Engineering Economic

Decisions
Lecture No.1
Chapter 1

Contemporary Engineering Economics, 5th edition.

Engineering Economic Decisions

A.
B.
C.
D.
E.

Rational Decision- making Process

Role of Engineers in Business
What Makes the Engineering Economic Decision Difficult?
Types of Strategic Engineering Economic Decisions
Fundamental Principles in Engineering Economics

Contemporary Engineering Economics, 5th edition.

A. Rational Decision- making Process

Which Car to Lease? Saturn vs. Honda
1.
2.

3.
4.
5.
6.

Recognize a decision
problem
Define the goals or
objectives
Collect all the relevant
information
Identify a set of feasible
decision alternatives
Select the decision criterion
to use
Select the best alternative

Need a car

Want mechanical
security
Gather technical as well
as financial data
Choose between
Saturn and Honda
Want minimum total
cash outlay
Select Honda

Contemporary Engineering Economics, 5th edition.

B. What Makes the Engineering Economic

Decision Difficult? - Predicting the Future
Estimating a Required investment
Forecasting a product demand
Estimating a selling price
Estimating a manufacturing cost
Estimating a product life

Contemporary Engineering Economics, 5th edition.

C. Role of Engineers in Business

Create & Design
Engineering Projects

Analyze
Production Methods
Engineering Safety
Environmental Impacts
Market Assessment

Evaluate
Expected Profitability
Timing of Cash Flows
Degree of Financial Risk

Evaluate
Impact on Financial Statements
Firms Market Value
Stock Price

Contemporary Engineering Economics, 5th edition.

Accounting Vs. Engineering Economics

Accounting:
Evaluating past
performance

Past

Eng. Economy:
Evaluating and
predicting
future events
Present

Future

Two Factors defining aspects of any engineering economic

decisions: time and uncertainty
eg: A Large-Scale Engineering Project
* requires a large sum of investment
* takes a long time to see the financial outcomes
* difficult to predict the revenue and cost streams
Contemporary Engineering Economics, 5th edition.

D. Types of Strategic Engineering Economic

Decisions in Manufacturing Sector
Service Improvement - Healthcare Delivery
Which plan is more economically viable?
Traditional Plan: Patients visit each service provider.
New Plan: Each service provider visits patients
Equipment and Process Selection
How do you choose between the Plastic SMC and the
Steel sheet stock for an auto body panel? The choice of
material will dictate the manufacturing process for an
automotive body panel as well as manufacturing costs.
Contemporary Engineering Economics, 5th edition.

D. Types of Strategic Engineering Economic

Decisions in Manufacturing Sector
Equipment Replacement
When is the right time to replace the old equipment?
New Product and Product Expansion
Shall we build or acquire a new facility to meet the
increased demand?
Is it worth spending money to market a new product?
Cost Reduction
Should a company buy equipment to perform an operation
now done manually?
Contemporary Engineering Economics, 5th
edition.

E. Fundamental Principles of Engineering

Economics

Principle 1: A dollar today worth more than a dollar tomorrow

Principle 2: All it counts is the differences among options

Option Monthly Monthly

Fuel
Maintenance
Cost

Cash outlay Monthly Salvage

at signing
payment Value end
of year 3

Buy

$960

$550

$6,500

$350

$9,000

Lease

$960

$550

$2,400

$550

Irrelevant items in decision making

Contemporary Engineering Economics, 5th
edition.

E. Fundamental Principles of Engineering

Economics

Principle 3: Marginal revenue must exceed marginal cost

Marginal cost
Manufacturing cost 1 unit
Marginal revenue
Sales revenue 1 unit

Principle 4: Additional risk is not taken without the expected

additional return
Investment Class Potential Risk

Expected Return

Savings account

Low/None

1.5%

Bond (debt)

Moderate

4.8%

Stock (equity)

High

Contemporary Engineering Economics, 5th

edition.

11.5%
10

Session 1. 1st February, 2012, TNBT

11

Session 1. 1st February, 2012, TNBT

12

Summary

The term engineering economic decision refers

to any investment decision related to an
engineering project.
The five main types of engineering economic
decisions are (1) service improvement, (2)
equipment and process selection, (3) equipment
replacement, (4) new product and product
expansion, and (5) cost reduction.
The factors of time and uncertainty are the
defining aspects of any investment project.

Contemporary Engineering Economics, 5th

edition.

13

SEMESTER 1, 2012/ 2013

Briefly explain two (2) out of four (4)

engineering economics principles.

Contemporary Engineering Economics, 5th

edition.

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