Risk
Expected
Return
Savings account(cash)
Low/None 1.5%
Bond (debt) Moderate 4.8%Stock (equity) High 11.5%
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Summary
The term engineering economic decisionrefers to any investment decision related toan engineering project.
The five main types of engineering economicdecisions are (1) service improvement, (2)equipment and process selection, (3)equipment replacement, (4) new product and
product expansion, and (5) cost reduction. The factors of timeand uncertaintyare the
defining aspects of any investment project.
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