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01 Engineering Economic Decisions 2
01 Engineering Economic Decisions 2
Economic Analysis
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IE 342 - Engineering Economic
Analysis
Instructors Dr. Emre Uzun (Sec 1)
E-mail: emreu@bilkent.edu.tr
Offıce: EA 328
Tel: x3484
Office Hours: By appointment via email
Okan Dükkancı (Sec 2)
E-mail: okan.dukkanci@bilkent.edu.tr
Offıce: EA 324
Tel: x3483
Office Hours: By appointment via email
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Required Text Book:
Park, C. S., Contemporary Engineering
Economics, 6th Ed., Prentice Hall, 2016
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Web Site/Email:
All announcements and course related material (e.g.
Study sets, lecture notes) will be posted on the course web
page.
Students are responsible for all the announcements made
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Course Description
Concepts of time value of money.
Analysis of engineering decisions
Principles and methodology of comparing decision
alternatives, such as various engineering designs,
manufacturing equipment, or industrial projects.
Effects of depreciation, inflation and taxation on
economic decisions, cost benefit analysis of public
projects.
Dealing with uncertainty and risk; rational decision
making when future outcomes are uncertain.
Replacement analysis.
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Grading
Midterm I - 22 %
Midterm II - 22 %
Final Exam - 30 %
4 Quizzes - 20 %
Class Participation - 6 %
Total - 100%
Attendance:
There may be random attendances taken which will count
towards your class participation grade.
FZ Grade Policy:
No FZ this semester!
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Policies
Makeup Policy:
A make-up examination for the midterms will only be given under highly unusual
circumstances (such as serious health or family problems). The student should
contact the instructor as early as possible and provide the instructor with proper
documentation (such as a medical note certified by Bilkent University’s Health
Center).
There is no make-up for quizzes.
Classroom Policy:
No need to come to classroom if you are not in the mood for learning!
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Tentative Course Outline:
Ch.1: Engineering Economic Decisions
Ch.3: Time Value of Money
Ch.3: Economic Equivalence
Ch.3: Interest Formulas - Single Cash Flows
Ch.3: Interest Formulas – Equal Payment Series
Ch.3: Interest Formulas – Gradient Series
Ch.3: Unconventional Equivalence Calculations
Ch.4: Nominal and Effective Interest Rates
Ch.4: Equivalence Analysis using Effective Interest Rates
Ch.4: Debt Management
Ch.4: Investing in Financial Assets
Ch.5: Payback Period
Ch.5: Discounted Cash Flow Analysis
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Ch.5: Variations of Present Worth Analysis
Ch.5: Comparing Mutually Exclusive Alternatives
Ch.6: Annual Equivalent Worth Criterion
Ch.6: Applying Annual Worth Analysis
Ch.7: Rate of Return Analysis
Ch.7: Finding RoR
Ch.7: Internal Rate of Return Criterion
Ch.7: Incremental Analysis
Ch.9: Asset Depreciation
Ch.9: Depreciation Methods
Ch.9: Corporate Income Taxes
Ch.10: Developing Project Cash Flows
Ch.11: Meaning and Measure of Inflation
Ch.11: Equivalence Calculation under Inflation
Ch.11: Effects of Inflation of Project Cash Flows
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Ch.12: Project Risk
Ch.12: Estimating Risk
Ch.12: Decision Tree Analysis
Ch.14: Replacement Analysis Fundamentals
Ch.14: Replacement Decision Models
Ch.15: Methods of Financing
Ch.15: Cost of Capital
Ch.15: Choice of MARR
Ch.16: Benefit-Cost Ratio
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Engineering Economic Decisions
Lecture 1
Presentation based on the book
Chan S. Park, Contemporary Engineering Economics
Chapter 1, © Pearson Education International Edition
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Getting a Car in the USA
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Getting a Car in the USA
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A Simple Illustrative Example: Car to
Finance – Saturn or Honda?
Recognize the decision Need to lease a car
problem
Collect all needed Gather technical and
(relevant) information financial data
Identify the set of feasible Select cars to consider
decision alternatives Wanted: small cash outlay,
Define the key objectives safety, good performance,
and constraints aesthetics,…
Select the best possible Choice between Saturn and
and implementable Honda (or others)
decision alternative Select a car (i.e., Honda,
Saturn or another brand)
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Large-Scale Engineering Projects
These typically
require a large sum of investment
predict
All the above aspects (and some others not listed here)
point towards the importance of EEA
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Types of Strategic Engineering Economic
Decisions in the Manufacturing Sector
Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
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The Four Fundamental Principles of
Engineering Economics
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Principle 1
An instant dollar is worth more than
a distant dollar…
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Principle 2
Only the cost (resource) difference
among alternatives counts
Option Monthly Monthly Cash paid Monthly Salvage
Fuel Cost Maintenance at signing payment Value at
(cash end of year
outlay ) 3
The data shown in the green fields are irrelevant items for decision
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making, since their financial impact is identical in both cases
Principle 3
Marginal (unit) revenue has to
exceed marginal cost, in order to
increase production
Marginal
cost
Manufacturing cost 1 unit
Marginal
revenue
Sales revenue 1 unit
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Principle 4
Additional risk is not taken without a
suitable expected additional return
Investment Class Potential Expected
Risk Return
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