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Decisions
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Copyright 2006
Contemporary Engineering Economics, 4th
edition, 2007
Chapter 1
Engineering Economic Decisions
2.
3.
4.
5.
6.
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
Estimating a Required
investment
Forecasting a product
demand
Estimating a selling
price
Estimating a
manufacturing cost
Estimating a product
life
Contemporary Engineering Economics, 4th
edition, 2007
Engineering Projects
Analyze
Evaluate
Evaluate
Production Methods
Engineering Safety
Environmental Impacts
Market Assessment
Expected
Profitability
Timing of
Cash Flows
Degree of
Financial Risk
Impact on
Financial Statements
Firms Market Value
Stock Price
Accounting
Evaluating and
predicting future events
Engineering Economy
Past
Future
Present
Contemporary Engineering Economics, 4th
edition, 2007
Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
10
: patient
: service provider
Contemporary Engineering Economics, 4th
edition, 2007
11
12
13
Shall we build or
acquire a new facility to
meet the increased
demand?
Is it worth spending
money to market a new
product?
14
5. Cost Reduction
15
16
Today
6-month later
17
Monthly
Fuel
Cost
Monthly Cash
Maintena outlay at
nce
signing
Monthly
payment
Salvage
Value at
end of
year 3
Buy
$960
$550
$6,500
$350
$9,000
Lease
$960
$550
$2,400
$550
18
Sales revenue
1 unit
1 unit
Marginal
revenue
19
Potential
Risk
Expected
Return
1.5%
Bond (debt)
Moderate
4.8%
Stock (equity)
High
Contemporary Engineering Economics, 4th
edition, 2007
11.5%
20
Summary
21