Engineering economic decisions

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Economic decision making for engineering systems is called engineering

economy. This definition may seem restricted to engineering projects and

systems only, engineering economy however is also the study of industrial

economics and the economic and financial factors which influence

industry.

Engineers are the people who are familiar with all the technicalities of

machinery and production therefore they are the best judges of the useful

lives of an asset and they also have the technical knowledge to calculate

the number of units a proposed plant would produce when operational.

In today’s competitive world of business it has become essential that

engineers should practice financial project analysis for engineering

projects and make rational decisions.

Engineering economy also includes the study of accounting practices for

manufacturing concerns. Unique features of accounting for manufacturing

concerns are process costing, batch costing, cost allocation.

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Engineering economy deals with justification and selection of projects.

Many engineers work on projects which address a specified activity or a

problem. Any decision regarding the project must be justified.

In business environments, many if not all, decisions are justified using

monetary criteria such as “profit”. Such decisions are made at the

managerial level and many engineers become managers in

manufacturing environment.

Therefore, all engineers, regardless of their employment, should know

methods and tools used in evaluation of projects.

The purpose of engineering economy is to expose all engineering

students to the methods which are widely used for evaluation of projects.

Even though, engineering economy deals mostly with selection of projects

in business environment, the tools and methods can be and are used by

individuals and non-profit organizations such as government, hospitals,

and charitable entities, etc.

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Let us present few examples in different environments where engineering

economy can facilitate the decision making process.

Business Environment: A small manufacturing company needs to buy a

forklift truck for material handling. Two different brands, say A and B, are

being considered. Which truck should be bought? The decision will

probably be based on minimization of cost.

Non-profit Organizations: A project for widening a two lane highway to

four lanes is being considered by the county board. A four lane highway

may reduce the traffic accident rate but is expected to lower property

values in the immediate neighborhood of the highway. Should the

proposed highway be built? The county board must weigh the relative

benefit of lower accident rates against the possible loss in value of homes

as well as the construction cost.

Individuals: A new college graduate needs a new car. Should this new

car be bought or leased? Methods from engineering economy can be

used for determining the best choice.

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Economic factors are as important as regard for the physical laws and

science that determine what can be accomplished with engineering. The

following figure shows how engineering is composed of physical and

economic components:

Physical Environment: Engineers produce products and services

depending on physical laws. Physical efficiency takes the form:

System output(s)

Physical (efficiency) = -------------------------

System input(s)

Economic Environment: Much less of a quantitative nature is known

about economic environments -- this is due to economics being involved

with the actions of people, and the structure of organizations.

Satisfaction of the physical and economic environments is linked through

production and construction processes. Engineers need to manipulate

systems to achieve a balance in attributes in both the physical and

economic environments, and within the bounds of limited resources.

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Following are some examples where engineeringeconomy plays a crucial role:

1. Choosing the best design for a high-efficiency gas furnace

2. Selecting the most suitable robot for a welding operation on anautomotive assembly line

3. Making a recommendation about whether jet airplanes for an overnightdelivery service should be purchased or leased

4. Considering the choice between reusable and disposable bottles forhigh-demand beverages

With items 1 and 2 in particular, note that coursework inengineering should provide sufficient means todetermine a good design for a furnace, or a suitablerobot for an assembly line, but it is the economicevaluation that allows the further definition of a bestdesign or the most suitable robot.

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Engineering Economic Decisions

Rational Decision- making

Process

The Engineer’s Role in

Business

Types of Strategic

Engineering Economic

Decisions

Fundamental Principles in

Engineering EconomicsBose Corporation

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Engineering Economics

Overview

• Rational Decision-Making Process

• Economic Decisions

• Predicting Future

• Role of Engineers in Business

• Large-scale engineering projects

• Types of strategic engineering economic decisions

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

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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

Saturn and Honda

Want minimum total

cash outlay

Select Honda

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Planning Investment

Marketing

ProfitManufacturing

Estimating a Required

investment

Forecasting a product

demand

Estimating a selling

price

Estimating a

manufacturing cost

Estimating a product

life

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Create & Design

• Engineering Projects

Evaluate

• Expected

Profitability

• Timing of

Cash Flows

• Degree of

Financial Risk

Analyze

• Production Methods

• Engineering Safety

• Environmental Impacts

• Market Assessment

Evaluate

• Impact on

Financial Statements

• Firm’s Market Value

• Stock Price

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The factors of time and uncertainty

are the defining aspects of any

engineering economic decisions

The term engineering economic decision refers to all investment decisions relating to engineering projects.

The five main types of engineering economic decisions 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 time and uncertainty are the defining aspects of any investment project.

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