Introduction to Engineering Economy

1
Introduction to Engineering Economy

• The systematic evaluation of the costs and
  benefits of proposed technical projects
• The principles and methodology of engineering
  economy are utilized to analyze alternative uses
  of financial resources, particularly in relation
  to the physical assets and the operation of an
  organization.

2
Decision Making and Problem Solving

• Simple Problems
• Can be analyzed in ones head without extensive
  analysis
• Do I buy a semester parking pass or use parking
  meters?
• Should I fix my car?
• Intermediate Problems (Principle subject of this
  course!!!)
• They are sufficiently important to justify
  serious thought and action
• They cant be worked in ones head must be
  organized
• The economic aspects are significant component in
  the analysis leading to a decision
• Complex Problems
• Represent a mixture of economic, political, and
  humanistic elements
• Selection of a president in USA
• Building a nuclear power plant

3
Intermediate Problem Example

• A student is buying a car, which costs 12,000.
  He can borrow money in the bank with a 10 yearly
  interest rate (quarterly compounding). The dealer
  offers one of the two promotions
• 1. Discount of 2,000 off the price of the car
• 2. Financing for one year with interest 0 (4
  quarterly payments, 3,000 each)
• Which promotion should the student take?
• (Suppose inflation is 0.)

4
Intermediate Problem Example

• Promotion 1
• Get 2,000 and borrow 12,000 - 2,000 10,000
• with interest 10
• 2,625 (5 more than 2,500) ?
• 2,658 (6.3 more than 2,500) ?
• 2,750 (10 more than 2,500) ?
• 3,000 (20 more than 2,500) ?
• Actual Payment 42,658 10,632

car
5
Intermediate Problem Example

• Promotion 2
• Borrow 12,000 with interest 0.
• Actual Payment 43,000 12,000
• Conclusion Select the first promotion!!

car
3,000
6
Engineering Economic Analysis

• Key Questions
• Which engineering projects are worthwhile?
• Which projects should have higher priority?
• How the project should be designed?
• How to achieve long-term financial goals?
• How to compare different ways to finance
  purchases?
• How to make short and long-term financial
  decisions?

7
Engineering Economic Analysis

• Examples of Non-Monetary Factors
• Meeting customer expectations consistently
• Maximization of employee satisfaction
• Maintaining flexibility to meet changing demand
• Maintenance of a desired public image
• Leveling cyclic fluctuations in production
• Improvement of safety in operations
• Reduction of pollutants

8
Rational Decision Making

• Recognize the problem
• I need a place to live this term.
• Define the Goal or Objective
• Ill find a nice apartment that is not too
  expensive.
• Assemble Relevant Data
• I need information on rent, utilities, apartment
  age, parking, driving time to UF, driving time to
  shopping, the neighborhood, other amenities
  provided (swimming, table tennis, etc.).
• Identify Feasible Alternatives
• Ill use the Yellow Pages, information from
  friends, apartment finding services, information
  from UF, the local newspaper, and my personal
  experience, to look for apartments.

9
Rational Decision Making

• 5. Select Criterion to Determine the Best
  Alternative
• Most important is rent plus utilities cost. Im
  also very concerned about driving time to UF, and
  the kind of neighborhood the apartment is in.
• Construct the model
• Ill make a spreadsheet. The rows will be the
  apartment choices, the columns the evaluation
  criteria. Then Ill try to fill in the
  interactions between the apartments and the
  criteria.
• This includes determining cash flows for
  engineering economic analysis!!!
• Predict Outcomes of Each Alternative
• Ill fill in the estimated costs for the
  spreadsheet and rate the amenities, driving time,
  etc.
• Choose the Best Alternative
• Apartment C looks cheapest, but I dont like the
  neighborhood. If I pay 50 more per month for
  Apartment B I get a nicer neighborhood, and a
  15-minute drive to UF. Maybe Ill choose
  Apartment B.

10
Rational Decision Making

• Audit the Results
• Did I make a good choice
• After living in Apartment B for six months, I am
  very happy with my choice!
• But this certainly isnt the case every time!!

11
Wrecked Car Example

• Bad news you just wrecked your car! An
  automobile wholesaler offers you 2,000 for the
  car as is. Your insurance company estimates
  that there is 2,000 in damages to your car. The
  insurance company can fix the car right away in a
  repair shop belonging to this company. Because
  you have collision insurance with a 1,000
  deductibility provision, the insurance company
  mails you a check for 1,000. The odometer
  reading on your wrecked car is 58,000 miles.
• Additional Information
• You have 7,000 in savings.
• You can buy a newer car for 10,000 with an
  odometer reading of 28,000 miles.
• After repairing the wrecked car, it can be sold
  for 4,500.
• A discount repair shop charges 1,100 and
  requires 1 month.
• A car rental for one month is 400.

12
Wrecked Car Example

• Alternatives
• Buy newer car. Sell now, but dont repair
• Cash flow 3,000 - 10,000 -7,000
• Repair now. Sell, and buy the newer car
• Cash flow -1,000 4,500 - 10,000 -6,500
• Repair at discount shop. Sell and buy the newer
  car
• Cash flow -100 4,500 - 10,000 -5,600
• Repair now. Keep your car.
• Cash flow -1,000
• Repair at discount shop.Rent a car, then keep
  your car.
• Cash flow -100 - 400 -500
• NOTE Dont forget factors such as mileage,
  repair shop reliability, investment opportunity
  for your savings et.