Contemporary engineering no01 engineering economics 6th by park decisions
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Engineering Economic Decisions
Lecture No. 1
Chapter 1
Contemporary Engineering Economics, 6th ed.
Copyright © 2016
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
What Is an Engineering Economic
Decision?
Role of engineers in business
Understanding the term “engineering economic
decision”
An overview of a variety of engineering economic
decision problems
Understanding the fundamental principles of
engineering economics
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
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Role of Engineers in Business
Create and Design
• Engineering Projects
Analyze
•
•
•
•
Production Methods
Engineering Safety
Environmental Impacts
Market Assessment
Evaluate
Evaluate
• Expected
Profitability
• Timing of
Cash Flows
• Degree of
Financial Risk
• Impact on
Financial Statements
• Firm’s Market Value
• Stock Price
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Engineering
Economic
Decisions
Plan for the acquisition of equipment (capital
expenditure) that will enable the firm to design and
produce products economically
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
What Makes Engineering Economic
Decisions Difficult?
•
•
•
•
•
Estimating a required investment
Forecasting a product demand
Estimating a selling price
Estimating a manufacturing cost
Estimating a product life
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Accounting Vs. Engineering Economy
Accounting
Engineering Economy
Past
Future
Present
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
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Common Types of Strategic
Engineering Economic Decisions
•
•
•
•
•
•
Equipment or process selection
Equipment replacement decisions
New products and product expansion
Cost reduction
Improvement in service or quality
Design decisions
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Fundamental Principles of
Engineering Economics
• Principle 1: A dollar earned today is worth more than
a dollar earned in the future.
• Principle 2: The only thing that matters is the
difference between alternatives.
• Principle 3: Marginal revenue must exceed marginal
cost.
• Principle 4: Additional risk is not taken without the
expected additional return.
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 1: A dollar earned today is worth more than a dollar earned
in the future.
Interest rate = 10%
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 2: The only thing that matters is
the difference between alternatives.
Option
Monthly
fuel cost
Monthly
maintenance
Cash
outlay at
signing
Monthly
payment
Salvage
value at
end of
year 3
Buy
$960
$550
$6,500
$350
$9,000
Lease
$960
$550
$2,400
$550
0
Irrelevant items in decision-making
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
Principle 3: Marginal revenue must exceed
marginal cost.
Marginal
cost
Manufacturing cost
Sales revenue
Contemporary Engineering Economics, 6 th edition
Park
1 unit
1 unit
Marginal
revenue
Copyright © 2016 by Pearson Education, Inc.
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Principle 4: Additional risk is not taken
without the expected additional return.
Investment Class
Potential
Risk
Expected
Return
Savings
account (cash)
Low/None
1.5%
o
Bond (debt)
Moderate
4.8%
o
Stock (equity)
High
o
Contemporary Engineering Economics, 6 th edition
Park
11.5%
Copyright © 2016 by Pearson Education, Inc.
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Two Factors in Engineering Economic
Decisions
•
•
Time
Uncertainty
Contemporary Engineering Economics, 6 th edition
Park
Copyright © 2016 by Pearson Education, Inc.
All Rights Reserved
