LectureNo.

1 Chapter1 ContemporaryEngineeringEconomics Copyright2010

Contemporary Engineering Economics 5th edition, (c) 2010

WhatisAllaboutanEngineering EconomicDecision?
LearningObjectives
Anoverviewofavarietyofengineering

economicdecisionproblems. Understandingthetermengineering economicdecision. Understandingthefundamentalprinciplesof engineeringeconomics.

Contemporary Engineering Economics 5th edition, (c) 2010

R l of fE i i Role Engineers i inB 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, (c) 2010

Engineering Economic Decisions

Plan l for f the h acquisitionof equipment(capital p )thatwill expenditure) enablethefirmto designandproduce products economically i ll

Manufacturin g

Profit

Planning Investment Marketing

Contemporary Engineering Economics 5th edition, (c) 2010

WhatMakesEngineeringEconomic DecisionsDifficult?
EstimatingaRequired

investment F Forecasting i aproduct d demand Estimatingasellingprice Estimatinga manufacturing gcost Estimatingaproductlife

Contemporary Engineering Economics 5th edition, (c) 2010

AccountingVs.EngineeringEconomy
Evaluating past performance Evaluating and predicting future events

Accounting
Past

E i Engineering i Economy E
Future Present

Contemporary Engineering Economics 5th edition, (c) 2010

CommonTypesofStrategic EngineeringEconomicDecisions
Equipmentorprocessselection Equipmentreplacementdecisions Newproductandproductexpansion Cost C treduction d ti Improvementinserviceorquality

Contemporary Engineering Economics 5th edition, (c) 2010

FundamentalPrinciplesofEngineering Economics
Principle1:Anearbydollarisworthmorethanadistant

dollar Principle2:Allitcountsisthedifferencesamong alternatives Principle3:Marginalrevenuemustexceedmarginalcost Principle4:Additionalriskisnottakenwithoutthe expectedadditionalreturn

Contemporary Engineering Economics 5th edition, (c) 2010

Principle1:Anearbydollarisworthmore thanadistantdollar

Today

6-month later

Contemporary Engineering Economics 5th edition, (c) 2010

P i i l 2: 2 Allitcounts t is i the th differences diff Principle amongalternatives

Option
Monthly FuelCost Monthly Cash Maintena outlayat nce signing Monthly payment Salvage Valueat endof year3

Buy y Lease

$960 $960

$550 $550

$6,500 , $2,400

$350 $550

$9,000 , 0

I l Irrelevant tit itemsi indecision d i i making ki

Contemporary Engineering Economics 5th edition, (c) 2010

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P i i l 3: 3 Marginal M i lrevenuemust texceed d Principle marginalcost

Marginal cost Manufacturingcost 1unit

Salesrevenue

1unit

Marginal revenue

Contemporary Engineering Economics 5th edition, (c) 2010

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P i i l 4: 4 Additional Additi lrisk i ki tt k Principle isnot taken withouttheexpectedadditionalreturn

InvestmentClass Savingsaccount (cash) Bond(debt) Stock(equity) Potential Risk s Low/None Expected Return etu 1.5%

Moderate High

4 8% 4.8% 11.5%

Contemporary Engineering Economics 5th edition, (c) 2010

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T F t i i i E i Two Factors inE Engineering Economic Decisions

Time Uncertainty

Contemporary Engineering Economics 5th edition, (c) 2010

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