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Lecture No.1Chapter 1Chapter 1
Contemporary Engineering EconomicsCopyright © 2010
1Contemporary Engineering Economics 5th edition, (c) 2010
What is All about an EngineeringWhat is All about an Engineering Economic Decision?
Learning ObjectivesAn overview of a variety of engineeringAn overview of a variety of engineering economic decision problems.Understanding the term “engineering economic decision.”Understanding the fundamental principles of engineering economicsengineering economics.
2Contemporary Engineering Economics 5th edition, (c) 2010
R l f E i i B iRole of Engineers in BusinessCreate & DesignCreate & Design
• Engineering Projects
EvaluateAnalyze Evaluate
• Expected Profitability• Timing of Cash Flows
• Production Methods• Engineering Safety• Environmental Impacts• Market Assessment
• Impact on Financial Statements• Firm’s Market Value• Stock PriceCash Flows
• Degree ofFinancial Risk
• Market Assessment Stock Price
3Contemporary Engineering Economics 5th edition, (c) 2010
Engineering Economic Profit
ManufacturingProfit
ManufacturingEconomic Decisionsl f hPlan for the
acquisition of equipment (capital expenditure) that will
PlanningPlanningp )enable the firm to design and produce products
i ll
Investment
Marketing
Investment
Marketingeconomically etingeting
Contemporary Engineering Economics 5th edition, (c) 2010 4
What Makes Engineering EconomicWhat Makes Engineering Economic Decisions Difficult?Estimating a Required investment
F i dForecasting a product demand
Estimating a selling priceEstimating a selling price
Estimating a manufacturing costg
Estimating a product life
5Contemporary Engineering Economics 5th edition, (c) 2010
Accounting Vs. Engineering Economy
Evaluating past performance Evaluating and predicting future events
E i i EAccounting
PresentFuturePast
Engineering EconomyAccounting
6
Present
Contemporary Engineering Economics 5th edition, (c) 2010
Common Types of StrategicCommon Types of Strategic Engineering Economic Decisions
Equipment or process selection
Equipment replacement decisionsEquipment replacement decisions
New product and product expansion
C t d tiCost reduction
Improvement in service or quality
7Contemporary Engineering Economics 5th edition, (c) 2010
Fundamental Principles of EngineeringFundamental Principles of Engineering Economics
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 returnexpected additional return
8Contemporary Engineering Economics 5th edition, (c) 2010
Principle 1: A nearby dollar is worth morePrinciple 1: A nearby dollar is worth more than a distant dollar
Today 6-month later
9Contemporary Engineering Economics 5th edition, (c) 2010
P i i l 2 All it t i th diffPrinciple 2: All it counts is the differences among alternatives
Option Monthly Fuel Cost
Monthly Maintenance
Cash outlay at signing
Monthly payment
Salvage Value at end ofnce signing end of year 3
Buy $960 $550 $6,500 $350 $9,000y , ,
Lease $960 $550 $2,400 $550 0
I l t it i d i i kiIrrelevant items in decision making
10Contemporary Engineering Economics 5th edition, (c) 2010
P i i l 3 M i l t dPrinciple 3: Marginal revenue must exceed marginal cost
Marginal cost
Manufacturing cost
cost
1 unit
Sales revenueMarginal revenue1 unit
11Contemporary Engineering Economics 5th edition, (c) 2010
P i i l 4 Additi l i k i t t kPrinciple 4: Additional risk is not taken without the expected additional return
Investment Class Potential
Risk
Expected
Returns etu
Savings account (cash)
Low/None 1.5%(cash)
Bond (debt) Moderate 4 8%Bond (debt) Moderate 4.8%
Stock (equity) High 11.5%
12Contemporary Engineering Economics 5th edition, (c) 2010
T F t i E i i E iTwo Factors in Engineering Economic Decisions
• Time• Time
• Uncertainty
13Contemporary Engineering Economics 5th edition, (c) 2010