INTRODUCTION TO ENGINEERING ECONOMY

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• INTRODUCTION TO ENGINEERING ECONOMY

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WHAT IS ECONOMICS ?

• The study of how limited resources is used to
  satisfy unlimited human wants

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WHAT IS ECONOMICS ?

• The study of how individuals and societies
  choose to use scarce resources that nature and
  previous generations have provided.

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LAND

• All gifts of nature, such as water, air,
  minerals, sunshine, plant and tree growth, as
  well as the land itself which is applied to the
  production process.

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LABOR

• The efforts, skills, and knowledge of people
  which are applied to the production process.

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CAPITAL

• Real Capital (Physical Capital )
• Tools, buildings, machinery -- things which have
  been produced which are used in further
  production
• Financial Capital
• Assets and money which are used in the production
  process
• Human Capital
• Education and training applied to labor in the
  production process

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ENGINEERING

• is the profession in which knowledge of the
  mathematical and natural sciences gained by
  study, experience, and practice with judgment to
  develop ways to utilize, economically, the
  materials and forces of nature for the benefit of
  mankind.
• Economic aspects of engineering
• Physical aspects of engineering
• Clearly, it is essential that the economic part
  of engg. Practice be accomplished well.

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Origins of Engineering Economy

• The perspective that ultimate economy is a
  concern to the engineer and the availability of
  sound techniques to address this concern
  differentiate this aspect of modern engineering
  practice from that of the past.

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Origins of Engineering Economy

• Pioneer Arthur M. Wellington, civil engineer
• latter part of nineteenth century
• addressed role of economic analysis in
  engineering projects
• area of interest railroad building
• Followed by other contributions which emphasized
  techniques depending on financial and actuarial
  mathematics.

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PRINCIPLES OF ENGINEERING ECONOMY

• 1. Develop the Alternatives
• 2. Focus on the Differences
• 3. Use a Consistent Viewpoint
• 4. Use a Common Unit of Measure
• 5. Consider All Relevant Criteria
• 6. Make Uncertainty Explicit
• 7. Revisit Your Decisions

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DEVELOP THE ALTERNATIVES

• The final choice (decision) is among
  alternatives. The alternatives need to be
  identified and then defined for subsequent
  analysis.

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FOCUS ON THE DIFFERENCES

• Only the differences in expected future
  outcomes among the alternatives are relevant to
  their comparison and should be considered in the
  decision.

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USE A CONSISTENT VIEWPOINT

• The prospective outcomes of the alternatives,
  economic and other, should be consistently
  developed from a defined viewpoint (perspective).

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USE A COMMON UNIT OF MEASURE

• Using a common unit of measurement to enumerate
  as many of the prospective outcomes as possible
  will make easier the analysis and comparison of
  alternatives.

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CONSIDER ALL RELEVANT CRITERIA

• Selection of a preferred alternative (decision
  making) requires the use of a criterion (or
  several criteria). The decision process should
  consider the outcomes enumerated in the monetary
  unit and those expressed in some other unit of
  measurement or made explicit in a descriptive
  manner.

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MAKE UNCERTAINTY EXPLICIT

• Uncertainty is inherent in projecting (or
  estimating) the future outcomes of the
  alternatives and should be recognized in their
  analysis and comparison.

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REVISIT YOUR DECISIONS

• Improved decision making results from an
  adaptive process to the extent practicable, the
  initial projected outcomes of the selected
  alternative should be subsequently compared with
  actual results achieved.

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ENGINEERING ECONOMY AND THE DESIGN PROCESS

• DESIGN PROCESS?????
• Is an iterative, decision making activity whereby
  scientific and technological information is used
  to produce a system, device, or process which is
  different, in some degree, from what the
  designer knows to have been done before and which
  is meant to meet human needs. Also we want to
  meet the human needs economically as emphasized
  in the definition of engineering.

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ENGINEERING ECONOMY AND THE DESIGN PROCESS

• An engineering economy study is accomplished
  using a structured procedure and mathematical
  modeling techniques. The economic results are
  then used in a decision situation that involves
  two or more alternatives and normally includes
  other engineering knowledge and input.

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ENGINEERING ECONOMIC ANALYSIS PROCEDURE

• Steps
• 1. Problem recognition, formulation, and
  evaluation.
• 2. Development of the feasible alternatives.
• 3. Development of the cash flows for each
  alternative.
• 4. Selection of a criterion ( or criteria).
• 5. Analysis and comparison of the alternatives.
• 6. Selection of the preferred alternative.
• 7. Performance monitoring and post-evaluation
  results.

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Engineering Design Process

• Activities
• 1-Problem / need definition.
• 2-Problem / need formulation and evaluation.
• 3-Synthesis of possible solutions (alternatives).
• 4-Analysis, optimization, and evaluation.
• 5-Specification of preferred alternative.
• 6-Communication.

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Relationship b/w both.

• A sound EE analysis (EEA) procedure incorporates
  the basic principles.
• The 7-step EEA procedure is used to assist
  decision making within the engineering design
  process.
• While performing engg. design activities were to
  draw info./help from EEA procedure.

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EEA Procedure Steps

• Problem Definition
• Search for Alternatives /Option Development.
• Development of investment alternatives
• Development of prospective outcomes
• Selection of Decision criteria and analysis of
  alternatives.
• Selection of the preferred alternative
• Performance monitoring and post evaluation of
  results

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Problem Definition

• It is not adequate simply to think about a
  perplexing question or situation.
• Rather, a problem must be well understood and
  stated in an explicit form before the engineer
  proceeds with the rest of analysis.
• The first step of the EEA Procedure (Problem
  Def.) is particularly important, since it
  provides the basis for the rest of the analysis.

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Problem Definition

• The term problem is used here generically. It
  includes all decision situations for which EE
  analysis is required.
• - problem recognition stimulated by
• internal or external
  organizational
• needs or requirements.
• - problem formulation Boundary or
  
• extent of situation is defined.
• - problem evaluation Refinement of
• needs and requirements.

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Search for Alternatives /Option Development

• 1-searching for potential alternatives and
• 2-screening them to select a smaller group of
  feasible alternatives for detailed analysis and
  comparison in step 5.
• NOTE In searching for alternatives , several
  limitations invariably exist, including
• a- lack of time and money.
• b- preconceptions of what will and what will
  not work and
• c- lack of knowledge.

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Development of investment alternatives

• Saying It takes money to make money.
• Most of the feasible alternatives require
  investment of money, hence it becomes a crucial
  step.
• The 2 most accepted Approaches for developing
  sound investment alternatives.
• 1-Classical Brainstorming
• 2-Nominal Group Technique

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1. Classical Brainstorming

• It is based on the fundamental principles of
  deferment of judgment and that quantity breeds
  quality.
• Four rules of Brnstmg.
• Criticism is ruled out.
• Freewheeling is welcomed.
• Quantity is wanted.
• Combination and improvement are sought.

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1-Classical Brainstorming

• The most well-known and often-used technique for
  idea generation.
• Steps
• Preparation participants selected, preliminary
  statement of problem is circulated.
• Brainstorming a warm-up session with simple
  problems is conducted, the relevant problem and
  the 4 rules of Brnstmg are presented and ideas
  are generated and recorded using checklists and
  other techniques,
• Evaluation the ideas are evaluated relative to
  the problem.

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2-Nominal Group Technique (NGT)

• The NGT involves a structured group meeting
  designed o incorporate individual ideas and
  judgments into group consensus.
• Sort of Group Discussion.
• Facilitator is required.

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ACCOUNTING AND ENGINEERING ECONOMY STUDIES

• EE studies provide information on which current
  decisions pertaining to the future operation of
  an organization can be based.
• After a decision to invest capital in a project
  has been made and the money has been invested,
  those who supply and manage the capital want to
  know the financial results. Therefore, accounting
  procedures are established so that financial
  events relating to the investment can be recorded
  and summarized and financial performance
  determined.

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ACCOUNTING AND ENGINEERING ECONOMY STUDIES

• General accounting and Cost accounting are the
  procedures that provide these necessary services
  in a business organization.
• Accounting procedures are similar to recording
  data in a scientific experiment.

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ACCOUNTING AND ENGINEERING ECONOMY STUDIES

• Modern cost accounting may satisfy any or all of
  the following objectives
• 1. To determine the cost of products or services
• 2. To provide a rational basis for pricing goods
  or services
• 3. To provide a means for controlling
  expenditures
• 4. To provide information on which operating
  decisions may be based and the results evaluated

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Questions

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Assignment

• Example 1.2
• Verbal test from the Problems(1.8)
• .in next class