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Introduction to Engineering Economy/Engineering Economic Decisions

Engineering Economy :Collection of mathematical techniques that simplify economic comparisons when making moderate decisions.

Grant et. al Principles of Engineering Economy “An economy study may be defined as a comparison between alternatives in which the differences between alternatives are expressed so far as practicable in money terms. Where technical considerations are somehow involved, such comparisons may be called an engineering economy study”

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Personal Life

- Investment alternatives- Vehicle financing alternatives- etc.

Engineering Economic Decisions

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Evaluating material handling alternatives in an automated sheet metal assembly system.

• Technical requirements & constraintsWeight, speed, reliability, energy, etc.Available space, ceiling height, corporate standard system, etc.

• EconomicsInitial costMaintenance costsYears of useScrap costTax implications

• Intangibles – Vendor relationships

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Chapter 1Engineering Economic Decisions• Rational Decision-Making

Process• Economic Decisions• Predicting Future• Role of Engineers in

Business• Large-scale engineering

projects• Types of strategic

engineering economic decisions

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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

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Which Car to Lease?1. Recognize a decision

problem2. Define the goals or

objectives3. Collect all the relevant

information4. Identify a set of feasible

decision alternatives5. Select the decision

criterion to use6. 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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Engineering Economic Decisions

Planning Investment

Marketing

ProfitManufacturing

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Predicting the Future

• Required investment• Forecasting product

demand• Estimating selling

price• Estimating

manufacturing cost• Estimating product life

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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

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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

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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

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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.

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Which Material to Choose?

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Equipment Replacement

• Now is the time to replace the old machine?

• If not, when is the right time to replace the old equipment?

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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

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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?

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Service Improvement• How many more jeans would Levi need to sell to justify

the cost of additional robotic tailors?

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Summary

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

• The five main types of engineering economic decisions are (1) equipment and process selection, (2) equipment replacement, (3) new product and product expansion, (4) cost reduction, and (5) service improvement.

• The factors of time and uncertainty are the defining aspects of any investment project.