s08 chapter 1
TRANSCRIPT
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Contemporary Engineering Economics, 4th
edition, 2007 1
IE 305
Engineering Economy
Dr. Dave Sly, PE, MBA
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My Background
President, Proplanner Web Based Process Engineering Software
Past President Cimtech (sold to EDS) Education
BS, MS, PhD Industrial Engineering
MBA, PE, Commercial Pilot
Other Madison Properties (current)
Indian Motorcycle Okoboji (previous)
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Contact Info
[email protected] or 296-3120
Office 2102 Black Engr
Office Hours MW 2-3, 4-5pm, Wed 12-1pm, or by
appt.
Prefer that you use web-ct mail for personalissues and the discussion board for all
Project and HW questions. TA info on web-ct (office hours to be
determined)
mailto:[email protected]:[email protected] -
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Grading
Straight Scale
100-92.5 = A
89.5-92.4=A-
Exams = 60% (20/20/20) Homework = 20%
Inclasses = 5%
Project = 15%
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In class assignments
Simple assignments during class using theclickers (purchase at bookstore by end ofweek).
I drop one of the assignments.
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MBA option in Engineering
Get your MBA in 1 more year
Pay undergrad tuition
Have your undergrad electives count towardsyour MBA
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Why you are taking this course
Engineers are employed by businesses Accountable to shareholders to make a profit
Frequently responsible for economic justification ofprojects
Many move into management (economic decision-making) positions
Engineers make money and have the luxury of Spending
Saving and investing Borrowing
Same economic principles at home or at work
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Are You Rich Yet?Barrons, September 20, 1999
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Filet Mignon & Champagne Rich
A portfolio of $4.55million
1% of U.S. individual
taxpayers An annual investment
income of $227,546
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Yacht & Limousine Rich
A portfolio of $19.33million
Annual investment
income of $966,621 Whos Who Y&L Rich:
Jack Welch of GE,
Mike Armstrong of
AT&T
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Really Really Rich
A portfolio of $37.86million
An annual investment
income of $1.9 million Only 110,672 U.S.
taxpayers reportedincome above $1
million (1996)
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Damn Filthy Rich
A portfolio of $1 billion
267 individuals in U.S.(1999)
Bill Gate: $85 billion Mike Dell: $20 billion
Jerry Yang: $3.8 billion
Don Trump:$1.6 billion
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Your Goal -Beer & Pretzels Rich at the
age of 65
Your current age: 20 years old
Amount of savings desired: $2 million
Interest earned on your savings: 10%
Required monthly savings: $987
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Monthly Savings Required
(to save $2M at age 65)
StartingAge
Required Monthly Savings at Varying InterestRates
5% 7% 10% 12% 15%
20 $987 $527 $190 $93 $31
30 $1,760 $1,110 $527 $311 $136
40 $3,358 $2,469 $1,507 $1,064 $617
50 $7,483 $6,310 $4,825 $4,003 $2,998
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Returns from Various Investment Classes
Average AnnualReturn 1970-1997
Best Year Worst year
U.S. Stocks 13.0% 37.6%
(1995)
-26.5% (1974)
InternationalStocks
12.7% 39.4%(1993)
-26.2% (1974)
CashEquivalent
6.8% 14.1%(1981)
3.0% (1991)
Real Estate 8.8% 20.5%(1979)
-5.6% (1991)
U.S. Bonds 9.3% 33.5%(1982)
-5.6% (1994)
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Whats the Engineering Degree Worth
in 2003?Majors Average Starting Salary
Chemical Engineering $52,169
Electrical Engineering $50,566
Mechanical Engineering $50,120
Computer Sciences $46,536
Industrial Engineering $46,123
Civil Engineering $41,067
For any engineering graduate, it is not difficult to set aside
$100 each month from his or her salary.
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Retirement Options
Start saving $2K/year upon graduation (age25) for 10 years, then stop (notrecommended).
Start saving $2K/year 10 years aftergraduation (age 35) and save for 30 years.
Using an interest rate of 8% per year, whichis best?
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Conclusion?
Start saving Early!
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Engineering Economic
Decisions
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Copyright 2006
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Chapter Opening StoryGoogle Inc.
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A Little Google History
1995 Developed in dorm room of Larry Page and Sergey Brin, graduate students
at Stanford University Nicknamed BackRub
1998 Raised $25 million to set up Google, Inc. Ran 100,000 queries a day out of a garage in Menlo Park
2005 Over 4,000 employees worldwide Over 8 billion pages indexed Market value of $110 billion
2007 Over 8,000 employees worldwide Over 380 million unique users per month Market value of $144.3 billion
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Rational Decision-Making Process
1. Recognize a decisionproblem
2. Define the goals orobjectives
3. Collect all the relevantinformation
4. Identify a set of feasibledecision alternatives
5. Select the decision criterionto use
6. Select the best alternative
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Which Car to Lease?
Saturn vs. Honda
1. Recognize a decisionproblem
2. Define the goals orobjectives
3. Collect all the relevantinformation
4. Identify a set of feasibledecision alternatives
5. Select the decisioncriterion to use
6. Select the best alternative
Need a car
Want mechanicalsecurity
Gather technical as wellas financial data
Choose betweenSaturn and Honda
Want minimum totalcash outlay
Select Honda
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Engineering Economic Decisions
Planning Investment
Marketing
ProfitManufacturing
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What Makes the Engineering Economic
Decision Difficult? - Predicting the Future
Estimating a Requiredinvestment
Forecasting a product
demand Estimating a selling
price
Estimating a
manufacturing cost Estimating a product
life
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Create & Design
Engineering Projects
Evaluate
ExpectedProfitabilityTiming of
Cash FlowsDegree ofFinancial Risk
Analyze
Production MethodsEngineering SafetyEnvironmental Impacts
Market Assessment
Evaluate
Impact onFinancial StatementsFirms Market Value
Stock Price
Role of Engineers in Business
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Present
FuturePast
Engineer ing EconomyAccount ing
Evaluat ing past performance Evaluat ing and predict ing future events
Accounting Vs. Accounting
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Two Factors in Engineering
Economic Decisions
The factors of time and uncertainty
are the defining aspects of anyengineering economic decisions
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A Large-Scale Engineering Project
Requires a large sumof investment
Takes a long time to
see the financialoutcomes
Difficult to predict therevenue and cost
streams
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Types of Strategic Engineering
Economic Decisions in Manufacturing
Sector Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
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Service Improvement - Healthcare
Delivery
Which plan is moreeconomically viable?
Traditional Plan: Patientsvisit each service provider.
New Plan: Each serviceprovider visits patients
: patient
: serv ice provider
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Equipment & Process Selection
How do you choose between the Plastic SMCand the Steel sheet stock for an auto bodypanel?
The choice of material will dictate themanufacturing process for an automotivebody panel as well as manufacturing costs.
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Equipment Replacement Problem
Now is the time toreplace the oldmachine?
If not, when is the righttime to replace the oldequipment?
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New Product and Product Expansion
Shall we build oracquire a new facility tomeet the increaseddemand?
Is it worth spendingmoney to market a newproduct?
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Example - MACH 3 Project
R&D investment: $750
million Product promotion through
advertising: $300 million
Priced to sell at 35% higherthan Sensor Excel (about$1.50 extra per shave).
Question 1: Wouldconsumers pay $1.50 extrafor a shave with greatersmoothness and lessirritation?
Question 2: What wouldhappen if the bladeconsumption dropped morethan 10% due to the longerblade life of the new razor?
Gillettes MACH3
Project
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Cost Reduction
Should a company buyequipment to performan operation now donemanually?
Should spend moneynow in order to savemore money later?
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Types of Strategic Engineering Economic
Decisions in Service Sector
Commercial Transportation
Logistics and Distribution
Healthcare Industry
Electronic Markets and Auctions
Financial Engineering
Retails
Hospitality and Entertainment Customer Service and Maintenance
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U.S. Gross Domestic Products (GDP)
Manufactur ing
(14%)
Service secto r
(80%)
Healthc are (14%)
Ag ricu lture (2%)
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Industrial Employment
Industry 1993Employmentdistribution
1983-94National
Average
1994-2005ProjectedChange
Manufacturing 12.6% -0.70% -7.2%
Services 30.5% 60.0% 39.0%
Retail trade 16.7% 31.1% 13.0%
Financial 8.0% 26.8% 6.3%
Source: Bureau of Econom ic Analysis/Bureau of Labo r Stat is t ics
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Employment Growth (industry)
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Employment (trends)
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Fundamental Principles of Engineering
Economics
Principle 1: A nearby dollar is worth more
than a distant dollar
Principle 2: All it counts is the differences
among alternatives Principle 3: Marginal revenue must
exceed marginal cost
Principle 4: Additional risk is not takenwithout the expected additional return
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Principle 1: A nearby dollar is worth
more than a distant dollar
Today 6-month later
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Principle 2: All it counts is the
differences among alternatives
Option MonthlyFuelCost
MonthlyMaintenance
Cashoutlay atsigning
Monthlypayment
SalvageValue atend ofyear 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
Irrelevant items in decision making
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Principle 3: Marginal revenue must
exceed marginal cost
Manufacturing cost
Sales revenueMarginal
revenue
Marginal
cost
1 unit
1 unit
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Principle 4:Additional risk is not
taken without the expected additional
returnInvestment Class Potential
Risk
Expected
Return
Savings account(cash)
Low/None 1.5%
Bond (debt) Moderate 4.8%Stock (equity) High 11.5%
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Summary
The term engineering economic decisionrefers to any investment decision related toan engineering project.
The five main types of engineering economicdecisions are (1) service improvement, (2)equipment and process selection, (3)equipment replacement, (4) new product and
product expansion, and (5) cost reduction. The factors of timeand uncertaintyare the
defining aspects of any investment project.