Engineering economics

Июль 29, 2022

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Экономика
Engineering economics

Содержание

2. What is Economics ? A social science of how limited resources are used to satisfy unlimited
3. Resources All gifts of nature, such as: water, air, minerals, sunshine, plant and tree growth, as
4. Engineering Economics, previously known as engineering economy, is a subset of economics for application to engineering
5. WHY DO ENGINEERS NEED TO LEARN ABOUT ECONOMICS? Ages ago, the most significant barriers to engineers
6. What is Engineering Economics? Engineering Economics is about making decisions Engineering Economics is the application of
7. How Engineering is composed of physical and economic components Engineering Assessing the worth of these products
8. Engineering Economics: Origins The development of EI methodology is relatively recent A pioneer in the field
9. Cost Concepts Time Value of Money Cash-Flow Concepts Comparing Alternatives Evaluating Projects Benefit-Cost Analysis Course Topics:
10. 1. Develop the Alternatives Creativity and innovation are essential to the process The alternatives need to
11. 1. Problem recognition, definition, and evaluation 2. Development of the feasible alternatives Searching for potential alternatives
12. Four essential steps in formulaing engineering economic decisions are: Creative step: find an opening through a
13. The creative step consists of finding an opening through a barrier of economic and physical limitations
14. In the definition step, we define the alternatives originated or selected for comparison Choice is always
15. In order to be able to compare the alternatives we need to convert them to a
16. Having done all the abovementioned, we need to decide what to choose Consider multiple criteria Cancel
17. Engineering economics is needed for many kinds of decision making Example: Buying a car Alternatives: $18,000
18. Example: Buying a car Alternatives: $18,000 now, or $600 per month for 3 years (= $21,600
19. Would you rather have: $100 today, or $100 a year from now? Key Concept: Time Value
20. Would you rather have: $100 today, or $100 a year from now? Basic assumption: Given a
21. Most people would prefer to have it sooner. Why??? Reasons: Security ? Interests ? Inflation? Currency
22. One consequence of the time value of money: Suppose you are willing to exchange a certain
23. Time Value of Money The time value of money centers around the idea of an interest
24. In this course, we will learn methods to: Compare different cash flows over time Using the
25. Interest factor: The ratio between an amount one period in the future and an equivalent amount
26. Nominal and Real interest rates Fisher Equation it - nominal interest rate rt+1 - real interest
27. A bank offers to pay $1,027.50 one year from now if you buy (now) a certificate
28. What Kinds of Questions Can Engineering Economics Answer? It will help you make good decisions: In
29. What Kinds of Questions Can Engineering Economics Answer? ENGINEERING ECONOMICS INVOLVES: FORMULATING, ESTIMATING, AND EVALUATING ECONOMIC
30. How Does It Do This? BY USING SPECIFIC MATHEMATICAL RELATIONSHIPS TO COMPARE THE CASH FLOWS OF
31. Where Do I Get the Data? Engineering economics is based mainly on estimates of future costs
32. SOME BASIC ECONOMIC CONCEPTS
33. Value is the worth that a person attaches to a good or service Value is inherent
34. Without the subjectivity of the concepts “value” and “utility” there would hardly be any room for
35. What If I Don’t Like the Answers? Remember: “Tools” don’t make decisions People make decisions, based
36. Your friend bought a small apartment building for $100,000. He spent $10,000 of his own money
37. Does your friend have a problem? If so, what is it? What are his alternatives? (Identify
38. Your friend spends each year $10,500 + $15,000 = $25,500, but receives 4 X $360 X
39. Option 2 Lower monthly expenses to $2,125-$∆C, so that this expenses and the interest that could
41. Скачать презентацию

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What is Economics ?
A social science of how limited resources

are used to satisfy unlimited human wants
What is Engineering ?
Engineering is the application of scientific, economic, social, and practical knowledge, in order to design, build, and maintain structures, machines, devices, systems, and materials

ENGINEERING ECONOMICS

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Resources
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.

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

LAND OR NATURAL RESOURCES

LABOR

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.

CAPITAL

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Engineering Economics, previously known as engineering economy, is a subset of

economics for application to engineering projects

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WHY DO ENGINEERS NEED TO LEARN ABOUT ECONOMICS?
Ages ago, the most

significant barriers to engineers were technological. The things that engineers wanted to do, they simply did not yet know how to do, or hadn't yet developed the tools to do. There are certainly many more challenges like this which face present-day engineers
Natural resources (from which we must build things) are becoming more scarce and more expensive
Negative side-effects of engineering innovations (such as air pollution from automobiles)
Engineers must decide if the benefits of a project exceed its costs, and must make this comparison in a unified framework. The framework within which to make this comparison is the field of engineering economics, which strives to answer exactly these questions, and perhaps more.

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What is Engineering Economics?
Engineering Economics is about making decisions
Engineering Economics

is the application of economic techniques to the evaluation of design and engineering alternatives

Engineering Economics assesses the appropriateness of a given project, estimates its value, and justifies it from an engineering standpoint

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How Engineering is composed of physical and economic components
Engineering
Assessing the worth

of these products in economic terms

Produce products and services depending on physical Laws

Physical Environment

Economic Environment

Physical Efficiency=System Output/System Input

Economic Efficiency=System Worth/System Cost

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Engineering Economics: Origins
The development of EI methodology is relatively recent
A pioneer

in the field was Arthur Wellington, a civil engineer, who at the end of 19th century addressed the role of economic analysis in engineering projects (his area of interest was railroad building in the USA)
This early work was followed by other contributions in which the emphasis was put on techniques that depended on financial mathematics. In 1930, Eugene Grant published a textbook which was a milestone in the development of engineering economy as we know it today (economic point of view of engineering)
In 1942 Woods and DeGarmo wrote a book, later titled Engineering Economy

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Cost Concepts
Time Value of Money
Cash-Flow Concepts
Comparing Alternatives
Evaluating Projects
Benefit-Cost Analysis
Course Topics:

IE 340
Depreciation and Income Taxes
Inflation and Price Changes
Dealing with Uncertainty

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1. Develop the Alternatives
Creativity and innovation are essential to the process
The

alternatives need to be identified and then defined for subsequent analysis
Consider the status quo, but do not focus on it(i.e., doing nothing)
2. Focus on the Differences
Only the differences among alternatives are relevant to comparison and decision
3. Use a Consistent Viewpoint (perspective)
4. Use a Common Unit of Measure
Use it for enumerating as many possible outcomes as possible, since it simplifies the analysis of alternatives
5. Consider All Relevant Criteria
Consider both those that can be measured in monetary terms and “non-monetary” criteria
6. Make Uncertainty Explicit
7. Revisit Your Decisions: compare initial projected outcomes with actual results achieved

Principles of Engineering Economy

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1. Problem recognition, definition, and evaluation
2. Development of the feasible alternatives
Searching

for potential alternatives
Screening them to select a smaller group of feasible alternatives
3. Development of the cash flows for each alternative (or of prospective outcomes)
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: helps to do better analysis and improves the operations in organization

Engineering economic analysis procedure

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Four essential steps in formulaing engineering economic decisions are:
Creative step:

find an opening through a barrier of economic and physical limitations
Definition step: define all factors associated with each alternative originated in creative step
Conversion step:
Decision step

Simpler procedure for formulating engineering economic decisions

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The creative step consists of finding an opening through a barrier

of economic and physical limitations (ex. aluminum discovery or mining)
We explore, investigate and research aiming at finding new opportunitites
Many successful ideas are simply new combinations of known facts

Creative step

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In the definition step, we define the alternatives originated or selected

for comparison
Choice is always between alternatives, but we also need to choose which alternatives to consider
Is it better to spend more time defining more possible alternatives or to take the decision fast considering only few?

Definition step

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In order to be able to compare the alternatives we need

to convert them to a common measure
We express each alternative in terms of cash flows at specified date in the future, and state also those considerations that cannot be reduced to money terms

Conversion step

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Having done all the abovementioned, we need to decide what to

choose
Consider multiple criteria
Cancel out identical factors and stress the attention on differences
When facts are missing use judgement
Making the decision

Decision step

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Engineering economics is needed for many kinds of decision making
Example: Buying

a car
Alternatives:
$18,000 now, or
$600 per month for 3 years
Which is better?

What Kinds of Questions Can Engineering Economics Answer? An example

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Example: Buying a car
Alternatives:
$18,000 now, or
$600 per month for 3 years

(= $21,600 total)
Which is better?
It depends!
Issue: how much is money now worth compared to money in the future?
Leads to idea of time value of money!

Engineering Economics Helps Make Cash Flow Comparisons!

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Would you rather have:
$100 today, or
$100 a year from now?
Key

Concept: Time Value of Money

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Would you rather have:
$100 today, or
$100 a year from now?
Basic

assumption:
Given a fixed amount of money, and
A choice of having it now or in the future,
Most people would prefer to have it sooner rather than later

Time Value of Money

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Most people would prefer to have it sooner. Why???
Reasons:
Security ?
Interests ?
Inflation?
Currency

strength ?
Uncertainty ?

Time Value of Money

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One consequence of the time value of money:
Suppose you are

willing to exchange a certain amount now for some other amount later
Then the later amount has to be ___larger or smaller___?

Time Value of Money

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Time Value of Money
The time value of money centers around the

idea of an interest rate (if projecting into the future):
Or, equivalently, a discount rate (if rolling back to the present)

Time value of money deals with changes in the value of money over some period of time (due to investment opportunities, uncertainty, etc.)
This is a key concept in engineering economics!

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In this course, we will learn methods to:
Compare different cash flows

over time
Using the interest rate or discount rate:
How much more a dollar today is worth compared to a dollar in one year
For example, if the interest rate is 5%:
$1 today is worth as much as $1.05 next year

What Does This Mean for Us?

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Interest factor: The ratio between an amount one period in the

future and an equivalent amount now.
Example: If you are indifferent between $5 now and $6 one period in the future, the interest factor is 6/5 = 1.20 (per period)
Interest rate = interest factor – 1
In above example, it’s 0.20 = 20%

Interest rates

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Nominal and Real interest rates
Fisher Equation
it - nominal interest rate
rt+1 -

real interest rate expected inflation
πt+1 - expected inflation

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A bank offers to pay $1,027.50 one year from now if

you buy (now) a certificate of deposit with $1,000. What is the interest rate?
Interest factor is 1,027.50/1,000 = 1.0275
Interest rate is 1.0275 - 1 = 2.75%

An Example

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What Kinds of Questions Can Engineering Economics Answer?
It will help

you make good decisions:
In your professional life
(Regardless of whether you go into the private or public sector)
And in your personal life!
Knowledge of engineering economics will have a significant impact on you personally!

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What Kinds of Questions Can Engineering Economics Answer?
ENGINEERING ECONOMICS INVOLVES:

FORMULATING, ESTIMATING, AND EVALUATING ECONOMIC OUTCOMES
WHEN CHOICES OR ALTERNATIVES ARE AVAILABLE

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How Does It Do This?
BY USING SPECIFIC
MATHEMATICAL RELATIONSHIPS
TO COMPARE

THE CASH FLOWS OF THE DIFFERENT ALTERNATIVES
(typically using spreadsheets)

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Where Do I Get the Data?
Engineering economics is based mainly

on estimates of future costs and benefits:
So it has to deal with risk and uncertainty
The costs, benefits, and other parameters are typically unknown, and can vary over time:
The values of these parameters will dictate a particular numerical outcome
And therefore a particular decision!
Sensitivity analysis can be used to explore how the decision changes as our estimates change

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SOME BASIC ECONOMIC CONCEPTS

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Value is the worth that a person attaches to a good

or service
Value is inherent in a regard a person has for it, not in the item itself
Value is not the cost of the item
Utility is a power to satisfy human wants and is determined subjectively
Utility is the satisfaction that a person derives from an item

Value and Utility

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Without the subjectivity of the concepts “value” and “utility” there would

hardly be any room for exchange between people. Why?
Through exchange we can increase the total utility of the goods and services. How?
Exchange is possible when it is mutually benefitial

Exchange

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What If I Don’t Like the Answers?
Remember:
“Tools” don’t

make decisions
People make decisions, based on values
Engineering economics is just a set of tools:
It can help in decision making
But it won’t make the decision for you
Which alternative is “best” is up to you!

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Your friend bought a small apartment building for $100,000. He spent

$10,000 of his own money for the building and obtained a mortgage from a local bank for the remaining $90,000. The annual mortgage payment is $10,500.
Your friend also expects that annual maintenance on the building and grounds will be $15,000.
There are four apartments (two bedrooms each) in the building that can each be rented for $360 per month.
Refer to the seven-step procedure and answer to the following questions:

Application of 2E analysis procedure Example

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Does your friend have a problem? If so, what is it?
What

are his alternatives? (Identify at least three).
Estimate the economic consequences and other required data for the alternatives.
Select a criterion for discriminating among alternatives, and use it to advise your friend on which course of action to pursue.
Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost.
What should your friend do based on the information you and he have generated?

Application of 2E analysis procedure Example

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Your friend spends each year $10,500 + $15,000 = $25,500, but

receives 4 X $360 X 12 = $ 17,280, i.e.
He is losing $8,220 each year – this is the problem!
Options
Raise the rent (Will the market bear an increase?)
Lower maintenance expenses (but not so far as to cause safety problems)
Sell the apartment building (What about a loss?)
Abandon the building (bad for your friends reputation)
Option 1
Raise the total rent by $360 X 4 + $ R, to cover monthly expenses $ 2.125 and the interest that could be earned on $ 10,000.
This would imply the minimum increase of the rent per apartment per month by ($2,125 - $1,440)/4 = $171.25, i.e. more that by 50%

Application of 2E analysis procedure Example

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Option 2
Lower monthly expenses to $2,125-$∆C, so that this expenses and

the interest that could be earned on $ 10,000 are covered by the revenue of $1,440 per month.
Also, suppose he could earn 0.25 % interest on $ 10,000 (i.e. $25 per month)
C (maintenance expenses)+25 + 10500/12 = 1440
Monthly expenses should be reduced to (C= $1,440 - $25 - $10,500/12) = $540, i.e. more than 50% decrease in maintenance expenses. Monthly expenses will be reduced to $2,125-$540 = $1585
Option 3
Try to sell the building for $ X, which recovers the original $10,000 and (ideally) recovers the $8,220/12 = $685 per month loss. It would also be perfect to recover the interest that could be earned on $10,000.
Option 4
Walk away from the venture. The bank would likely assume possession and may try to collect fees from your friend.
This option would be very bad for his credit rating.

Application of 2E analysis procedure Example

Engineering economics

Содержание

What is Economics ?A social science of how limited resources

ResourcesAll gifts of nature, such as: water, air, minerals, sunshine, plant

Engineering Economics, previously known as engineering economy, is a subset of

WHY DO ENGINEERS NEED TO LEARN ABOUT ECONOMICS?Ages ago, the most

What is Engineering Economics? Engineering Economics is about making decisionsEngineering Economics

How Engineering is composed of physical and economic componentsEngineeringAssessing the worth

Engineering Economics: OriginsThe development of EI methodology is relatively recentA pioneer

Cost Concepts Time Value of MoneyCash-Flow ConceptsComparing AlternativesEvaluating ProjectsBenefit-Cost AnalysisCourse Topics:

1. Develop the AlternativesCreativity and innovation are essential to the processThe

1. Problem recognition, definition, and evaluation2. Development of the feasible alternatives Searching

Four essential steps in formulaing engineering economic decisions are:Creative step:

The creative step consists of finding an opening through a barrier

In the definition step, we define the alternatives originated or selected

In order to be able to compare the alternatives we need

Having done all the abovementioned, we need to decide what to

Engineering economics is needed for many kinds of decision makingExample: Buying

Example: Buying a carAlternatives:$18,000 now, or$600 per month for 3 years

Would you rather have:$100 today, or$100 a year from now? Key

Would you rather have:$100 today, or$100 a year from now? Basic

Most people would prefer to have it sooner. Why???Reasons:Security ?Interests ?Inflation?Currency

One consequence of the time value of money: Suppose you are

Time Value of MoneyThe time value of money centers around the

In this course, we will learn methods to:Compare different cash flows

Interest factor: The ratio between an amount one period in the

Nominal and Real interest ratesFisher Equationit - nominal interest ratert+1 -

A bank offers to pay $1,027.50 one year from now if

What Kinds of Questions Can Engineering Economics Answer? It will help

What Kinds of Questions Can Engineering Economics Answer? ENGINEERING ECONOMICS INVOLVES:

How Does It Do This?BY USING SPECIFIC MATHEMATICAL RELATIONSHIPS TO COMPARE

Where Do I Get the Data? Engineering economics is based mainly

SOME BASIC ECONOMIC CONCEPTS

Value is the worth that a person attaches to a good

Without the subjectivity of the concepts “value” and “utility” there would

What If I Don’t Like the Answers? Remember: “Tools” don’t

Your friend bought a small apartment building for $100,000. He spent

Does your friend have a problem? If so, what is it?What

Your friend spends each year $10,500 + $15,000 = $25,500, but

Option 2Lower monthly expenses to $2,125-$∆C, so that this expenses and

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What is Economics ?
A social science of how limited resources

Resources
All gifts of nature, such as: water, air, minerals, sunshine, plant

WHY DO ENGINEERS NEED TO LEARN ABOUT ECONOMICS?
Ages ago, the most

What is Engineering Economics?
Engineering Economics is about making decisions
Engineering Economics

How Engineering is composed of physical and economic components
Engineering
Assessing the worth

Engineering Economics: Origins
The development of EI methodology is relatively recent
A pioneer

Cost Concepts
Time Value of Money
Cash-Flow Concepts
Comparing Alternatives
Evaluating Projects
Benefit-Cost Analysis
Course Topics:

1. Develop the Alternatives
Creativity and innovation are essential to the process
The

1. Problem recognition, definition, and evaluation
2. Development of the feasible alternatives
Searching

Four essential steps in formulaing engineering economic decisions are:
Creative step:

Engineering economics is needed for many kinds of decision making
Example: Buying

Example: Buying a car
Alternatives:
$18,000 now, or
$600 per month for 3 years

Would you rather have:
$100 today, or
$100 a year from now?
Key

Would you rather have:
$100 today, or
$100 a year from now?
Basic

Most people would prefer to have it sooner. Why???
Reasons:
Security ?
Interests ?
Inflation?
Currency

One consequence of the time value of money:
Suppose you are

Time Value of Money
The time value of money centers around the

In this course, we will learn methods to:
Compare different cash flows

Nominal and Real interest rates
Fisher Equation
it - nominal interest rate
rt+1 -

What Kinds of Questions Can Engineering Economics Answer?
It will help

What Kinds of Questions Can Engineering Economics Answer?
ENGINEERING ECONOMICS INVOLVES:

How Does It Do This?
BY USING SPECIFIC
MATHEMATICAL RELATIONSHIPS
TO COMPARE

Where Do I Get the Data?
Engineering economics is based mainly

What If I Don’t Like the Answers?
Remember:
“Tools” don’t

Does your friend have a problem? If so, what is it?
What

Option 2
Lower monthly expenses to $2,125-$∆C, so that this expenses and