SM 300

Engineering Economics
 Seven Principles of Engineering Economy (Contd.)
Principle 6: Make Risk and Uncertainty Explicit
Risk and uncertainty are inherent in estimating the future
outcomes of the alternatives and should be recognized in
their analysis and comparison.
Analysis of the alternatives involves projecting or
estimating the future consequences associated with each
of them…
However, the magnitude and the impact of future
outcomes of any course of action are uncertain.
 Should a company investment more on R&D when it
already has a patent for a product/process?
 Seven Principles of Engineering Economy (Contd.)
Principle 7: 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.
Learning from and adapting based on our experience are
essential and are indicators of a good organization.
Too often no feedback to the decision-making process
occurs… which is in fact important for future decision
making on related problems.
 Engineering Economic Process… with Application
Your friend bought an apartment building for $100,000. She spent
$10,000 of her own money, got a mortgage for the remaining
$90,000. Annual mortgage payment to the bank is $10,500.
Expected annual maintenance of the apartment building is
$15,000. She can rent out the 4 apartments (two bedrooms each)
in the building, at $360 per month. [Assume she was working after 12th
standard till last month when she bought an apartment]

Q1. Does your friend have a problem?

Ans:
Apply Step 1 of EE Process: Problem recognition, definition,
and evaluation
Engineering Economic Process… with Application(contd.)
Apply Step 2 of EE Process: Development of Alternatives…
Generally, this involves two primary actions:
(1) Searching for Potential Alternatives and
(2) Screening them to select a smaller group of feasible alternatives
for detailed analysis
Superior Alternatives can be searched by applying Principle 1… Use
creativity to Develop Alternatives
Most of the Ideas require investment of money, and only a few of all
feasible ideas can be developed… due to lack of time, knowledge,
or resources….
Use techniques to develop investment alternatives by removing
some of the barriers to creative thinking-
(1) Classical Brainstorming- Based on the principles of Deferment of
judgment and Quantity breeds Quality
Engineering Economic Process… with Application(contd.)
Steps in Brainstorming (A. F. Osborn)
(i) Preparation- Select participants (4-7) and circulate preliminary
problem statement
(ii) Brainstorming- Warm up session with simple unrelated problem
 the relevant problem with 4 rules presented--- Rules are-
1. Criticism ruled out
2. Freewheeling is welcomed
3. Quantity is wanted
4. Combination and improvement are sought
(iii) Evaluation- Ideas are evaluated relative to the problem

(2) Nominal Group Technique (NGT)- Structured group meeting (5-10

people) to incorporate individual ideas and judgments into group
consensus.
Engineering Economic Process… with Application(contd.)
The Basic Format of Nominal Group Technique (NGT)-
(i) Individual silent generation of ideas
(ii) Individual round-robin feedback and recording of ideas
(iii) Group clarification of each idea
(iv) Individual voting and ranking to prioritize ideas
(v) Discussion of group consensus results

Q2. What are the alternatives available to your friend?