EGN 3615 — Spring 12
ENGINEERING ECONOMICS
WITH SOCIAL AND GLOBAL IMPLICATIONS
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Economic
Decisions
Cost &
Estimating
After-tax
Interest &
Equivalence
Depreciation
Engineering
Economics
Time Value
of Money
Best
Alternative
Rate-ofReturn
Present
Worth
Annual
Equivalent
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Chapter Outline
 Types of Problems
 Role of Engineering Economic Analysis
 Problem-Solving / Decision-Making Process
 Ethical Dimensions in Engineering Decision-Making
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Learning Objectives
 Distinguish between simple and complex problems
 Understand the role and purpose of engineering
economic analysis
 Apply problem-solving /decision making process
 Solve simple problems associated with engineering
decision-making process
 Understand ethical dimension of decision-making
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Making Economic Decisions
This course develops the tools to properly analyze
and solve the economic problems that are
commonly faced by engineers.
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People are Surrounded by Problems
 Which career to pursue?
 What level of preparation is required for the career
chosen?
 Where may the preparation be obtained?
 How to get up and get to class?
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The problems are often not
isolated from each other.
Organizations Have Opportunities
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Do we make part A or B
today?
Should we use a drilling or
boring machine?
Should we purchase a
boring machine?
When must we replace the
drilling machine?
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Would a mechanized or
computerized drilling
machine be the preferred
alternative?
Where do we locate
machinery in the plant?
Decisions concerning these opportunities may be
arrived at with the help of economic analysis.
Problem Difficult Levels
Simple
Intermediate
Complex
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A Sea of Problems - I
Simple Problems
 Can often be solved in one’s head without extensive
analysis.
 Examples:
 Should I pay cash or use my credit card?
 Do I buy a semester parking pass or use the parking
meters?
 Shall we replace a burned-out motor?
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A Sea of Problems - II
Intermediate Problems
 Must be organized and analyzed
 Have significant economic aspects
 Are primarily economic
 Are the principal subject of this course
 Are generally adequately solved with single-criteria decision
making
 Examples:
 Should I buy or lease a new apartment?
 Which type of equipment should the company purchase?
 Shall I buy or lease my next car?
 Which equipment should be selected for a new assembly line?
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A Sea of Problems - III
Complex Problems
 Such problems represent a mixture of 3 elements:
economic, political and humanistic
 Complex problems are beyond the scope of this course
from a decision-making criteria point of view, but the
economic aspects of complex problems will be discussed
 Examples:
 Feasibility study of a new automobile plant
 Planning for new highways
 Such problems represent a mixture of 3 elements:
economic, political and humanistic
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Engineering Economic Analysis
Key Questions:
 Which engineering projects are worthwhile?
 Which projects should have higher priority?
 How the project should be designed?
 How to achieve long-term financial goals?
 How to compare different ways to finance purchases?
 How to make short and long-term financial decisions?
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Examples of Engineering Economic
Analysis
 A company plans to design a building
 Construction cost occurs in the near future
 Benefits to users begin when construction is finished
 Economic analysis of cost, benefits and revenues
occurring over time is an engineering economic analysis
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9-Step Decision-Making Process
1. Recognize Problem
2. Define the Goal or Objective
3. Assemble Relevant Data
5. Select the Criterion
4. Identify Feasible Alts
6. Construct a Model
7. Predict Each Alt’s Outcomes
9. Audit the Result
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Overall Mission
/ Objectives
8. Choose the Best Alternative
9. Audit the Results
 Compare the results of changes to the predictions to
assure that the chosen alternative was implement as
planned and the results are as expected.
 Fix deviations from planned changes.
 Make sure prediction errors are not repeated.
 Identify added opportunities.
 Audits promote realistic economic analysis and
implementation.
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9. Audit the Results
 Reality vs. prediction
 Learn from mistakes
 Replacement analysis
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Work a Problem Example:
Moving to a new apartment.
 1. Recognize the problem
 My contract is about to end, I have to make a
decision to move or renew the contract for the
next year.
 2. Define the goal or objective
 Find a place to stay during the next year while
studying at USF
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Work a Problem Example:
Moving to a new apartment.
 3. Assemble relevant data
 Am I alone or with family
 Selection of Roommates
 Rent price, move in fee
 Amenities or Services
 Pet friendly
 Distance from school
 Distance from the mall, principal stores, etc
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Work a Problem Example:
Moving to a new apartment.
 4. Identify Feasible Alternatives
 Do not move
 Move to a cheaper apartment but far from school
(need a car, buy a parking permit, near to the mall,
I can save time)
 Move to a expensive apartment but near USF
campus (can walk, bike, use USF Bull Runner but
need to adjust my schedule to the bus schedule)
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Work a Problem Example:
Moving to a new apartment.
 5. Select the criterion to Determine the best
alternative
 Minimize the expenditure of money
 Minimize the time to go to school
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Work a Problem Example:
Moving to a new apartment.
 6. Construct the model
 7. Predict the outcomes for each alternative
 Compare alternatives in equivalent units (e.g.,
money)
 8. Choose the best alternative
 “Apartment C looks cheapest, but I don’t like the
neighborhood. If I pay $50 more per month for Apartment
B I get a nicer neighborhood, and a 15-minute drive to USF.
Maybe I’ll choose Apartment B.”
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Work a Problem Example:
Moving to a new apartment.
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9. Audit the Results
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“Did I make a good choice”
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“After living in Apartment B for six months, I am
very happy with my choice!”
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But this certainly isn’t the case every time!!
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Ethics in Engineering Economic Analysis
 The concept of distinguishing between right and
wrong in decision-making.
 Ethics includes:
 Establishing systems of beliefs and moral obligations
 Defining values and fairness
 Determining duty and guidelines for conduct
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Ethics in Engineering Economic Analysis
 Focused on how well and how honestly the decisionmaking process is conducted – the data, method of
analysis, recommendations, and follow-up
 Recognize ethical issues exist and make them an explicit
part of decision-making process
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Code of Ethics
National Soc. of Professional Eng.
 Engineers, in the fulfillment of their professional duties, shall:
 Hold paramount the safety, health, and welfare of the public.
 Perform services only in areas of their competence.
 Issue public statements only in an objective and truthful manner.
 Act for each employer or client as faithful agents or trustees.
 Avoid deceptive acts.
 Conduct themselves honorably, responsibly, ethically, and
lawfully so as to enhance the honor, reputation, and usefulness
of the profession. (http://www.nspe.org/ethics/eh1-code.asp)
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Ethical Dimensions in
Engineering Decision-Making
Decision Process Step
1. Recognize the
problem
2. Define
goals/objectives
3. Collect relevant data
Example Ethical Lapses
• “Looking the other way”, or ignoring
the problem due to bribes or fear of
retribution
• Favoring one group of stakeholders by
focusing on their objective
• Using faulty or inaccurate data
4. Identify feasible alts.
• Leaving legitimate alts out of
consideration
5. Select criterion to
determine best alt
• Considering only monetary
consequences when other significant
consequences exist
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Ethical Dimensions in
Engineering Decision-Making
Decision Process Step
6. Construct a model
7. Predict alt’s
outcomes
8. Choose the best alt
9. Audit the result
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Example Ethical Lapses
• Using a short time horizon that favors
one alt over another
• Using optimistic estimates for one alt
and pessimistic ones for the other
alts
• Choosing an inferior alt, one that is
unsafe, adds unnecessary cost for
user, harms the environment
• Hiding past mistakes
Recap
 Distinguish between simple and complex problems
 Understand the role and purpose of engineering
economic analysis
 Apply problem-solving / decision making process
 Solve simple problems associated with engineering
decision-making process
 Understand ethical dimension of decision- making
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Assignment: Read Chapters 1 and 2
End of Chapter 1
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