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DECISION MAKING & PROJECT
APPRAISAL
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Identity of the decision maker
Who makes decisions?
Managerial decision making is essentially an individual process, but
one which takes place within an organizational context
Decision maker – central to the process
Decision
– may influence other individuals and groups both within and outside
the organization
- Potential to influence the surrounding economic, social and
technical environment within which they all operate
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Identity of the decision maker
Resolving complex decisions involve:
- Definition and evaluation of alternative actions
- Resolution of how the chosen project should be physically undertaken
Involve the expenditure of vast amounts of money
Primary stakeholders – groups seeking to directly influence the decision
maker, such as professional representative institutions or local community
groups
Secondary stakeholders (third parties to the decision) – environmental and
economic pressure groups
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Role of engineering economics in decision-making
Most decisions involve money, called capital or capital funds , which is usually limited in
amount.
The decision of where and how to invest this limited capital is motivated by a primary
goal of adding value as future, anticipated results of the selected alternative are
realized.
Engineers play a vital role in capital investment decisions based upon their ability and
experience to design, analyze, and synthesize.
The factors upon which a decision is based are commonly a combination of economic
and noneconomic elements. Engineering economy deals with the economic factors.
Engineering economy involves formulating, estimating, and evaluating the expected
economic outcomes of alternatives designed to accomplish a defined purpose.
Mathematical techniques simplify the economic evaluation of alternatives.
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Cash flows
4 Essential
elements of
the
estimates
and decision
Times of occurrence of cash flows
Interest rates for time value of money
Measure of economic worth for
selecting an alternative
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Example 1
An engineer is performing an analysis of warranty costs for drive train
repairs within the first year of ownership of luxury cars purchased in
the United States. He found the average cost (to the nearest dollar) to
be $570 per repair from data taken over a 5-year period.
What range of repair costs should the engineer use to ensure that the
analysis is sensitive to changing warranty costs?
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Decision-making
process
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Example
Charlene is a newly hired mechanical engineer. She has been asked to select a
pump to move 15,000 liters of slurry a day to the pollution treatment center.
What process should she use to select the pump?
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1. Define Problem
(1) slurry characteristics, such as particle size and corrosiveness;
(2) pipe sizes and flow velocities for input and output;
(3) any size, power, and location restrictions;
(4) time horizon for using the pump and how soon is it needed;
(5) cost limits;
(6) vendor selection process—purchase order, competitive bid, or request for proposal (RFP);
(7) how many pumps (identical, similar, or by the same vendor) are needed.
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2. Choose Objective(s)
Cost over the pump’s life and technical performance will usually dominate, but Charlene
must also consider other factors, such as vendor and pump reliability, similarity to
current practice, maintainability, and flexibility for changed conditions.
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3. Identify Alternatives
If the pump will be purchased from a catalog or other vendor material,
then Charlene must assemble and examine those materials from all
appropriate vendors. If an RFP will be issued, then possible alternative
specifications must be developed.
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4. Evaluate
Consequences
Charlene must enumerate each alternative’s
advantages and disadvantages with respect to the
objectives.
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5. Select
Charlene must select a pump based on costs and benefits adjusted for the time value of
money. Technical performance objectives must be completely satisfied, so that any
pump with deficiencies is eliminated from consideration.
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6. Implement
The pump must be ordered and installed.
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7. Audit
This step evaluates the pump and the decision-making process after the
pump is in use. The intent is to provide “lessons learned” to assist in future
decisions.
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Identifying attributes/criteria of evaluation
Attributes represent the characteristics associated with the essential features of a proposed
development.
Any given option being considered must perform positively with respect to these features if it is
to have any hope of fulfilling the overall objectives for the project as laid down by the decision
maker.
Within a complex engineering development, criteria may vary from well-defined quantitative
attributes, such as economic and financial viability, to ones that are extremely difficult to define
and quantify, such as morale and environmental welfare.
Many view criteria that can be expressed in monetary terms as the most important within a
decision problem, given that selecting the most efficient option that will make the best use of
limited resources is the primary concern of the decision maker.
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Identifying attributes/criteria of evaluation
More complex decision problems may involve attributes that prove difficult to define and
measure.
These attributes are termed ‘intangible’ or ‘qualitatively based’.
A wide range of criteria, some monetary, some non-monetary but quantitative, and others
purely qualitative must be considered.
This can only be achieved within a multi-attribute or multicriteria decision-making format.
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