Engineering Economic Decisions
Lecture No. 1
Chapter 1
Contemporary Engineering Economics, 6th ed.
Copyright © 2016
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
What Is an Engineering Economic
Decision?
 Role of engineers in business
 Understanding the term “engineering
economic decision”
 An overview of a variety of engineering
economic decision problems
 Understanding the fundamental principles of
engineering economics
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Role of Engineers in Business
Create and Design
• Engineering Projects
Analyze
Evaluate
Evaluate
• Production Methods
• Engineering Safety
• Environmental Impacts
• Market Assessment
• Expected
Profitability
• Timing of
Cash Flows
• Degree of
Financial Risk
• Impact on
Financial Statements
• Firm’s Market Value
• Stock Price
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Engineering
Economic
Decisions
Investment
Planning
Marketing
Manufacturing
Plan for the acquisition of equipment (capital
expenditure) that will enable the firm to design and
produce products economically
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Profit
What Makes Engineering Economic
Decisions Difficult?
•
•
•
•
•
Estimating a required investment
Forecasting a product demand
Estimating a selling price
Estimating a manufacturing cost
Estimating a product life
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Accounting Vs. Engineering Economy
Evaluation
of past
performance
Evaluation and
prediction of
future events
Accounting
Engineering Economy
Past
Future
Present
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Common Types of Strategic
Engineering Economic Decisions
•
•
•
•
•
•
Equipment or process selection
Equipment replacement decisions
New products and product expansion
Cost reduction
Improvement in service or quality
Design decisions
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Fundamental Principles of
Engineering Economics
• Principle 1: A dollar earned today is worth more
than a dollar earned in the future.
• Principle 2: The only thing that matters is the
difference between alternatives.
• Principle 3: Marginal revenue must exceed
marginal cost.
• Principle 4: Additional risk is not taken without
the expected additional return.
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 1: A dollar earned today is worth
more than a dollar earned in the future.
Interest rate = 10%
$110
one
$100 year
today later
Contemporary Engineering Economics, 6th edition
Park
$121
two
years
later
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 2: The only thing that matters is the
difference between alternatives.
Monthly
fuel cost
Monthly
maintenance
Cash
outlay at
signing
Monthly
payment
Buy
$960
$550
$6,500
$350
$9,000
Lease
$960
$550
$2,400
$550
0
Option
Salvage
value at
end of
year 3
Irrelevant items in decision-making
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 3: Marginal revenue must exceed
marginal cost.
Marginal
cost
Manufacturing cost
Sales revenue
Contemporary Engineering Economics, 6th edition
Park
1 unit
1 unit
Marginal
revenue
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 4: Additional risk is not taken
without the expected additional return.
Investment Class
Potential
Risk
Expected
Return
o
Savings
account (cash)
Low/None
1.5%
o
Bond (debt)
Moderate
4.8%
o
Stock (equity)
High
Contemporary Engineering Economics, 6th edition
Park
11.5%
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Two Factors in Engineering Economic
Decisions
•
•
Time
Uncertainty
Contemporary Engineering Economics, 6th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved