Engineering Economics Intro PDF

ENGINEERING ECONOMICS Engineering Economy Defined ¨ A systematic way of generating and evaluating the merits of proposed solutions to engineering / business problems. ¤ Identify traditional and creative solutions. ¤ Accurately identify the true costs and benefits associated...

ENGINEERING ECONOMICS Engineering Economy Defined ¨ A systematic way of generating and evaluating the merits of proposed solutions to engineering / business problems. ¤ Identify traditional and creative solutions. ¤ Accurately identify the true costs and benefits associated with these solutions over time. ¤ Select the solution(s) that best utilize resources (money, people, equipment, etc) for the well being of the company and/or society. What kinds of problems can you evaluate with engineering economy? ¨ Personally (economic decisions) ¤ Buying a house or car ¤ Paying off loans (credit cards, student loans, etc.) ¤ Making investments ¨ Professionally ¤ Justifying new projects, methods, equipment, etc. ¤ Finding the value of capital (land, buildings, equipment) ¤ Evaluating alternative plans ¤ Every time you need to “sell” something to upper management, you will need to attach some monetary value, which will come from engineering economic analysis. How do we approach these problems? 1. Define Problem 2. Collect all relevant data / information 3. Develop Alternatives 4. Analyze and Compare Alternatives 5. Select preferred alternative (with management input/approval). 6. Implement, and monitor performance & post- evaluation of results. Impacts of Projects on a Business Engineering Economy Figure 1.5, textbook University opens bus system bidding process Prospective bus companies received an invitation to bid on the University’s new bus system Friday. Gary Graham, Office of Parking, Traffic and Transportation director, said bidding will end March 31, and the company who provides the lowest bid while meeting the University’s specifications will win. A GPS locator system, a passenger counting system, University colors and logos on the buses and new routes are among the University’s specifications. Graham said the bus service will be in place for fall 2009. By Brianna Paciorka The LSU Reveille March 9, 2009 What questions should the University be asking? ¨ How much of the costs can be covered by student fees? ¨ At what cost would an alternative automatically be rejected? ¨ Will students use the bus system enough to justify costs? ¤ How many times will students use the bus? (student fee/#rides) ¤ How much does one ride cost the system? ¨ How long will this system last?  Example: choosing a mortgage You have been out of school and working for a few years, and you are ready to buy a house. You have been saving money for a down payment and are considering a house that costs $200,000. You have two major decisions to make: How much should you put down for the down payment? (10% or 20%?) Should you take on a 15 or 30 year mortgage? 15-year mortgage rate: 4.5% 30-year mortgage rate: 5%. 10%, 15 yr 10%, 30 yr 20%, 15 yr 20%, 30 yr Monthly payment $1,377 $966 $1224 $859 Total interest paid $67,858 $167,860 $60,318 $149,209 Fundamental Principles of Engineering Economy ¨ A dollar today is worth more than a dollar tomorrow ¨ All that matters is the difference between alternatives ¨ Marginal revenue must exceed marginal cost (must make money) ¨ Additional risk is not taken without expected additional return (the potential reward must be worth the risk) Engineering Economics: Healthcare ¨ A hospital is considering hiring “hospitalists,” which are internal medicine physicians, to take care of patients post-surgery rather than surgeons. ¤ Frees up time for surgeons ¤ Surgeons are paid much more than hospitalists ¤ Can the hospital justify doing this? ¤ Besides money, what else should the hospital consider? Engineering Economics: Manufacturing ¨ A modular home manufacturer is considering purchasing a crane to assist with setting walls for a house. This will reduce the manual labor and time needed at one station in the plant ¤ The plant has 25 stations, and each part (house) moves through every station. This crane will be at station 4. ¤ Can the plant manager justify this purchase? Engineering Economics: Mars habitat ¨ NASA plans on sending people to Mars in the next 20 years. Research and development is going on to determine what type of habitat can be used while there. ¤ Crew size is limited to 4-6 people ¤ Payload (how much can be lifted with current shuttles) is about 6,000 lbs ¤ NASA depends on funding from the US government ¤ What economic considerations should NASA make in designing the habitat? Engineering Economics: Summary ¨ Lessons learned ¤ Cost and profit are the driving factors in business decisions ¤ Quantifying cost can be challenging. Consider n Employees: labor, productivity, safety & health n Customers: Must be satisfied, safe n Products: quality & reliability, on-time production n Material and equipment: maintenance, quality, throughput n Overhead: facilities, utilities, management n Taxes, other fees