2007 Chapters 3-1

2007 Chapters 3-1 - Engineering Economics & Management...

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1 Engineering Economics & Management Civi 322/Engi 303 Chapters 3-4 Read Chapter 2 for a better understanding of financial statements.
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2 Engineering Economy Do benefits exceed costs of an engineering design/project? Requires systematic evaluation of costs and benefits of various alternatives
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3 Basic Principles Develop the alternatives decision (choice) lies among alternatives Focus on the incremental differences only the incremental differences in expected future outcomes among the alternatives are relevant Use a consistent viewpoint Use a common unit of measure
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4 Basic Principles Consider all relevant criteria maximum monetary return, etc. Make uncertainty explicit uncertainty inherent in estimating Revisit your decisions validation
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5 Economic Analysis Procedure Recognize, formulate, and evaluate problem Develop feasible alternatives Develop cash flows for each alternative Select criteria Analyze and compare alternatives Select preferred alternative Monitor performance and evaluate results
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6 Additional factors Ignore sunk costs Use a common planning horizon Include the time value of money Consider separable decisions separately Include intangible consequences
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7 Cost-Volume Relations Volume activity with strong influence on cost inputs or outputs e.g. automobiles produced Fixed Costs cost of providing basic operating capacity Variable Costs have close relationship to volume
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8 Semi-Variable Costs neither fixed nor variable; auto depreciation Average Unit Cost per unit activity cost variable cost per unit volume is constant fixed cost varies with changes in volume Marginal/Incremental Costs added cost of an additional unit of output Recurring and Nonrecurring Costs Direct and Indirect Costs
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9 Sunk Cost cost that has occurred in the past and has no relevance to estimates of future revenues Opportunity Cost cost of the foregone opportunity Life-Cycle Cost all costs related to a system during its life span
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2007 Chapters 3-1 - Engineering Economics & Management...

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