MSE 604 CHAPTER ONE

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MSE 604CHAPTER ONE

• FOUNDATIONS OF ENGINEERING ECONOMY

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Learning Objectives

• Importance of engineering economy in engineering
  practice
• Origins of engineering economy
• Principles of engineering economy
• Engineering economy and the design process
• Accounting and engineering economy studies

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Why Engineering Economy

• Utilization of scientific and engineering
  knowledge
• Achieved through the design we use
• Achievements do not occur without a price
• Purpose of this course
• Develop and illustrate the principles required to
  answer the basic economic question
• Do its benefits exceed its costs?

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Engineering Economy Definition

• Involves systematic evaluation of economic merits
  of proposed solutions to engineering problems
• Solutions to engineering problems
• Must demonstrate a positive balance of long-term
  benefits over long-term costs
• Must promote the well-being and survival of an
  organization
• Involves technical analysis with emphasis on
  economic aspects

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Origins of Engineering Economy

• Development of engineering economy is relatively
  recent
• Arthur Wellington addressed the role of economic
  analysis in engineering projects
• Emphasis was primarily on financial and
  statistical mathematics
• Eugene Grant published the first edition of
  engineering economy
• Milestone in the development of engineering
  economy as we practice it today

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Engineering Economy and the Design Process

• Engineering Economic Analysis (Steps)
• Problem recognition
• Development of the feasible alternatives
• Development of the outcomes and cash flows
• Selection of a criterion
• Analysis and comparison of alternatives
• Selection of the preferred alternative
• Performance monitoring

• Engineering Design Process (Activities)
• Problem definition
• Problem formulation and evaluation
• Synthesis of possible solutions
• Analysis, optimization, and evaluation
• Specification of preferred alternative
• Communication

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Step 1. Problem Definition

• Must be well understood and stated in an explicit
  form
• Provides the basis for the rest of the analysis
• Formulation should be viewed from systems
  perspective
• Boundary needs to be carefully defined

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Step 2. Development of Alternatives

• Two primary actions are
• Searching for potential alternatives
• Depends largely on an individuals or groups
  problem-solving efficiency
• Screening them to select a smaller group of
  feasible alternatives
• Existence of usual limitations screens the
  alternatives
• Lack of time and money
• Lack of knowledge
• Preconceptions of what will and what will not work

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Step 3. Development of Prospective Outcomes

• Uses basic cash-flow approach employed in
  engineering economy
• Occurs when money is transferred from
  organization or individual to another
• Represents economic effects of an alternative in
  terms of money spent and received
• Nonmonetary factors (attributes) play a
  significant role in the final recommendation

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Step 4. Selection of a Decision Criterion

• Select the alternative that will best serve
  long-term interests of organization
• Should reflect a consistent and proper viewpoint

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Step 5. Analysis and Comparison of Alternatives

• Largely based on cash-flow estimates
• Effort is required to obtain reasonable accurate
  forecasts of cash flow
• When cash flow and other required estimates are
  determined
• Alternatives can be compared based on their
  differences

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Step 6. Selection of the Best Alternative

• Best alternative is simply a result of the total
  effort
• Dictates the quality of the results obtained and
  recommended course of action

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Step 7. Performance Monitoring

• Improves the achievement of related goals and
  objectives
• Reduces the variability in desired results
• Aim is to learn how to do better analyses
• Feedback is important in any organization

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Example

• While studying for the Engineering Economy, you
  and two friends find yourselves craving for a
  fresh pizza
• Cant spare the time to pick up the pizza
• Pick-Up-Sticks offers a 1 thick, 20 square
  pizza with your choice of two toppings for 15
  plus 5 sales tax and a 1.50 delivery charge
• Freds offers the round, deep-dish Sasquatch
  which is 20 inches in diameter
• It is 1-3/4 thick, which includes two toppings,
  and costs 17.25 plus 5 sales tax and free
  delivery

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Questions

1. What is the problem in this situation? Please
   state it in a lucid manner.
2. Systematically apply the seven principles of
   engineering economy to the problem you have
   defined in part (a).
3. Assuming that your common unit of measure is
   (i.e., cost), what is the better value for
   getting a pizza based on the criterion of
   minimizing cost per unit of volume?
4. What other criteria might be used to select which
   pizza to purchase?

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Answer to Part a

• Involves how to satisfy the hunger of three
  students--assume a delicious pizza will satisfy
  this need
• Learn enough about Engineering Economy to
  pass--or better yet earn an A or a B
• Use hunger satisfaction with a pizza as the
  problem definition

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Answer to Part b

• Principle 1 - Develop the Alternatives
• i) Order a pizza from Pick-Up-Sticks.
• ii) Order a pizza from Freds.
• Other options probably exist
• Principle 2 - Focus on the Differences
• Difference in delivery time could be an issue
• Quality of the ingredients used to make the pizza
  could be another factor to consider
• Concentrate our attention on cost differences in
  part (c) to follow

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Answer to Part b-Cont.

• Principle 3 - Use a Consistent Viewpoint
• Consider problem from perspective of three
  customers
• Use the customers point of view in this
  situation rather than that of the owner of the
  pizza shop
• Principle 4 - Use a Common Unit of Measure
• Use dollar as one of the most important
  measures
• Which pizza to order, well use a cost based
  metric in part (c)
• Principle 5 - Consider All Relevant Criteria
• Factors other than cost may affect the decision
• For example, variety and quality of toppings and
  delivery time may be important to your choice

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Answer to Part b-Cont.

• Principle 6 - Make Uncertainty Explicit
• Variability in quality of the pizza, its delivery
  time and even its price should be carefully
  examined
• Principle 7 - Revisit Your Decision
• After youve consumed your pizza, were you
  pleased with the taste of the toppings?
• Keep these sorts of things in mind when you order
  your next pizza!

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Answer to Part c

• Determine better value based on minimized cost
• List any key assumptions that underpin your
  analysis to minimize the cost per unit of volume
• Assumptions
• (i) weight is directly proportional to volume
  with
• (ii) you and your friends will eat the entire
  pizza
• (iii) data provided in the Example Problem are
  accurate
• Analysis
• Total volume and total cost are calculated

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Answer to Part d

• Typical other criteria you and your friends could
  consider
• (i) cost per square inch of pizza (select
  Pick-Up-Sticks)
• (ii) minimize total cost regardless of area or
  volume (select Pick-Up-Sticks)
• (iii) Freds can deliver in 30 minutes but
  Pick-Up-Sticks cannot deliver for one hour

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Accounting and Engineering Economy Studies

• Engineering economy studies
• Engineers and managers use the principles of
  engineering economy to assist decision making
• Provide information pertaining to the future
  operation
• Accounting
• Financial results after a decision has been made
• Procedures are established
• Financial events relating to the investment can
  be recorded and summarized

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Agenda of Next Session

• Selected cost concepts important in engineering
  economy studies are presented
• Emphasis is placed on economic principles of
  engineering design
• Application of life cycle cost concepts is also
  discussed