cie412 -fall 2008 dr. bryan pearce

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CIE412 -FALL 2008

Dr. Bryan PearceProfessor of Civil and Environmental Engineering

303 Boardman Hall [email protected]

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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Chapter 1Making Economic

Decisions

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

Making

CIE 412 - Chapter 1 - a

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


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


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,…


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?


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


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.


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.



1. Recognize Problem / Opportunity

2. Define Goals/Objectives

3. Assemble Relevant Data

4. Identify Feasible Alts

7. Predict Alts’ Outcomes

8. Choose the Best Alt.9. Audit the Results

Overall Mission / Objectives

5. Select the Criterion

6. Construct a Model

Needs for New Products, Processes, or Facilities Improvement of Products, Processes, or

Facilities (TQM, CI) SWOT (Strengths, Weaknesses, Opportunities,

and Threats) Analysis Investment/Financing


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


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


Vast information What is “relevant”? From who’s 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)


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.


Include as many as possible alternatives:◦ Do-nothing option ◦ Simple solutions

Bounded rationality – Number of alternatives


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

Category Economic Criterion

Fixed input Maximize the benefits or other outputs

Fixed output Minimize the costs or other inputs

Neither input nor output fixed

Maximize the profits (Value of outputs – cost of inputs)


Real systems and models A model describes the interrelationships

among the relevant data and predicts the outcomes of various alternatives.


Comparable outcomes ◦ Single criterion◦ Single composite criterion

Risk and uncertainty Search for more information (loop) Modification of alternatives (loop)


Selection criterion Other intangible considerations


Reality vs. prediction Learn from mistakes Replacement analysis


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


Engineers, in the fulfillment of their professional duties, shall:

1. Hold paramount the safety, health, and welfare of the public.

2. Perform services only in areas of their competence.3. Issue public statements only in an objective and

truthful manner.4. Act for each employer or client as faithful agents or

trustees.5. Avoid deceptive acts.6. 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)


Decision Process Step Example Ethical Lapses

1. Recognize the problem • “Looking the other way”, or not to recognize the problem due to bribes or fear of retribution

2. Define goals/objectives • Favoring one group of stakeholders by focusing on their objective

3. Assemble relevant data • Using faulty or inaccurate data

4. Identify feasible alts. • Leaving legitimate alts out of consideration

5. Select criterion to determine best alt

• Considering only monetary consequences when other significant consequences exist


Decision Process Step Example Ethical Lapses

6. Construct a model • Using a short horizon that favors one alt over another

7. Predict alts’ outcomes • Using optimistic estimates for one alt and pessimistic ones for the other alts

8. Choose the best alt • Choosing an inferior alt, one that is unsafe, adds unnecessary cost for user, harms the environment

9. Audit the result • Hiding past mistakes


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


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.


Example 1-2 Linear Programming Model

Minimize $3.00X + $4.40YSubject to: (0.25)X + (0.40)Y 0.31

X + Y = 1X, Y 0

where X = portion from 1st source of materialY = portion from 2nd source of

material


Concept of Sunk Cost◦ Only the remaining production is considered

Is the assumption of other costs as variable reasonable?


Intangible constraint◦ The thickness of wall space

Further study◦ Trade-off between insulation and energy cost


cie412 -fall 2008 dr. bryan pearce

Technology

printer cie

profit cie

published information

intangible considerations

economic aspects

economic merits

economic decisions

simple problems