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INTRODUCTION TO
ENGINEERING ECONOMY
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WHAT IS ECONOMICS ?
The study of how limited
resources is used to
satisfy unlimited human
wants
WHAT IS ECONOMICS ?
The study of how individuals
and societies choose to use
scarce resources that nature
and previous generations
have provided.
Resources
•
•
•
Land
Labor
Capital
Resources
•
•
•
Land
Labor
Capital
LAND
All gifts of nature, such as: water,
air, minerals, sunshine, plant and
tree growth, as well as the land
itself which is applied to the
production process.
LABOR
The efforts, skills, and knowledge
of people which are applied to the
production process.
CAPITAL
• Real Capital (Physical Capital )
Dollar
Bills
– Tools, buildings, machinery -things
which
have been produced which are used in further
production
• Financial Capital
– Assets and money which are used in the
production process
• Human Capital
– Education and training applied to labor
in the production process
ENGINEERING
• …is the profession in which knowledge of
the mathematical and natural sciences
gained by study, experience, and practice
with judgment to develop ways to utilize,
economically, the materials and forces of
nature for the benefit of mankind.
• Economic aspects of engineering
• Physical aspects of engineering
• Clearly, it is essential that the economic
part of engg. Practice be accomplished
well.
Origins of Engineering
Economy
The perspective that ultimate economy
is a concern to the engineer and the
availability of sound techniques to
address this concern differentiate this
aspect of modern engineering practice
from that of the past.
Origins of Engineering
Economy
• Pioneer: Arthur M. Wellington, civil engineer
latter part of nineteenth century;
addressed role of economic analysis in
engineering projects;
area of interest: railroad building
• Followed by other contributions which
emphasized techniques depending on
financial and actuarial mathematics.
PRINCIPLES OF ENGINEERING
ECONOMY
1. Develop the Alternatives;
2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
DEVELOP THE ALTERNATIVES
The final choice (decision) is
among alternatives. The
alternatives need to be identified
and then defined for subsequent
analysis.
FOCUS ON THE DIFFERENCES
Only the differences in expected future
outcomes among the alternatives are
relevant to their comparison and
should be considered in the decision.
USE A CONSISTENT VIEWPOINT
The prospective outcomes of the
alternatives, economic and other,
should be consistently developed from
a defined viewpoint (perspective).
USE A COMMON UNIT OF
MEASURE
Using a common unit of measurement
to enumerate as many of the
prospective outcomes as possible will
make easier the analysis and
comparison of alternatives.
CONSIDER ALL RELEVANT
CRITERIA
Selection of a preferred alternative
(decision making) requires the use of
a criterion (or several criteria). The
decision process should consider the
outcomes enumerated in the monetary
unit and those expressed in some
other unit of measurement or made
explicit in a descriptive manner.
MAKE UNCERTAINTY EXPLICIT
Uncertainty is inherent in projecting
(or estimating) the future outcomes of
the alternatives and should be
recognized in their analysis and
comparison.
REVISIT YOUR DECISIONS
Improved decision making results
from an adaptive process; to the extent
practicable, the initial projected
outcomes of the selected alternative
should be subsequently compared
with actual results achieved.
ENGINEERING ECONOMY AND
THE DESIGN PROCESS
• DESIGN PROCESS?????
Is an iterative, decision making activity whereby
scientific and technological information is used
to produce a system, device, or process which is
different, in some degree, from what the designer
knows to have been done before and which is
meant to meet human needs. Also we want to
meet the human needs economically as
emphasized in the definition of engineering.
ENGINEERING ECONOMY AND
THE DESIGN PROCESS
An engineering economy study is
accomplished using a structured
procedure and mathematical modeling
techniques. The economic results are
then used in a decision situation that
involves two or more alternatives and
normally includes other engineering
knowledge and input.
ENGINEERING ECONOMIC ANALYSIS
PROCEDURE
Steps:
1. Problem recognition, formulation, and
evaluation.
2. Development of the feasible alternatives.
3. Development of the cash flows for each
alternative.
4. Selection of a criterion ( or criteria).
5. Analysis and comparison of the
alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and postevaluation results.
Engineering Design Process
• Activities:
1-Problem / need definition.
2-Problem / need formulation and
evaluation.
3-Synthesis of possible solutions
(alternatives).
4-Analysis, optimization, and evaluation.
5-Specification of preferred alternative.
6-Communication.
Relationship b/w both.
• A sound EE analysis (EEA) procedure
incorporates the basic principles.
• The 7-step EEA procedure is used to
assist decision making within the
engineering design process.
• While performing engg. design activities
we’re to draw info./help from EEA
procedure.
EEA Procedure Steps
• Problem Definition
• Search for Alternatives /Option
Development.
• Development of investment alternatives
• Development of prospective outcomes
• Selection of Decision criteria and analysis
of alternatives.
• Selection of the preferred alternative
• Performance monitoring and post
evaluation of results
Problem Definition
• It is not adequate simply to think about a
perplexing question or situation.
• Rather, a problem must be well
understood and stated in an explicit form
before the engineer proceeds with the rest
of analysis.
• The first step of the EEA Procedure
(Problem Def.) is particularly important,
since it provides the basis for the rest of
the analysis.
Problem Definition
• The term problem is used here generically.
It includes all decision situations for
which EE analysis is required.
- problem recognition: stimulated by
internal or external organizational
needs or requirements.
- problem formulation: Boundary or
extent of situation is defined.
- problem evaluation: Refinement of
needs and requirements.
Search for Alternatives /Option
Development
1-searching for potential alternatives and
2-screening them to select a smaller group
of feasible alternatives for detailed
analysis and comparison in step 5.
NOTE: In searching for alternatives , several
limitations invariably exist, including
a- lack of time and money.
b- preconceptions of what will and what
will not work and
c- lack of knowledge.
Development of investment
alternatives
• Saying: “It takes money to make money”.
• Most of the feasible alternatives require
investment of money, hence it becomes a
crucial step.
• The 2 most accepted Approaches for
developing sound investment alternatives.
1-Classical Brainstorming
2-Nominal Group Technique
1. Classical Brainstorming
• It is based on the fundamental principles of
deferment of judgment and that quantity breeds
quality.
• Four rules of Brnstmg.
•
•
•
•
Criticism is ruled out.
Freewheeling is welcomed.
Quantity is wanted.
Combination and improvement are sought.
1-Classical Brainstorming
•
•
1.
2.
3.
The most well-known and often-used technique
for idea generation.
Steps:
Preparation: participants selected, preliminary
statement of problem is circulated.
Brainstorming: a warm-up session with simple
problems is conducted, the relevant problem
and the 4 rules of Brnstmg are presented and
ideas are generated and recorded using
checklists and other techniques,
Evaluation: the ideas are evaluated relative to
the problem.
2-Nominal Group Technique
(NGT)
• The NGT involves a structured group
meeting designed o incorporate
individual ideas and judgments into
group consensus.
• Sort of Group Discussion.
• Facilitator is required.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
• EE studies provide information on which current
decisions pertaining to the future operation of an
organization can be based.
• After a decision to invest capital in a project has
been made and the money has been invested,
those who supply and manage the capital want to
know the financial results. Therefore, accounting
procedures are established so that financial
events relating to the investment can be recorded
and summarized and financial performance
determined.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
• General accounting and Cost
accounting are the procedures that
provide these necessary services in
a business organization.
• Accounting procedures are similar to
recording data in a scientific
experiment.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
Modern cost accounting may satisfy any or
all of the following objectives:
1. To determine the cost of products or
services
2. To provide a rational basis for pricing
goods or services
3. To provide a means for controlling
expenditures
4. To provide information on which operating
decisions may be based and the results
evaluated
Questions
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Assignment
• Example 1.2
• Verbal test from the Problems(1.8)
……….in next class