Download - Lecture # 1 foundation
Lecture # 1
Foundation
1-1 Dr. A. Alim
Chemical Process Economics II
Foundation of engineering economy.
Interest / Time value of money:
Compounding factors.
Gradient factors.
Effects of inflation.
Nominal and effective interest rates.
Variable interest rates.
1-2 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Chemical Process Economics II
Analysis of cost estimation:
Money business cycle
Capital costs.
Product costs.
Depreciation and Depletion.
Taxes and Economic Value Added (EVA).
Disposal of Assets.
1-3 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Chemical Process Economics II
Analysis of profitability: Measures of profitability. Investment alternatives - PW and AW. IRR and incremental analysis. Replacement / Retention. Public sector projects Breakeven analysis
Optimization. Systems with no constraints: One variable and multivariable. Systems with constraints: Linear and nonlinear programming.
1-4 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Chemical Process Economics II
Variation and Decision Making Under Risk:
Sensitivity analysis.
Decision Trees.
Certainty, risk and uncertainty.
Expected value analysis (EV).
Random variables / sampling.
Probability distribution functions.
1-5 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
What is Engineering Economy and why it
is important to study?
Engineering designs must satisfy:
- Technical feasibility : the solution obeys the laws of
nature and science.
- Technical efficiency: best solution should generate least
waste, consumes least energy,..etc.
In addition to technical requirements, there are always
economic requirements:
- Economic feasibility: solutions proposed must not
exceed budget limits.
- Economic efficiency: The most economical of many
alternatives should be selected. 1-6 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Engineering Economy
Every technical solution has financial consequences.
Engineering economic analysis determines whether a proposed solution is
financially viable.
Will it pay?
Is this the minimum cost solution?
Will it generate an acceptable return?
Three major types of engineering economic decisions:
Profit enhancing programs
Cost control programs
Public improvement programs.
1-7 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Engineering Economic Decisions
Profit Enhancing Programs: projects designed to generate revenues. New product development
New product acquisition
Product/service capacity expansion
Improved customer service
1-8 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Engineering Economic Decisions
Cost Control Programs: projects designed to generate savings. Improving efficiency
Streamlining operations
Eliminating waste / Reducing costs
Reducing liabilities
1-9 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Engineering Economic Decisions
Public Improvement Programs: government entities also make capital expenditures. Increased public satisfaction
Increased public safety
Improved infrastructure
1-10 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Investment Categories
New business New products or services.
Expansion Capacity increase.
Replacement Replacement/Retention decision.
Abandonment Eliminating products, services, or capacity.
1-11 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Investment Decisions
Invest Releases funds to start a project
Do Not Invest Eliminates the project from further consideration
Wait (Delay) Time to gather information about the future can aid in
decision-making
1-12 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
The Decision Making Process
1. Understand the problem – define objectives
2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply
sensitivity analysis and risk potential.
6. Select the “best” alternative
7. Implement the alternative and monitor
results
1-13 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
The Decision Making Process
Successful application of decision making
process requires:
* Technical ability, good understanding of
fundamentals of engineering economics.
* Strict adherence to codes of ethics.
1-14 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
Ethics – Different Levels
Universal morals or ethics – Fundamental
beliefs: stealing, lying, harming or murdering
another are wrong
Personal morals or ethics – Beliefs that an
individual has and maintains over time; how a
universal moral is interpreted and used by
each person
Professional or engineering ethics – Formal
standard or code that guides a person in work
activities and decision making
1-15 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Code of Ethics for Engineers All disciplines have a formal code of ethics. National Society of
Professional Engineers (NSPE) maintains a code specifically for
engineers; many engineering professional societies have their own code
1-16 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
In this course, you will learn:
The fundamentals of engineering economy (time
value of money, interest, economic equivalence)
To perform the 7-steps in the economic decision
making process
To financially evaluate engineering projects under
certainty, risk, uncertainty, and multiple options
Numerous methods in which to determine the best
choice from a feasible set with multi-attributes
To solve a variety of problems dealing with capital
investments 1-17 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
You will appreciate:
The basics of making a capital investment decision.
The risk associated with capital investments.
The level at which most companies invest.
The “globalization” of our world, as companies
make investments all over the world in various
currencies.
The entire decision-making process.
1-18 Slide Sets to accompany Blank & Tarquin, Engineering
Economy, 7th Edition, 2012
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved