CVE 4000

Engineering Economy and Planning

Summer 2018
Lecture #1
Making Economic Decisions
May 14, 2018

Dr. Troy Nguyen, P.E.

OEC Building, Room 356B
tnguyen@fit.edu
Introduction
• About the Instructor
– Dr. Troy Nguyen (pronounced as “Wynn”)
– Ph.D. in Mechanical Engineering, Colorado State University
– Licensed professional engineer (P.E.) in Florida
– Licensed general contractor in Florida
– 27+ years of industry experience in system design and development
– Teaching & research interest: power systems, renewable energy,
infrastructure construction management, building information
modeling (BIM)
• About You
– Who are you? (name, major)
– Where (what industry) do you plan to work?
About the Course
• This course provides the tools to analyze and solve
economic problems commonly faced by engineers
• Administrative Details
– Admin Letter on Canvas
– Course Syllabus on Canvas
• Academic Honesty (Florida Tech Student Handbook)
– Posted on Canvas for everyone to review
• Course Weekly Activities
– Mondays - Material presentation/ In class problem solving
Wednesdays – Material presentation
– Weekly homework
In Class Problem Solving
• Class is divided into teams
– 3-4 persons per team
• Instructor will hand out a problem to
be solved
• Teams will have 20-25 minutes to come https://www.searchenginejournal.com/10-tools-
for-in-team-marketing-collaboration/175659/
up with proposed solution(s)
• 3-4 teams will be selected to present
during each class session
• A member from each team will be
selected AT RANDOM to present the
team’s propose solution
• Participation counts toward HW and
Attendance/Participation grading
Major Team #
Team Formation
Major Team #
Elec 1 Elec 6
Chem 2 Mech 7
Mech 3 Mech 8
Mech 4 Civil 9
Mech 5 Mech 10
Chem 6 Mech 1
Civil 7 Mech 2
Mech 8 Mech 3
Mech 8 Mech 4
Mech 10 Comp 5
Mech 1 Mech 6
Comp 2 Elec 7
Mech 3 Mech 8
Elec 4 Ocean 9
Mech 5 Civil 10
Major Team #
Team Formation (continued)
Chem 1
Mech 2
Mech 3
CM 4
Business 5
Comp 6
Mech 7
Ocean 8
Civil & CM Instructor
Mech 9
Mech 10
Mech 1
Mech 2
Making Economic Decisions - Outline

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

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Making Economic Decisions - 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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Types 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
 Should I buy or lease my next car?
 How much should I save a month to achieve a financial goal?
 Which photocopy machine should the company purchase?
 Complex Problems
 Feasibility study of a new automobile plant.
 Planning for new highways
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Role of Engineering Economic Analysis
 A systematic tool for comparing alternatives by their
economic merits. Most suitable for “intermediate”
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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Scenario: Alternative Fuel Vehicles
 Starting about the 1990s, there has been a race to create the
best alternative fuel vehicle.
 There are many personal, economic, environmental, political
decision-making issues associated with this industry

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Scenario: Alternative Fuel Vehicles
 Currently, many alternative fuel vehicle choices emerged—
including hybrid, electric, and highly efficient gasoline
powered.
 Design Concerns
– Engine power and acceleration
– Fuel mileage
– Refuels
– Safety
– Maintenance
– Fuel distribution
– Environmental issues, ethical issues,…
Questions
 Question #1: What marketplace dynamics drive or suppress the
development of alternative fuel vehicles?

 Question #2: Concerns and questions that consumers might

have regarding the conversion to alternative fuel vehicles.
Which are economic and which are non-economic factors?
 Question #3: From manufacturer’s viewpoint, what are the
major concerns, political problems, and overriding goals at
producing an alternative fuel vehicle?

 Question #4: Are there any ethical aspects to the conversion to

alternative fuel vehicles?

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Decision Making Process
1. Recognize Problem / Opportunity
Overall Mission /
Objectives
2. Define Goals/Objectives

3. Assemble Relevant Data 5. Select the Criterion

4. Identify Feasible 6. Construct a Model

Alternatives (Alts)

7. Predict Alts’ Outcomes

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

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Decision-Making Process
1. Recognize Problem / Opportunity
 Needs for New Products, Processes, or Facilities
 Improvement of Products, Processes, or Facilities
(TQM, CI processes)
 SWOT (Strengths, Weaknesses, Opportunities, and
Threats) Analysis
 Investment/Financing

TQM = Total Quality Management

CI = Continuous Improvement
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Decision-Making Process
2. Define Goals/ Objectives
 General or specific goals
 Systems perspective
 Limiting factors
 Multiple goals
 Conflicting goals
Decision-Making Process
3. Assemble Relevant Data
 Importance of Data Collection
 Relevance of Information
 Dollar Amount and Time Horizon lovestats.wordpress.com
 Sources of Information
– Financial Accounting System
– Cost Accounting Records
– Market Research
– Quotations
– Economic Indicators
– Other Published Information

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Assemble Relevant Data - Example
 What information/data are relevant for
decision to purchase a cell phone?
– Market review of cell phones
– Does it fit in your pocket? (size)
– Is it a smart phone?
– Is there roaming charge?
– When will it be obsolete?
– Contract Obligation
– Others?

 Financial Consequences (Costs & Benefits):

– Prices
– Intangible: social impacts, environmental impacts, etc.
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Decision-Making Process
4. 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 Process
5. Select the Criterion
 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 Maximize the profits (Value of outputs – cost
output fixed of inputs)
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Decision-Making Process
6. Construct Models
 Real Systems and Models
 A model describes the interrelationships
among the relevant data and predicts the
outcomes of various alternatives.

 Example: Costs
Model of a Building
Energy System

www.robuststrategy.com
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Decision-Making Process
7. Predict Alternatives’ Outcome
 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 Process
8. Choose Best Alternative(s)
 Selection criterion
 Other intangible considerations

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Decision-Making Process
9. Audit the Results
 Reality vs. prediction
 Learn from mistakes
 Replacement Analysis

Copyright Oxford University Press 2014

Decision Making Process Example – Investing
for Retirement (1)
• Life expectancy is longer in modern societies
• Need more money to sustain future health care
and living expenses

• Achieve financial security after retirement

• Life expectancy (varies for each person)

• Personal & financial needs during retirement
• Future costs of living and health care
• Etc.

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Decision Making Process Example – Investing
for Retirement (2)

• Stock investment
• Bank saving account
• Government bond
• Buy a business to operate

• % of return on investment
• Risk level (high/medium/low)
• Monthly dividend payment
• Low tax
Decision Making Process Example – Investing
for Retirement (3)
Decision Making Process Example – Investing
for Retirement (4)

• Best return on investment

• Lowest risk
• Pay monthly dividend payment
• Pay low tax

• Quarterly review of profit/loss

• Hire consultant to verify results
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

Copyright Oxford University Press 2014

Code of Ethics - National Society of Professional Engineers

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)

Copyright Oxford University Press 2014

Ethical Dimensions in Engineering Decision Making (1)

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 • Considering only monetary consequences
determine best alt when other significant consequences exist

Copyright Oxford University Press 2014

Ethical Dimensions in Engineering Decision Making (2)

Decision Process Step Example Ethical Lapses

6. Construct a model
7. Predict alts’ outcomes
8. Choose the best alt
9. Audit the result
• Using a short horizon that favors one
alternative over another
• Using optimistic estimates for one alt. and
pessimistic ones for the other alts
• Choosing an inferior alt, one that is
unsafe, adds unnecessary cost for user,
harms the environment
• Hiding past mistakes

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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
 “Current costs”
‒ All alternatives are evaluated based on their cost Now
‒ No complicated financing scheme
‒ Time value of money is not a factor
 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
alternative can be identified.

Copyright Oxford University Press 2014

Example 1-2 in Textbook (Linear Programming)
Given: Concrete aggregate mix must contain at least 31% sand by volume for proper
batching.
• Material from source #1: 25% sand and 75% coarse aggregate @ $3/m3
• Material from source #2: 40% sand and 60% coarse aggregate @ $4.40/m3
Determine the least cost per cubic meter of blended aggregate
Solution: Because material from source #2 is more expensive, use just enough to
meet the required 31% sand.
Let x = portion of the blended aggregate from source #1
1-x = portion of the blended aggregate from source #2
Sand balance: x 0.25 + 1 − x (0.40) = 0.31
−0.15x = −0.09
x = 0.60
So the blend should be 60% from source #1 and 40% from source #2
$3 $4.40 $1.80 $1.76 $3.56
Cost: 0.60 + 0.40 = + =
𝑚3 𝑚3 𝑚3 𝑚3 𝑚3

Copyright Oxford University Press 2014

Example 1-4 in Textbook (Intangible Constraints)
Given: Design of a cold-storage warehouse
Constraint: maximum heat transfer across walls is limited to 30,000 joule/sec/m2 when there
is a temperature difference of 30⁰C across the insulation layer
insulation
∆𝑻 = 𝟑𝟎℃

𝒋𝒐𝒖𝒍𝒆
𝑸 ≤ 𝟑𝟎𝟎𝟎𝟎
𝒔𝒆𝒄 𝒎𝟐
Two insulation materials are considered:

Material $/m3 Thermal Conductivity (J-m/m2 - ⁰C-hr)

Rock wool $12.50 140
Foamed Insulation $14.00 110

Which insulation material should be selected?

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Example 1-4 in Textbook (Intangible Constraints)
Basic equation for heat conduction through wall
𝑲(∆𝑻) Q = heat transfer, J/hr/m2
𝑸=
𝑳 K = thermal conductivity, J-m/m2 - ⁰C-hr
∆T = temperature difference, ⁰C
Solution: L = thickness of insulation material, m
Calculate required insulation thickness
𝟏𝟒𝟎(𝟑𝟎)
Rock wool: 𝟑𝟎, 𝟎𝟎𝟎 = L= 0.14 m
𝑳
𝟏𝟏𝟎 (𝟑𝟎)
Foamed: 𝟑𝟎, 𝟎𝟎𝟎 = L= 0.11 m
𝑳
Cost of insulation per square meter

Rock wool: $12.50 x (0.14 m) x (1 m2) = $1.75/m2

Foamed: $14.00 x (0.11 m) x (1 m2) = $1.54/m2

Copyright Oxford University Press 2014