Lecturer Week 3

Dr. Syed Faiz Ahmed

Fundamentals of Engineering Economics

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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 Economics
Bose 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
• Fundamental Principles in Engineering Economics

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 Flow Chart
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  Need a car
problem
2. Define the goals or  Want mechanical
objectives security
3. Collect all the relevant  Gather technical as
information well as financial data
4. Identify a set of feasible  Choose between
decision alternatives Saturn and Honda
5. Select the decision  Want minimum total
criterion to use cash outlay
6. Select the best  Select Honda
alternative

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 Manufacturing Profit

Planning Investment

Marketing
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 Getting an Idea: (Necessity is the mother of invention)
 What are the market demands
 What are necessities.
 How we can make people life more comfortable.
 Setting Design Goals & Objectives:
 How to fulfill market demands
 Keep things simple
 Location
 Product shape easy Or more attractive
 Keep product cost low.

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 Evaluate Design Alternatives:
 How to comply Goals & Objective
 Selection of method & materials
 Gauging Product Cost:
 Set optimal price
 Do Survey
 Bulk quantity production calculation
 Environmental Issues
 Green Energy
 Pollution Free
 Recycle / reusability

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 Engineering decisions
 Perfect Design
 Long life
 Very High Quality
 Economics Decisions
 Cost effective
 high profit
 Engineering Economics Decisions.
 Low cost high profit
 Good looking but cheap
 No need to design for very long time.

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 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

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk

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Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

Past Future
Present

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The factors of time and uncertainty
are the defining aspects of any
engineering economic decisions

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 Requires a large sum
of investment
 Takes a long time to
see the financial
outcomes
 Difficult to predict
the revenue and cost
streams
(Remember Cash flow
discussed earlier)

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 Service Improvement
 Equipment and Process Selection
 Equipment Replacement
 New Product and Product Expansion
 Cost Reduction

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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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 How do you choose between the Plastic SMC
and the Steel sheet stock for an auto body
panel?
 The choice of material will dictate the
manufacturing process for an automotive
body panel as well as manufacturing costs.

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 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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 Shall we build or
acquire a new facility
to meet the increased
demand?
 Is it worth spending
money to market a new
product?

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 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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Types of Strategic Engineering
Economic Decisions in Service Sector

 Commercial / Public Transportation

 Logistics and Distribution
 Healthcare Industry
 Electronic Markets (TV, Radio Newspapers)
 Financial Engineering (loans and etc…)
 Retails (discounts / promossions)
 Hospitality and Entertainment
 Customer Service and Maintenance

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Manufacturing
(14%)

Service sector
(80%)
Healthcare (14%)
Agriculture (2%)

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 Example - Healthcare Delivery
Which plan is more
economically viable?

 Traditional Plan: Patients

visit each service provider.

 New Plan: Each service

provider visits patients
: patient

: service provider
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 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 taken
without the expected additional return

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Today 6-month later

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Option Monthly Monthly Cash Monthly Salvage
Fuel Maintena outlay at payment Value at
Cost nce signing end of
year 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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 Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

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Investment Class Potential Expected
Risk Return
Savings account Low/None 1.5%
(cash)

Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

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 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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