6/9/2015

CE 301 Engineering Economics

Chapter 1
Making Economic Decisions
Dr. Khaled Hamad
University of Sharjah
College of Engineering

Decision Making
 Decision making is a major aspect of everyday life.
 Individuals, households, and firms face daily problems

 Knowledge of the decision-making process and of the

tools used to make comparisons between competing
alternatives leads to better decisions.

 Tools for analyzing and solving the economic

problems faced by engineers are needed.

 Complex problems can be broken down to produce

reasonable solutions.

2 CE 301 Eng Economy

1
 6/9/2015

Classification of Eng. Economy Problems

 Simple Problems
 Can be analyzed in one’s head without extensive analysis
 Do I drive own car, take a taxi, take a bus, walk, or ride a bicycle to
come to school?
 How often should I eat lunch at cafeteria?
 Intermediate Problems (Main subject of this course!!!)
 They are sufficiently important to justify serious thought and
action
 They cannot be worked in one’s head; must be organized
 The economic aspects are significant component in the analysis
leading to a decision
 Complex Problems
 Represent a mixture of economic, political, and social elements
 Selection of a president of a country
 Building a nuclear power plant
3 CE 301 Eng Economy

Examples of Engineering Economic Analysis

 Focus on costs, revenues, and benefits that occur at
different times
 All engineer designs call for spending money.

 Decisions concerning the following questions may be

made with the help of economic analysis:
 Which projects are worthwhile?
 Which projects should have higher priority?
 How the project should be designed?
 How to achieve long-term financial goals?
 How to compare different ways to finance purchases?
 How to make short and long-term financial decisions?

4 CE 301 Eng Economy

2
 6/9/2015

Examples of Engineering Economic Analysis

 Questions or issues of non-monetary factors for
engineers to consider:

 Maintaining an eye-pleasing view

 Meeting customer expectations consistently
 Maximization of employee satisfaction
 Maintaining flexibility to meet changing demand
 Maintenance of a desired public image
 Leveling cyclic fluctuations in production
 Improvement of safety in operations
 Reduction of pollutants

5 CE 301 Eng Economy

1. Recognize the problem

The 2. Define goal or objective

Decision
3. Assemble relevant data
Making
Process 4. Identify feasible alternatives

5. Select decision criterion

6. Construct a model

7. Predict alternative outcomes

8. Choose best alternative

9. Audit the result

6 CE 301 Eng Economy

3
 6/9/2015

Decision Making Process

1. Recognize the problem
 You and a group of friends need a place to live in this semester.

2. Define the Goal or Objective

 To find a nice apartment that is not too expensive.

3. Assemble Relevant Data

 You need information on rent, utilities, apartment condition,
parking, travel time to campus, travel time to shopping, the
neighborhood, other amenities provided (banking,
entertainment, etc.).

4. Identify Feasible Alternatives

 Use the Phone Directory, information from friends, apartment
finding services, information from University, the local
newspaper, and my personal experience, to look for apartments.

7 CE 301 Eng Economy

Decision Making Process

5. Select Criterion to Determine the Best Alternative
 Most important is rent-plus-utilities cost. You should also be concerned
about travel time to campus, and kind of neighborhood apartment in.

6. Construct the model

 Make a spreadsheet. The rows will be the apartment choices, the columns
the evaluation criteria. Then try to fill in the interactions between the
apartments and the criteria. This includes determining cash flows for
engineering economic analysis!!!

7. Predict Outcomes of Each Alternative

 Fill in the estimated costs for the spreadsheet and rate the amenities, travel
time, etc.

8. Choose the Best Alternative

 You do not have to choose the cheapest apartment. For a little bit more,
you can get a nicer neighborhood, and maybe a shorter walk to campus.
8 CE 301 Eng Economy

4
 6/9/2015

Decision Making Process

9. Audit the Results
 Did you make a good choice?
 After living in apartment you selected for six months, are
you very happy with your choice!

9 CE 301 Eng Economy

Example 1
Bad news – your brother just wrecked his car!

 An automobile wholesaler offers him $2,000 for the car “as is.”
 His insurance company estimates that there is $2,000 of damage to
his car.
 He has a collision insurance with a $1,000 deductibility provision.
 The insurance company can fix the car right away in a repair shop
belonging to this company. Otherwise, insurance company can mail
him a check for $1,000.
 If repaired, the wrecked car can be sold for $4,500.
 The odometer reading on the wrecked car is 58,000 miles.
 Your brother can buy a newer car for $10,000 with an odometer
reading of 28,000 miles.
 A discount repair shop can repair it for $1,100 but requires 1 month.
 A car rental for one month is $400.
 You brother has $7,000 in savings.

10 CE 301 Eng Economy

5
 6/9/2015

Solution
Alternatives
1. Do not repair, sell now, and buy new car:
 Cash flow = $1K + $2K - $10K = -$7K

2. Repair at insurance shop, sell, and buy the newer car:

 Cash flow = -$1K + $4.5K - $10K = -$6.5K

3. Repair at discount shop, rent a car, sell, and buy the newer car:
 Cash flow = $1K - $1.1K - $0.4+ $4.5K - $10K = -$6.0K

4. Repair at insurance shop, and keep your car:

 Cash flow = -$1K

5. Repair at discount shop, rent a car, then keep your car:

 Cash flow = $1K - $1.1K - $0.4 = -$0.5K

NOTE: Keep in mind other non-monetary factors such as mileage,

repair shop reliability, investment opportunity for savings etc.
11 CE 301 Eng Economy

Example 1-2
Concrete aggregate mix must contain 31% sand. First source of
material has 25% sand and 75% coarse aggregate, and cost
$3/m3. Second source: 40% sand and 60% aggregate, but cost
$4.4/m3. Determine least cost per m3 of blended aggregate.

Solution:

Let x = Portion of blended aggregates from 1st source

1-x = Portion of blended aggregates from 2nd source

Sand Balance:
x(0.25)+(1-x)(0.40)=0.31
0.25 x+ 0.40 - 0.40 x=0.31 => x = 0.60
Therefore, least cost would be
0.60 (3.00)+ 0.40 (4.40)=1.80+1.76 = 3.56/m3
12 CE 301 Eng Economy

6
 6/9/2015

Example – Etisalat’s New Smartphone Plans

Plan 1 Plan 2 Plan 3

Device Upfront Price Free Free AED 2,199
Monthly data allowance 1 GB 10 GB 10 GB
Flexi-minutes 100 300 300
Contract period 18 months 18 months 12 months
Monthly charge AED 250 AED 400 AED 250
13 CE 301 Eng Economy

Example – Etisalat’s New Smartphone Plans

Plan 1 Plan 2 Plan 3
Device Upfront Price Free Free AED 2,199
Monthly data allowance 1 GB 10 GB 10 GB
Flexi-minutes 100 300 300
Contract period 18 months 18 months 12 months
Monthly charge AED 250 AED 400 AED 250
Apparent total monthly 4,500 7,200 3,000
charge over contract period
Total with device 4,500 7,200 5,199
Extra cost of another 6 1,500
months
Total charge over 18 months 4,500 7,200 6,699

14 CE 301 Eng Economy

7
 6/9/2015

The Role of Engineering Economic Analysis

 Assists in making decisions where:
 decision is sufficiently important that serious thought and
effort is required.
 careful analysis requires that the decision variables be carefully
organized and the consequences be understood.
 economic issues are a significant component of the analysis
leading to a decision.

 The following standards should always be considered:

 Minimize costs
 Ensure the gains of winners exceed the losses of losers
 Maximize profit or sales
 Minimize project completion time
 Improve the distribution of income or wealth
 Minimize negative environmental consequences
15 CE 301 Eng Economy

Next Class
 Read Chapter 1 of textbook
 Try to do some of the problems at end of Chapter 1 of
old textbook
 Next time we’ll learn cost types and cost estimating

16 CE 301 Eng Economy