WELCOME ENGM 5580 – Advanced Engineering Economy Dr. Serkan Varol What is Engineering Econom • It is a subset of economics Formulating and Evaluating different options • Studies the behavior of individuals and companies in the decision making process • Deals with interest and Money, present-future worth analysis, depreciation calculations, capital budgeting, time value effect, risk analysis, rate of return, economic service life, utilization maximization… From Personal Perspective • “If I invest $5,000 today (with a certain APR in return), how much can I earn by the end of 2030?” • “What would be the future (e.g. 10 years from today) worth of $10,000?” • “Should I sell or keep my equipment?” • “If I buy a house right now, what would be the total interest that I would be paying in year 2040?” Engineering Economy Decisions • Be creative! • What is missing in the puzzle? • Look for trends in industry • Make smart capital investment decisions Kodak Case: https://www.youtube.com/watch?v=wwfwr8eYP50&t=367s “Famous” Companies • Facebook: A 19 year old Harvard sophomore launched Facebook (as a proprietorship) in 2004 • Tesla: Founded by a group engineers (partnerships) who taught that people did not need to compromise to drive electric vehicles. • Google: Founded in 1998 by 2 PhD students (partnerships) at Stanford University Type of Organizations Proprietorships Owned by an individual Responsible for debts, assets, policies etc. Taxed at the owner’s personal tax rate For more info: Partnerships More than one owner Work is shared Corporations A legal entity under federal law Organizational structure Taxed at the owner’s personal tax rate on his/her share of a partnership’s taxable income Taxed differently (favored) https://www.youtube.com/watch?v=nsV461YIr6c The Role of Engineers • Ranging from Manufacturing to Financing decision • We are focusing on the economic decisions related to engineering projects (aka “engineering economic decision”) EXAMPLES • Buy / Make decision • Depreciation • Forecasting Facts about Engineering Econo • Companies encourage project ideas and ventures. • Engineering economics begin after ALTERNATIVES have been found and evaluated. • As an ENGINEER, you may deal with new product or product expansion, equipment replacement cost reduction, quality improvement Principles of Engineering Econo #1: A dollar earned today is worth more than a dollar earned in the future #2: All that counts are the differences among alternatives #3: Marginal revenue must exceed marginal cost #4: Additional risk is not taken without the expected additional return In Class Activity Think about a device/tool/equipment etc. (pencil, cell phone, drill, automobile, razor blade..etc.) that could be redesigned to serve your needs better. Identify the economic factors that you would need to consider prior to making a decision to re-manufacture the redesigned product. Example: Improving a razor blade from single to double blades (the cost of blade, labor, design aspects (should you make it bigger so that the second razor can fit) This is not an assignment to submit..just think about it HOMEWORK 1 • Read the “Investment Decision Making and Risk” (by A. Virlics) article and make a 1-page summary that includes main points and your understanding of the paper. File can be found under week-1 tab (File name: FL1.1) IT IS DUE NEXT TUESDAY BY 23:55 pm (ONLINE SUBMISSION)
