Engineering Economics

Valerie Tardiff and Paul Jensen

Operations Research Models and Methods
8/25/04 Copyright 2004 - All rights reserved
Questions
 What is engineering economics?
 Who cares about it?
 Why do engineers have to study it?

2
Money and Success
 This course has to do with money
and success.
 Most of us want some measure of
success in life.
 For better or for worse, money (and
economics) has a lot to do with
success.

3
Economics and Engineering
 Economics is a big part of an engineer's
job.
 The engineer must translate scientific ideas in
products and systems that better mankind.
 Ideas need to make sense economically and
the engineer must be able to convince others
that this is so.
 That is true of any organization that you
might join upon graduation.

4
The Goal

 For-profit organizations have for

goal to make money - now and in
the future.
 Not-for-profit must remain financially
sound.
 Both types must worry about money
or they will probably cease to exist.

5
Economics and World
Institutions

6
Economics and World
Institutions
 World: International trade, balance of
payments, currency evaluation
 Federal, State and Local: Tax spending,
GNP, distribution of resources, support of
institutions, public welfare
 Organization: Revenues, costs, profit,
return on investment, stock prices
 You: Salary, investments, savings,
borrowing

7
Business Decisions are not
Simple
 Product design
 Process design (inspection, operations, raw
materials)
 Machine selection
 Facility design

 All decisions are interrelated. You can't make

one without affecting many others. This is
especially true when multiple products,
periods, stages are involved.

8
The Question is:
 How do you operate in this environment?
 How does the organization you work for
operate?

 Engineering economics is entirely involved

with evaluating the comparison of
alternatives that involve spending money
in hopes of earning more.

9
Engineering Economic
Analysis - Seven Steps
1. Recognize and formulate the problem.
2. Develop feasible alternatives.
3. Develop cash flows for each alternative.
4. Select a criterion (or criteria) for
determining the preferred alternative.
5. Analyze and compare alternatives.
6. Select the preferred alternative.
7. Perform monitoring and post-evaluation.

10
Importance of Learning this
Material
 The course is about decision making
in the environment of an organization
(business or government).
 The methods have applications to
personal decisions as well.

11