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Unformatted text preview: CE 395
W. Hitchcock Introduction Engineering Economics
Why Study This Topic? Unprecedented world-wide competition is a challenge
to every aspect of the US economy. The United States is the largest consumer of natural resources and materials per capita in the world. Fundamental Drivers for Designers, Engineers and Policy Makers:
Beat the competition with best cost , best quality and timely delivery Accomplish the first driver without compromising the commitment to good environmental stewardship Engineering Economics
Engineering and Manufacturing Success "Make the Right Decisions !"
To be successful in an environmental of international competition and ever increasing public scrutiny, it is imperative that project design and management teams make rational and economically sound decisions in design, construction, and manufacturing processes. Example: Project Finance Issues
Multiple Facets Always Present Financial decision making
What projects are attractive? Choosing between projects Financing a project
Construction Phase Long term Contractor financial issues Bonding capacity Project cash flow management Total project return Maximizing revenues Minimizing operating costs Financial Decision Making Getting Started Engineering Managers are constantly faced with decisions, What do I do or what choice do I make? Flipping a coin is the last resort Making a decision can be a complicated process First we must clearly recognize what the problem is and then establish a goal or objective that we would like the decision to achieve We should then gather as much relevant data as reasonably possible to support an reasoned evaluation. Alternative Decision Making
A Logical Procedure
1. Define the Problem:
a. Important to uncouple issues for a decision to the lowest level of alternatives for analysis b. Complex problems should be subdivided into manageable problems for decision. 2. Decisions are among established known
a. Alternatives should defined with common terminology and perspective (viewpoint) b. Be creative in establishing all feasible alternatives c. Be sure to focus on "the differences" between alternatives d. "Doing Nothing" is often a viable option Alternative Decision Making
A Logical Procedure - Continued 3. Establish a metric for comparison
a. If possible, establish numerical measures b. In the end it is the difference between alternatives that really matters (more attractive or less attractive) 4. The decision is based on future events
a. Develop projected cash and performance profiles for each alternative b. Clearly recognize and note the uncertainties Alternative Decision Making
A Logical Procedure - Continued
5. Establish criteria for comparison of
alternatives (sometimes a primary and secondary are useful) 6. Alternative selection:
a. Each competing alternative is evaluated according to the established criteria. b. The most attractive alternative is selected 7. Audit results and improve process Decision Making
Criteria for Decisions Non Financial Minimal environmental disruption Creates jobs Most public benefit Most redistribution of wealth Shortest time for desired result Quality consideration Note: In above cases, some measure for selection should be established and it might be controversial Financial Decision Making We will study basic concepts in financial
decision making Requires the use of cash flow models of project alternatives and criteria for evaluating them Basic Criteria:
Fixed Input Cost -------- Maximize Output Value Fixed Output Value ---- Minimize Input Cost Neither Fixed ------------ Maximize (Output Input) Financial Decision Making
Developing the Cash Flow To develop financial models for evaluating the
input costs and output benefits of a project we must fully describe the project in terms of it's cash flow A project cash flow is the sequential ordering of the cash costs and benefits over the life of a project in equal time measures (called interest or compounding periods) Financial Concepts
Benefits above the line Time Costs below the line Note: In practice it becomes very important to denote benefits or cash inflows as positive numbers and costs and cash outflows as negative numbers. Homework Assignment
Modified Problem 1-16 Given: Basic Information of Problem 1-16 plus:
Friend has owned apartment for 1 year The $15,000 maintenance estimate not competitively bid (potential reduction of 10 15 %/yr likely possible) 3. Current apartment pricing is below the median rate for similar locations (range between $325 and $650/mo) 4. It has been 5 years since last renovation. 1. 2. Homework Assignment
Modified Problem 1-16 Requirements:
1. 2. 3. 4. 5. Define the problem. What are the alternatives? Select metric(s) for comparison? Model future outcomes of alternatives What is the criterion for choosing?
a. b. Monetary? Are there any non-monetary? 6. What alternative do you recommend?
a. What assumptions create uncertainty for the outcome? b. Can you think of ways to describe monetarily the magnitude of the risk? 7. How would you audit the results? ...
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This note was uploaded on 09/26/2008 for the course CE 395 taught by Professor Hitchcock during the Summer '05 term at University of Alabama at Birmingham.
- Summer '05