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Introduction to Introduction to
.
Sep. 4, 1997
Engineering economy relates or applies many concepts from economics, mathematics, finance, accounting, statistics, and management to the evaluation of engineering systems or projects. In the design of engineering systems, the engineer will always have to compare and evaluate different alternatives.
Engineering economy provides the principles, concepts, techniques, and methods by which alternatives can be compared and analyzed.
Sep. 4, 1997
Industry
Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role
Sep. 4, 1997
Industry
Defense
Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role
Sep. 4, 1997
Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital RoleIndustry
Defense
Transportation
Sep. 4, 1997
Industry
Defense
Transportation
Health Care
Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role
Sep. 4, 1997
Industry
Defense
Transportation
Health Care
Personal Finance
Various Areas Various Areas Engineering Economy Engineering Economy Plays Vital RolePlays Vital Role
Sep. 4, 1997
Engineering Economy ??Engineering Economy ??
Economic aspects of engineering
Systematic evaluation of the costs & benefits of proposed technical projects
Principles for analyzing alternative use of cooperation's resources (capital, personnel, asset, etc.)
Assessing economic merits of alternative uses of personal funds
Sep. 4, 1997
Examples of Engineering Examples of Engineering EconomyEconomy
Choose the best design for a bridge
Select the most suitable robot for a welding operation on an automotive assembly line
Make a recommendation about whether jet airplanes for a delivery service should be purchased or leased
Consider the choice between reusable and disposable food container.
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Engineering Economy Engineering Economy PrinciplesPrinciples Principle 1 - Develop the Alternatives
Principle 2 - Focus on the differences
Principle 3 - Use a consistent viewpoint
Principle 4 - Use a common unit of measure
Principle 5 - Consider all relevant criteria
Principle 6 - Make uncertainty explicit
Principle 7 - Revisit your decisions
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Engineering Economy Engineering Economy Process Process
I. Define the Problem
Suppose that a company has the problem of making money:
The problem is to increase revenues while reducing costs
The problem is to maintain revenues while reducing costs
The problem is an accounting system that provides distorted cost information
Sep. 4, 1997
Engineering Economy Engineering Economy ProcessProcess
II. Develop Alternatives
III. Compare and Select the Preferred Alternative Considering nonmonetary factors if
there is any; safety, employee satisfaction, company reputation, etc.
IV. Monitor Performance and Post-evaluate Results comparing actual results achieved with
the previously estimated outcomes.
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ExampleExample
Your car was wrecked !! Wholesaler offers you $2,000 for the
car "as is."
Insurance company's claims adjuster estimates that there is $2,000 in damages to your car.
Insurance company mails you a check for $1,000 after deductible. Wrecked car has 58,000 miles.
You need a car immediately, what should you do?
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I. Define ProblemI. Define Problem
Find the best way Find the best way of getting a car !!of getting a car !!
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II. Explore AlternativesII. Explore Alternatives1. Sell the wrecked car for $2,000 to the wholesaler and
spend this money, the $1,000 insurance check, and all of your $7,000 life savings on a newer car. Total amount paid out of savings is $7,000, and the car will have 28,000 miles.
2. Spend the $1,000 insurance check and $1,000 of savings to fix the car. Total amount paid out of savings is $1,000, and the car will have 58,000 miles.
3. Spend the $1,000 insurance check and $1,000 of savings to fix the car, then sell the car for $4,500. Spend the $4,500 plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,500, and the car will have 28,000 miles.
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II. Explore AlternativesII. Explore Alternatives4. Give the car to a mechanic, who will repair it for $1,100
($1,000 insurance and $100 of your savings) but will take an additional month of repair time, and rent a car for that time at $400/month (paid out of savings). Total amount paid out of savings is $500, and the car will have 58,000 miles.
5. Same as 4, but then sell the car for $4,500 and use this money plus $5,500 of additional savings to buy the newer car. Total amount paid out of savings is $6,000, and the car will have 28,000 miles.
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III. Alternative analysisIII. Alternative analysis
View point: owner of the car
Unit of measure: $
????
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III. Alternative analysisIII. Alternative analysis1. Alternative 1 is eliminated.
Car value = $10,000, savings = 0.
2. Alternative 2 is eliminated.
Car value = $4,000, savings = $6,000.
3. Alternative 3 is eliminated.
Car value = $10,000, savings = $500.
4. Alternative 4 would be a good alternative, provided that the risk of a poor repair job is judged to be small. Car value = $4,000, savings = $6,500.
5. Alternative 5 is the alternative accepted.
Car value = $10,000, savings = $1,000.
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Make Uncertainty Explicit Make Uncertainty Explicit If the original car is repaired and kept, there is a
possibility that it would have a higher frequency of breakdowns (based on personal experience). If a cheaper repair facility is used, the chance of a later breakdown is even greater (based on personal experience).
The newer car purchased may be too expensive, based on the additional price paid (which is at least $6,000/30,000 miles = 20 cents per mile).
The newer car may also have been in an accident and could have a worse repair history than the presently owned car.
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Revisit Your Decisions Revisit Your Decisions
The newer car turned out after being "test driven" for 20,000 miles to be a real beauty. Mileage was great, and no repairs were needed. The systematic process of identifying and analyzing alternative solutions to this problem really paid off!
Sep. 4, 1997
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