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Resources & Principles of Engineering Economics

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19 views25 pages

Resources & Principles of Engineering Economics

Uploaded by

muhammad rizwan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ENGINEERING ECONOMICS

Lecture 3
RESOURCES

1. Land

2. Labor

3. Capital
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.
LABOR

The efforts, skills, and knowledge of people which


are 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 Dollar Bills
Engineering Economy Applications

• Promote well-being of an organization.

• Include innovative ideas and new technology

• Allow Identification of the estimated outcomes

• Establish a measure to represent profitability


The Principles of Engineering Economy

1. Develop the Alternatives


The choice is among alternatives. The alternatives need to be
identified and then defined for subsequent analysis.

• Creativity & innovation are essential to this process.

• Detailed evaluation among multiple alternatives improve the


quality of the decision.
The Principles of Engineering Economy

2. Focus on the differences


Only the difference in expected future outcomes among the
alternatives are relevant to their comparison and should be
considered in the final decision.

Example – Housing Alternatives


If you have to choose between 2 residences of same purchase price.
Price of the residence will have no effect on your final decision. Instead,
decision would be made among other factors like:
• Location
• Annual operating cost
• Maintenance expenses
The Principles of Engineering Economy

3. Use a Consistent Viewpoint


The future outcomes of the alternatives, economic and other,
should be consistently developed from a defined viewpoint

Example – Flexible benefit package


We assume that the feasible alternatives for operating the plan all
have the same future costs to the company.
Since the alternatives have difference among the viewpoint of the
employees. The decision shall be made from the perspective of
the employees.
The Principles of Engineering Economy

4. Use a Common Unit of Measure


Using a common unit of measurement to compute as many of
the future outcomes as possible will simplify the analysis of
the alternatives.

• Try to convert outcomes into a single monetary unit such as


dollars.
The Principles of Engineering Economy

5. Consider All Relevant Criteria

Selection of a preferred alternative requires the use of a


standards. The decision process should consider both the
outcomes computed in the economic unit and those
expressed in some other unit of measurement or made clear
in a descriptive manner.
The Principles of Engineering Economy

6. Make Risk and Uncertainty Explicit


Risk and Uncertainty are essential in estimating the future
outcomes of alternatives and should be recognized in their
analysis and comparison.

7. Revisit Your Decisions


Improved decision making results from an adaptive process;
to the extent practicable, the initial project outcomes of the
selected alternatives should be subsequently compared with
the actual results achieved.
The Principles of Engineering Economy

Summary

1. Develop the Alternatives


2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider all Relevant Criteria
6. Make Uncertainty Explicit
7. Revisit your Decisions
Engineering Economy & the Design Process

• A sound engineering economic analysis procedure


includes the basic seven principles .

• The seven-step procedure is also used to assist decision


making within the engineering design process.
Engineering Economy & the Design Process

Step 1 : Problem Definition


• The first step of the engineering economic analysis procedure
(problem definition)is particularly important, since it provides the
basis for the rest of the analysis.

• A problem must be well understood and stated in a clear form before


the project team proceeds with the rest of the analysis.

• Recognition of the problem is normally stimulated by internal or


external organizational needs or requirements.

Example
An operating problem within a company (internal need) or a customer
expectation about a product or service (external requirement)
Engineering Economy & the Design Process

Step 2 : Development of Alternatives

The two primary actions in Step 2 of the procedure are:

• Searching for potential alternatives

• Screening them to select a smaller group of feasible


alternatives for detailed analysis.
Engineering Economy & the Design Process

Step 2 : Development of Alternatives


EXAMPLE:
The management team of a small furniture-manufacturing
company is under pressure to increase profitability in order
to get a much-needed loan from the bank to purchase a
modern pattern-cutting machine.

One proposed solution is to sell waste chips & shavings


to a local charcoal manufacturer instead of using them to
fuel space heaters for the company’s office & factory areas.
Engineering Economy & the Design Process

Step 3 : Development of Prospective Outcomes

• Focus on the Differences


• Use a Consistent Viewpoint
• Use a Common Unit of Measure

It uses basic cash flow approach employed in engineering


economy
Engineering Economy & the Design Process

CASH FLOW
The total amount of money being transferred into and out of a
business
Engineering Economy & the Design Process

Non-monetary factors
• Meeting or exceeding customer expectations
• Safety to employees and to public
• Improving employee satisfaction
• Maintaining production flexibility to meet changing
demands.
• Achieving good public relations
Engineering Economy & the Design Process

Step 4 : Selection of a Decision Criterion

• The decision maker will choose the alternative that will


best serve the long-term interests of the owners of
organization.

• Economic decision criterion should have a consistent


and proper viewpoint to be maintained throughout
the engineering economy study.
Engineering Economy & the Design Process

Step 5 : Analysis & Comparison of Alternatives


Based on cash-flow estimates for feasible alternatives for
detailed study.

Factors like inflation, exchange rates, legal mandates


should be considered. The consideration of future
uncertainty is an essential part of engineering economy.

After detailed analysis, comparison is made among the


alternatives based on the differences
Engineering Economy & the Design Process

Step 6 : Selection of the Preferred Alternatives

The soundness of the technical-economic modeling &


analysis technique dictates the quality of the results
obtained.
Engineering Economy & the Design Process

Step 7 : Performance Monitoring & Post


evaluation of Results
Monitoring project performance during its operational phase
improves the achievement related goals & objectives &
reduces the variability in desired results.

The aim is to learn how to do better analyses, & the feedback


from post implementation evaluation is important to the
continuing improvement of operation in any organization.
THANK YOU

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