Chapter 1 Making Economic Decisions

Chapter 1Making Economic DecisionsCopyright Oxford University Press 201111. Recognize Problem / Opportunity2. Define Goals/Objectives3. Assemble Relevant Data4. Identify Feasible Alts7. Predict Alts Outcomes8. Choose the Best Alt.9. Audit the ResultsOverall Mission / Objectives5. Select the Criterion6. Construct a ModelDecision-Making ProcessCopyright Oxford University Press 20117Distinguish between simple and complex problemsUnderstand the role and purpose of engineering economic analysisApply Problem-Solving / Decision Making ProcessUnderstand Ethical Dimension of Decision MakingSolve simple problems associated with engineering decision making processLearning ObjectivesCopyright Oxford University Press 20113This course develops the tools to properly analyze and solve the economic problems that are commonly faced by engineers.Making Economic DecisionsCopyright Oxford University Press 20114Simple ProblemsShould I buy metro-rail pass or pay every time? Should our company pay the vendor cash or credit?Intermediate ProblemsShould I buy or lease my next car?Which CNC machine should the company purchase?Complex ProblemsFeasibility study of a new automobile plant.Planning for new highwaysA Sea of ProblemsCopyright Oxford University Press 20115A systematic tool for comparing alternatives by their economic merits. Most suitable for problemsWith importance, that require organized analysis of the economic aspectsCould apply to Product/Process Design, Purchase of Capital Equipment, Selection of Projects, Investment, and many other decision making processes.Role of Engineering Economic AnalysisCopyright Oxford University Press 20116Decision-Making Process1. Recognize Problem / OpportunityNeeds for New Products, Processes, or FacilitiesImprovement of Products, Processes, or Facilities (TQM, CI)SWOT (Strengths, Weaknesses, Opportunities, and Threats) AnalysisInvestment/FinancingCopyright Oxford University Press 20118Decision-Making Process2. Define Goals/ObjectivesGeneral or specific goalsSystems perspectiveLimiting factorsMultiple goalsConflicting goalsCopyright Oxford University Press 20119Decision-Making Process3. Assemble Relevant DataImportance of Data CollectionRelevance of InformationDollar Amount and Time HorizonSources of InformationFinancial Accounting System Cost Accounting RecordsMarket ResearchQuotationsEconomic IndicatorsOther Published InformationCopyright Oxford University Press 201110Example 1-1Assemble Relevant DataVast informationWhat 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 ManagerAlt. 1 $793.50 / mo (Printing Dept.) vs. Alt. 2 ($793.50-$294.00)+688.50 / mo (Comm. Printer)Copyright Oxford University Press 201111Decision-Making Process3. Assemble Relevant DataFinancial Consequences (Costs & Benefits):Market Consequences: has established pricesExtra-Market Consequences: prices could be assigned by indirect meansIntangible Consequences: Social impacts, environmental impacts, etc.Copyright Oxford University Press 201112Decision-Making Process4. Identify Feasible AlternativesInclude as many as possible alternatives:Do-Nothing option Simple solutionsBounded rationality Number of alternatives

Copyright Oxford University Press 201113Decision-Making Process5. Select the CriterionMultiple criteriaConflicting criteriaIntegrating criteriaMost common criterion Maximize profitCategoryEconomic CriterionFixed inputMaximize the benefits or other outputsFixed outputMinimize the costs or other inputsNeither input nor output fixedMaximize the profits (Value of outputs cost of inputs)Copyright Oxford University Press 201114Decision-Making Process6. Construct ModelsReal Systems and Models A model describes the interrelationships among the relevant data and predicts the outcomes of various alternatives.

Copyright Oxford University Press 201115Decision-Making Process7. Predict Alternatives OutcomesComparable outcomes Single criterionSingle composite criterionRisk and uncertaintySearch for more information (loop)Modification of alternatives (loop)Copyright Oxford University Press 201116Decision-Making Process8. Choose Best Alternative(s)Selection criterionOther intangible considerations

Copyright Oxford University Press 201117Decision-Making Process9. Audit the ResultsReality vs. predictionLearn from mistakesReplacement Analysis

Copyright Oxford University Press 201118EthicsThe concept of distinguishing between right and wrong in decision making.Ethics includes: Establishing systems of beliefs and moral obligationsDefining values and fairnessDetermining duty and guidelines for conduct

Copyright Oxford University Press 201119Code 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.asp)Copyright Oxford University Press 201120Ethical Dimensions in Engineering Decision MakingDecision Process StepExample Ethical Lapses1. Recognize the problemLooking the other way, or not to recognize the problem due to bribes or fear of retribution2. Define goals/objectivesFavoring one group of stakeholders by focusing on their objective3. Assemble relevant dataUsing faulty or inaccurate data4. Identify feasible alts.Leaving legitimate alts out of consideration5. Select criterion to determine best altConsidering only monetary consequences when other significant consequences existCopyright Oxford University Press 201121Ethical Dimensions in Engineering Decision MakingDecision Process StepExample Ethical Lapses6. Construct a modelUsing a short horizon that favors one alt over another7. Predict alts outcomesUsing optimistic estimates for one alt. and pessimistic ones for the other alts8. Choose the best altChoosing an inferior alt, one that is unsafe, adds unnecessary cost for user, harms the environment9. Audit the resultHiding past mistakesCopyright Oxford University Press 201122Ethics in Engineering Economic AnalysisHow well and how honestly the decision-making process is conducted the data, method of analysis, recommendations, and follow-upRecognize ethical issues exist and make them an explicit part of decision making processCopyright Oxford University Press 201123Decision-Making for Current CostsIf 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.Copyright Oxford University Press 201124Decision-Making for Current CostsExample 1-2Linear Programming ModelMinimize $3.00X + $4.40YSubject to:(0.25)X + (0.40)Y 0.31X + Y = 1X, Y 0Where X = portion from 1st source of materialY = portion from 2nd source of materialCopyright Oxford University Press 201125Example 1-3Decision-Making for Current CostsConcept of Sunk CostOnly the remaining production is consideredIs the assumption of other costs as variable reasonable?

Copyright Oxford University Press 201126Example 1-4Decision-Making for Current CostsIntangible constraintThe thickness of wall spaceFurther StudyTrade-off between insulation and energy cost

Copyright Oxford University Press 201127