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INTRODUCTION TO ENGINEERING ECONOMY

$$. $$. INTRODUCTION TO ENGINEERING ECONOMY. $$. $$. WHAT IS ECONOMICS ?. The study of how limited resources is used to satisfy unlimited human wants. WHAT IS ECONOMICS ?.

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INTRODUCTION TO ENGINEERING ECONOMY

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  1. $$ $$ INTRODUCTION TO ENGINEERING ECONOMY $$ $$

  2. WHAT IS ECONOMICS ? The study of how limited resources is used to satisfy unlimited human wants

  3. WHAT IS ECONOMICS ? The study of how individuals and societies choose to use scarce resources that nature and previous generations have provided.

  4. 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.

  5. LABOR The efforts, skills, and knowledge of people which are applied to the production process.

  6. 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

  7. ENGINEERING • …is the profession in which knowledge of the mathematical and natural sciences gained by study, experience, and practice with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind. • Economic aspects of engineering • Physical aspects of engineering • Clearly, it is essential that the economic part of engg. Practice be accomplished well.

  8. Origins of Engineering Economy The perspective that ultimate economy is a concern to the engineer and the availability of sound techniques to address this concern differentiate this aspect of modern engineering practice from that of the past.

  9. Origins of Engineering Economy • Pioneer: Arthur M. Wellington, civil engineer latter part of nineteenth century; addressed role of economic analysis in engineering projects; area of interest: railroad building • Followed by other contributions which emphasized techniques depending on financial and actuarial mathematics.

  10. PRINCIPLES OF ENGINEERING ECONOMY 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

  11. DEVELOP THE ALTERNATIVES The final choice (decision) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis.

  12. FOCUS ON THE DIFFERENCES Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision.

  13. USE A CONSISTENT VIEWPOINT The prospective outcomes of the alternatives, economic and other, should be consistently developed from a defined viewpoint (perspective).

  14. USE A COMMON UNIT OF MEASURE Using a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives.

  15. CONSIDER ALL RELEVANT CRITERIA Selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria). The decision process should consider the outcomes enumerated in the monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner.

  16. MAKE UNCERTAINTY EXPLICIT Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison.

  17. REVISIT YOUR DECISIONS Improved decision making results from an adaptive process; to the extent practicable, the initial projected outcomes of the selected alternative should be subsequently compared with actual results achieved.

  18. ENGINEERING ECONOMY AND THE DESIGN PROCESS • DESIGN PROCESS????? Is an iterative, decision making activity whereby scientific and technological information is used to produce a system, device, or process which is different, in some degree, from what the designer knows to have been done before and which is meant to meet human needs. Also we want to meet the human needs economically as emphasized in the definition of engineering.

  19. ENGINEERING ECONOMY AND THE DESIGN PROCESS An engineering economy study is accomplished using a structured procedure and mathematical modeling techniques. The economic results are then used in a decision situation that involves two or more alternatives and normally includes other engineering knowledge and input.

  20. ENGINEERING ECONOMIC ANALYSIS PROCEDURE Steps: 1. Problem recognition, formulation, and evaluation. 2. Development of the feasible alternatives. 3. Development of the cash flows for each alternative. 4. Selection of a criterion ( or criteria). 5. Analysis and comparison of the alternatives. 6. Selection of the preferred alternative. 7. Performance monitoring and post-evaluation results.

  21. Engineering Design Process • Activities: 1-Problem / need definition. 2-Problem / need formulation and evaluation. 3-Synthesis of possible solutions (alternatives). 4-Analysis, optimization, and evaluation. 5-Specification of preferred alternative. 6-Communication.

  22. Relationship b/w both. • A sound EE analysis (EEA) procedure incorporates the basic principles. • The 7-step EEA procedure is used to assist decision making within the engineering design process. • While performing engg. design activities we’re to draw info./help from EEA procedure.

  23. EEA Procedure Steps • Problem Definition • Search for Alternatives /Option Development. • Development of investment alternatives • Development of prospective outcomes • Selection of Decision criteria and analysis of alternatives. • Selection of the preferred alternative • Performance monitoring and post evaluation of results

  24. Problem Definition • It is not adequate simply to think about a perplexing question or situation. • Rather, a problem must be well understood and stated in an explicit form before the engineer proceeds with the rest of analysis. • The first step of the EEA Procedure (Problem Def.) is particularly important, since it provides the basis for the rest of the analysis.

  25. Problem Definition • The term problem is used here generically. It includes all decision situations for which EE analysis is required. - problem recognition: stimulated by internal or external organizational needs or requirements. - problem formulation: Boundary or extent of situation is defined. - problem evaluation: Refinement of needs and requirements.

  26. Search for Alternatives /Option Development 1-searching for potential alternatives and 2-screening them to select a smaller group of feasible alternatives for detailed analysis and comparison in step 5. NOTE: In searching for alternatives , several limitations invariably exist, including a- lack of time and money. b- preconceptions of what will and what will not work and c- lack of knowledge.

  27. Development of investment alternatives • Saying: “It takes money to make money”. • Most of the feasible alternatives require investment of money, hence it becomes a crucial step. • The 2 most accepted Approaches for developing sound investment alternatives. 1-Classical Brainstorming 2-Nominal Group Technique

  28. 1. Classical Brainstorming • It is based on the fundamental principles of deferment of judgment and that quantity breeds quality. • Four rules of Brnstmg. • Criticism is ruled out. • Freewheeling is welcomed. • Quantity is wanted. • Combination and improvement are sought.

  29. 1-Classical Brainstorming • The most well-known and often-used technique for idea generation. • Steps: • Preparation: participants selected, preliminary statement of problem is circulated. • Brainstorming: a warm-up session with simple problems is conducted, the relevant problem and the 4 rules of Brnstmg are presented and ideas are generated and recorded using checklists and other techniques, • Evaluation: the ideas are evaluated relative to the problem.

  30. 2-Nominal Group Technique (NGT) • The NGT involves a structured group meeting designed o incorporate individual ideas and judgments into group consensus. • Sort of Group Discussion. • Facilitator is required.

  31. ACCOUNTING AND ENGINEERING ECONOMY STUDIES • EE studies provide information on which current decisions pertaining to the future operation of an organization can be based. • After a decision to invest capital in a project has been made and the money has been invested, those who supply and manage the capital want to know the financial results. Therefore, accounting procedures are established so that financial events relating to the investment can be recorded and summarized and financial performance determined.

  32. ACCOUNTING AND ENGINEERING ECONOMY STUDIES • General accounting and Cost accounting are the procedures that provide these necessary services in a business organization. • Accounting procedures are similar to recording data in a scientific experiment.

  33. ACCOUNTING AND ENGINEERING ECONOMY STUDIES Modern cost accounting may satisfy any or all of the following objectives: 1. To determine the cost of products or services 2. To provide a rational basis for pricing goods or services 3. To provide a means for controlling expenditures 4. To provide information on which operating decisions may be based and the results evaluated

  34. Questions ???????????????????????????????????????????????????????????????????????????????????????????????????????????

  35. Assignment • Example 1.2 • Verbal test from the Problems(1.8) ……….in next class

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