INTRODUCTION

Math 16 Engineering Economy

Engineering
Engineering without economy, make no sense at all The Accreditation Board for Engineering and Technology (ABET) states that engineering is the profession in which a knowledge of the mathematical and natural science gained by study, experience, and practice is applied with judgment to develop ways to utilize economically, the materials and forces of nature for the mankind Economical role of an engineer is emphasized as well as his technical role

Why Study of Engineering Economy Important to Engineers?

Engineers are called upon to analyze and select the most economical alternative among several design alternatives. Engineers often play a major role in investment decisions based on the analysis and design of new products or processes. Decisions made by the engineer during the engineering phase of a products development determine the majority of the costs of manufacturing the product.

What is Engineering Economy?

The analysis and evaluation of factors that will affect the economic success of engineering projects to the end that a recommendation can be made which will ensure the best use of capital; Is the discipline concerned with the economic aspects of engineering, it involves the systematic evaluation of the costs and benefits of proposed technical projects; Involves the systematic evaluation of the economic merits of proposed solutions to engineering problems. To be economically acceptable (i.e., affordable), solutions to engineering problems must demonstrate a positive balance of long-term benefits over long-term costs.

Engineering Economy
Is a collection of mathematical techniques which simplify economic comparisons among alternatives. Engineering Economy involves formulating, estimating, and evaluating the economic outcomes when alternatives to accomplish a defined purpose are available. Alternatives: An alternative is stand-alone solution for a given situation.

What is Economics
The study of how limited resources is used to satisfy unlimited human wants; The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided.

Resources
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. CAPITAL Real Capital (Physical Capital )
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

Resources

LABOR The efforts, skills, and knowledge of people which are applied to the production process.

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; 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

Principle 1: Develop the alternative
As engineering economy is defined as the mathematical technique to compare between alternatives, therefore alternatives should exist. These alternatives should be identified and well defined in order to be able to compare between them.

Principle 2: Focus on the difference

Comparison between alternative is based only on the difference in the expected future outcomes, if all alternatives have the same future outcomes comparison is meaningless. All common future outcomes could be eliminated from the analysis process.

Principles of Engineering Economy

Principle 3: Use a consistent view point All alternatives should be defined from one point of view (one perspective), which is usually the decision maker perspective. It is preferred first that the perspective of a particular decision is defined, and then it could be used in the analysis and comparison of the alternatives. Principle 4: Use a common unit of measure Using a common unit of measurement for the prospective outcomes simplifies the analysis and comparison process, as it makes the outcomes directly comparable. In economic field it preferred to use a monetary unit as pounds (L.E.) as a unit of measure.

Principles of Engineering Economy

Principle 5: Consider all relevant criteria The main criterion for selection between alternatives is the maximum return interest; however there are some objectives that you would like to achieve with your decision. These objectives might not be expressed in monetary unit; it should be considered and given a weight in the decision process (such that psychological objective).

Principles of Engineering Economy

Principle 6: Make uncertainty explicit For any project future outcomes estimation of different alternatives is accompanied with uncertainty. This uncertainty should be stated explicitly and taken into consideration in the analysis and comparison process Principle 7: Revisit your decision Improving decision making requires comparison between the project initial outcomes and the actual results achieved. Post-evaluation action points out the weakness in the estimation process and the engineering economy studied done in order to enhance it in the future projects

Principles of Engineering Economy

Principle 5: Consider all relevant criteria The main criterion for selection between alternatives is the maximum return interest; however there are some objectives that you would like to achieve with your decision. These objectives might not be expressed in monetary unit; it should be considered and given a weight in the decision process (such that psychological objective).

Engineering Economy and the Design Process

1-Problem definition (Principle 1) 2-Development of alternatives (Principle 1) Classical brainstorming Nominal Group Technique (NGT) 3-Development of Prospective outcomes (Principle 2,3 & 4) 4-Selection of decision criterion (Principle 3 & 5)

5-Analysis and comparison of Alternatives (Principle 6)

6-Selection of the preferred alternative 7-Performance monitoring and post-evaluation of results (Principle 7)

Example
Bad news: You have just wrecked your car! You need another car immediately because you have decided that walking, riding a bike, and taking a bus are not acceptable. An automobile wholesaler offers you 2000 m.u. for your wrecked car "as is." Also, your insurance company's claims adjuster estimates that there is 2000 m.u. in damages to your car. Because you have collision insurance with a 1000 m.u. deductibility provision, the insurance company mails you a check for 1000 m.u. The odometer reading on your wrecked car is 58000 Km. What should you do? Uses the seven-step procedure from to analyze your situation. Also, identify which principles accompany each step.

Solution
Step 1 -Define the Problem Your basic problem is that you need transportation. Step 2-Develop Your Alternatives (Principle 1)

Your problem has been reduced to either replacing or repairing your automobile.
The alternatives would appear to be:

Solution
1. Sell the wrecked car for 2000 m.u. to the wholesaler and spend this money, the 1000 m.u. insurance check, and all of your 7000 m.u. savings account on a new car. The total amount paid out of your savings account is m.u.7000, and the car will have 28000 Km of prior use. 2. Spend the 1000 m.u. insurance check and m.u.1000 m.u. of savings to fix the car. The total amount paid out of your savings is 1000 m.u., and the car will have 58000 Km of prior use. 3. Spend the 1000 m.u. insurance check and 1000 m.u. of your savings to fix the car and then sell the car for 4500 m.u.. Spend the 4500 m.u. plus 5500 m.u. of additional savings to buy the new car. The total amount paid out of savings is 6500 m.u., and the car will have 28000 Km.

Solution
4. Give the car to a part-time mechanic, who will repair it for 1100 m.u. (1000 m.u. insurance and 100 m.u. of your savings), but will take an additional month of repair time. You will also have to rent a car for that time at 400m.u./month (paid out of savings). The total amount paid out of savings is 500 m.u., and the car will have 58000 Km on the odometer.
5. Same as Alternative 4, but you then sell the car for 4500 m.u. and use this money plus 5500 m.u. of additional savings to buy the newer car. The total amount paid out of savings is 6000 m.u., and the newer car will have 28000 Km of prior use.

Solution
Step 3-Estimate the Cash Flows for Each Alternative (Principle 2)
Alternative 1 varies from all others because the car is not to be repaired at all but merely sold. This eliminates the benefit of the m.u.500 increase in the value of the car when it is repaired and then sold. Also this alternative leaves no money in your savings account. There is a cash flow of -8000 m.u. to gain a new car valued at 10000 m.u. Alternative 2 varies from Alternative 1 because it allows the old car to be repaired. Alternative 2 differs from Alternatives 4 and 5 because it utilizes a more expensive (500 m.u. more) and less risky repair facility. It also varies from Alternatives 3 and 5 because 'the car will be kept. The cash flow is -2000 m.u. and the repaired car can be sold for 4500 m.u. Alternative 3 gains an additional 500 m.u. by repairing the car and selling it to buy the same car as in Alternative 1. The cash flow is -7500 m.u. to gain the newer car valued at 10000 m.u.

Solution
Step 3-Estimate the Cash Flows for Each Alternative (Principle 2)

Alternative 4 uses the same idea as Alternative 2, but involves a less expensive repair shop. The repair shop is more risky in the quality of its end product, but will only cost 1100 m.u. in repairs and 400 m.u. in an additional month's rental of a car. The cash flow is -1500 m.u. to keep the older car valued at 4500 m.u..
Alternative 5 is the same as Alternative 4, but gains an additional 500 m.u. by selling the repaired car and purchasing a newer car as in Alternatives 1 and 3. The cash flow is -7000 m.u. to obtain the newer car valued at 10000 m.u.

Solution
Step 4-Select a Criterion It is very important to use a consistent viewpoint (Principle 3) and a common unit of measure (Principle 4) in performing this step. The viewpoint in this situation is yours (the owner of the wrecked car). The value of the car to the owner is its market value (i.e., 10000 m.u. for the newer car and 4500 m.u. for, the repaired car). Hence, the dollar is used as the consistent value against which everything is measured. This reduces all decisions to a quantitative level, which can then be reviewed later with qualitative factors that may carry their own dollar value (e.g., how much is low mileage or a reliable repair shop worth?).

Solution
Step 5-Analyze and Compare the Alternatives (Principle 5). Make sure you consider all relevant criteria 1. Alternative 1 is eliminated, because Alternative 3 gains the same end result and would also provide the car owner with 500 m.u. more cash. This is experienced with no change in the risk to the owner. (Car value = 10000 m.u., savings = 0, total worth = 10000 m.u. ) . 2. Alternative 2 is a good alternative to consider, because it spends the least amount of cash, leaving 6000 m.u. in the bank. Alternative 2 provides the same end result as Alternative 4, but costs 500 m.u. more to repair. Therefore, Alternative 2 is eliminated. (Car value = 4500 m.u., savings m.u., total worth = 10500 m.u. )

Solution
Step 5-Analyze and Compare the Alternatives (Principle 5). Make sure you consider all relevant criteria
3. Alternative 3 is eliminated, because Alternative 5 also repairs the car but at a lower out-of-savings cost (500 m.u. difference), and both Alternatives 3 and 5 have the same end result of buying the newer car. (Car value = 10000 m.u., savings =500 m.u., total worth = 10500 m.u. )

4. Alternative 4 is a good alternative, because it saves m.u.500 m.u. by using a cheaper repair facility, provided that the risk of a poor repair job is judged to be small. (Car value = m.u.4500 m.u., savings = 6500 m.u., total worth = 11000 m.u. )
5. Alternative 5 repairs the car at a lower cost (m.u.500 cheaper) and eliminates the risk of breakdown by selling the car to someone else at an additional 500 m.u. gain. (Car value = 10000 m.u., savings = 1000 m.u., total worth = 11000 m.u..)

Solution
Step 6-Select the Best Alternative
When performing this step of the procedure, you should make uncertainty explicit (Principle 6). Among the uncertainties that can be found in this problem, the following are the most relevant to the

decision. If the original car is repaired and kept, there is a possibility

that it would have a higher frequency of breakdowns (based on personal experience). If a cheaper repair facility is used, the chance of a later breakdown is even greater (based on personal experience). Buying a new car will use up most of your savings. Also, the new car purchased may be too expensive, based on the additional price paid (which is at least 6000 m.u. /30000 Km =20 cents per Km). Finally, the new car may also have been in an accident and could have a worse repair history than the presently owned car.

Based on the information in all previous steps, alternative 5 was,

actually chosen.

Solution
Finally, the new car may also have been in an accident and could have a
worse repair history than the presently owned car. Based on the information in all previous steps, alternative 5 was, actually chosen.
Step 7-Monitor tile Performance of Your Choice

This step goes hand-in-hand with Principle 7 (revisit your decisions). The newer car turned out after being "test driven" for 20000 Km to be a real beauty. Mileage was great, and no repairs were needed. The systematic process of identifying and analyzing alternative solutions to this problem really paid off!