Chapter 1 Making Economic Decisions

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CIE412 -FALL 2008 Dr. Bryan Pearce Professor of
Civil and Environmental Engineering 303 Boardman
Hall brp_at_maine.edu
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Required Text     Engineering Economic Analysis 
by Donald G Newnan, Ted G Eschenbach, and Jerome
P. Lavelle  2004 (9th Edition) Oxford University
Press
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Not A Required Text but Cheap and Interesting    
 (Wall Street Journal) Guide to Understanding
Money Investing, by Kenneth M. Morris and
Virginia M. Morris . 1999.
Personal Finance??
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Engineering Economic Analysis 9th Edition

• Chapter 1
• Making Economic Decisions

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Chapter Outline

• Types of Problems
• Role of Engineering Economic Analysis
• Problem-Solving / Decision-Making Process
• Ethical Dimensions in Engineering Decision-Making

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Learning Objectives

• Distinguish between simple and complex problems
• Understand the role and purpose of engineering
  economic analysis
• Apply problem-solving / decision making process
• Understand ethical dimension of decision- making
• Solve simple problems associated with engineering
  decision-making process

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Digression

• Who can paraphrase what we are trying to do in
  CIE412...or in engineering in general?

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Vignette Alternative Fuel Vehicles

• In 2005, only 11 hybrid vehicle models in U.S.
  (1 of auto sale)
• By 2012, 52 hybrid vehicles will be available
  (4.2 U.S. market) predicted by J.D. Power
  Assoc.
• Design Concerns Engine power and acceleration,
  fuel mileage, refuels, safety, maintenance, fuel
  distribution, environmental issues, ethical
  issues,

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Vignette Alternative Fuel Vehicles

• What marketplace dynamics drive or suppress the
  development of alternative fuel vehicles?
• Develop a list of concerns and questions that
  customers might have regarding the conversion to
  alternative fuel vehicles. Which are economic
  and which are non-economic factors?
• Are there any ethical aspects to the conversion
  to alternative fuel vehicles?

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Making Economic Decisions

• This course develops the tools to properly
  analyze and solve the economic problems that are
  commonly faced by engineers.

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A Sea of Problems

• Simple Problems (
• Should I buy metro-rail pass or pay every time?
• Should our company pay the vendor cash or credit?
• Intermediate Problems (Eng. Eco. perhaps)
• Should I buy or lease my next car?
• Which CNC machine should the company purchase?
• Complex Problems ( Goes beyond Eco.)
• Feasibility study of a new automobile plant.
• Planning for new highways.
• Choosing boy or girl friend.

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Role of Engineering Economic Analysis

• A systematic tool for comparing alternatives by
  their economic merits. Most suitable for
  problems
• With importance, that require organized analysis
  of the economic aspects
• Could apply to Product/Process Design, Purchase
  of Capital Equipment, Selection of Projects,
  Investment, and many other decision- making
  processes.

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Decision-Making Process
1. Recognize Problem / Opportunity
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Decision-Making 1. Recognize Problem /
Opportunity

• Needs for New Products, Processes, or Facilities
• Improvement of Products, Processes, or Facilities
  (TQM, CI)
• SWOT (Strengths, Weaknesses, Opportunities, and
  Threats) Analysis
• Investment/Financing

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Decision-Making 2. Define Goals/Objectives

• General or specific goals
• Systems perspective
• Limiting factors
• Multiple goals
• Conflicting goals

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Decision-Making 3. Assemble Relevant
Data

• Importance of Data Collection
• Relevance of Information
• Dollar Amount and Time Horizon
• Sources of Information
• Financial Accounting System
• Cost Accounting Records
• Market Research
• Quotations
• Economic Indicators
• Other Published Information

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Example 1-1Assemble Relevant Data

• Vast information
• What is relevant?
• From whos viewpoint?
• From the Manager of Shipping Dept.
• Alt. 1 793.00 /30,000 copies (Printing Dept.)
  vs.
• Alt. 2 688.00 /30,000 copies (Comm. Printer)
• From General Manager
• Alt. 1 793.50 / mo (Printing Dept.) vs.
• Alt. 2 (793.50 - 294.00) 688.50 / mo (Comm.
  Printer)

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Decision-Making Process3. Assemble Relevant Data

• Financial Consequences (Costs Benefits)
• Market Consequences has established prices
• Extra-Market Consequences prices could be
  assigned by indirect means
• Intangible Consequences social impacts,
  environmental impacts, etc.

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Decision-Making Process4. Identify Feasible
Alternatives

• Include as many as possible alternatives
• Do-nothing option
• Simple solutions
• Bounded rationality Number of alternatives

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Decision-Making Process5. Select the Criterion

• Multiple criteria
• Conflicting criteria
• Integrating criteria
• Most common criterion Maximize profit

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Decision-Making Process6. Construct Models

• Real systems and models
• A model describes the interrelationships among
  the relevant data and predicts the outcomes of
  various alternatives.

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Decision-Making Process7. Predict Alternatives
Outcomes

• Comparable outcomes
• Single criterion
• Single composite criterion
• Risk and uncertainty
• Search for more information (loop)
• Modification of alternatives (loop)

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Decision-Making Process8. Choose Best
Alternative(s)

• Selection criterion
• Other intangible considerations

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Decision-Making Process9. Audit the Results

• Reality vs. prediction
• Learn from mistakes
• Replacement analysis

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Ethics

• The concept of distinguishing between right and
  wrong in decision-making.
• Ethics includes
• Establishing systems of beliefs and moral
  obligations
• Defining values and fairness
• Determining duty and guidelines for conduct

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Code of EthicsNational Soc. of Professional Eng.

• Engineers, in the fulfillment of their
  professional duties, shall
• Hold paramount the safety, health, and welfare of
  the public.
• Perform services only in areas of their
  competence.
• Issue public statements only in an objective and
  truthful manner.
• Act for each employer or client as faithful
  agents or trustees.
• Avoid deceptive acts.
• Conduct themselves honorably, responsibly,
  ethically, and lawfully so as to enhance the
  honor, reputation, and usefulness of the
  profession. (http//www.nspe.org/ethics/eh1-code.a
  sp)

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Ethical Dimensions in Engineering Decision-Making
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Ethical Dimensions in Engineering Decision-Making
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Ethics in Engineering Economic Analysis

• How well and how honestly the decision-making
  process is conducted the data, method of
  analysis, recommendations, and follow-up
• Recognize ethical issues exist and make them an
  explicit part of decision-making process

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Decision-Making for Current Costs

• If results of the decision occur in a very short
  period of time, costs and benefits can be added
  up quickly.
• Using suitable economic criterion, the best alt
  can be identified.

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Decision-Making for Current Costs

• Example 1-2
• Linear Programming Model
• Minimize 3.00X 4.40Y
• Subject to (0.25)X (0.40)Y ? 0.31
• X Y 1
• X, Y ? 0
• where X portion from 1st source of material
• Y portion from 2nd source of material

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Example 1-3Decision-Making for Current Costs

• Concept of Sunk Cost
• Only the remaining production is considered
• Is the assumption of other costs as variable
  reasonable?

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Example 1-4Decision-Making for Current Costs

• Intangible constraint
• The thickness of wall space
• Further study
• Trade-off between insulation and energy cost