Engineering Economic Decisions Lecture No 1 Chapter 1

Engineering Economic Decisions Lecture No. 1 Chapter 1 Contemporary Engineering Economics, 6 th ed. Copyright © 2016 Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

What Is an Engineering Economic Decision? �Role of engineers in business �Understanding the term “engineering economic decision” �An overview of a variety of engineering economic decision problems �Understanding the fundamental principles of engineering economics Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Role of Engineers in Business Create and Design • Engineering Projects Analyze Evaluate • Production Methods • Engineering Safety • Environmental Impacts • Market Assessment • Expected Profitability • Timing of Cash Flows • Degree of Financial Risk • Impact on Financial Statements • Firm’s Market Value • Stock Price Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Engineering Economic Decisions Investment Planning Marketing Manufacturing Plan for the acquisition of equipment (capital expenditure) that will enable the firm to design and produce products economically Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Profit

What Makes Engineering Economic Decisions Difficult? • • • Estimating a required investment Forecasting a product demand Estimating a selling price Estimating a manufacturing cost Estimating a product life Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Accounting Vs. Engineering Economy Evaluation of past performance Evaluation and prediction of future events Accounting Engineering Economy Past Future Present Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Common Types of Strategic Engineering Economic Decisions • • • Equipment or process selection Equipment replacement decisions New products and product expansion Cost reduction Improvement in service or quality Design decisions Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Fundamental Principles of Engineering Economics • Principle 1: A dollar earned today is worth more than a dollar earned in the future. • Principle 2: The only thing that matters is the difference between alternatives. • Principle 3: Marginal revenue must exceed marginal cost. • Principle 4: Additional risk is not taken without the expected additional return. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Principle 1: A dollar earned today is worth more than a dollar earned in the future. Interest rate = 10% $110 one $100 year today later Contemporary Engineering Economics, 6 th edition Park $121 two years later Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Principle 2: The only thing that matters is the difference between alternatives. Option Monthly fuel cost Monthly maintenance Cash outlay at signing Monthly payment Salvage value at end of year 3 Buy $960 $550 $6, 500 $350 $9, 000 Lease $960 $550 $2, 400 $550 0 Irrelevant items in decision-making Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Principle 3: Marginal revenue must exceed marginal cost. Marginal cost Manufacturing cost Sales revenue Contemporary Engineering Economics, 6 th edition Park 1 unit Marginal revenue Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Principle 4: Additional risk is not taken without the expected additional return. Investment Class Potential Risk Expected Return Savings account (cash) Low/None 1. 5% o Bond (debt) Moderate 4. 8% o Stock (equity) High o Contemporary Engineering Economics, 6 th edition Park 11. 5% Copyright © 2016 by Pearson Education, Inc. All Rights Reserved

Two Factors in Engineering Economic Decisions • • Time Uncertainty Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved