Module 0: GDB 3023 Engineering

Economics and Entrepreneurship

 Course Outline
2
Credit Hours: 3 UNIT
 Lecture 3 hours/week
Tuesday 4 – 6 pm
Wednesday 11 – 12 pm

PE ME EE CVE CE
TUE 16:00 – 18:00 C1 C6 D2 14-02-07 D1
WED 10:00 - 11:00 C1 D3 D2 14-02-07 D1

1. Introduction to engineering capital investments alternatives

2. Provide a working knowledge on making economic comparisons of alternatives
involving future benefits and costs
3. Understand the impacts of taxation, depreciation, capital budgeting, project risk and
uncertainty and economic optimization
 Course Learning Outcomes
3

At the end of this course, students are expected to be able to

CO1 Describe the monetary side of engineering, basics concepts of engineering
economy and its underlying principles

CO2 Discuss and apply the various methodology of engineering economy and
their application that will assist in making rational and practical decision
or solution to engineering problems

CO3 Discuss and solve problems related to the advanced topics such as
interests, depreciation, depletion, income taxes, effect of inflation, tools
for evaluating alternatives, capital financing, replacement analysis and
sensitivity analysis in project situations involving risk and uncertainty

Prepare a business plan for successful entrepreneurial venture that may include
among others identifying possible product lines, company registration,
potential venture capital, and finance managements.
 Learning Method

Student are expected to

1. Undertake independent learning and team discovery

2. Use the textbook wisely and attempts all assigned exercise questions
prior to attending the lecture sessions
3. Read all the assigned topics and articles prior to lecture sessions
4. Actively participate in class discussion and team dynamics
5. Ask questions and give opinions within the team and in class
6. Prepare business plan proposal
 Assessments

Assessment Method Percentage (%)

Tests (2) 30

Case Study/Project 10

Individual Assignments/ 5
Group Participations

Exercise/Quiz 5

Final Exam 50
 Recommended Text and References

 Main reference –
Engineering Economy, 16th Edition by William G. Sullivan, Elin M.
Wicks, C. Patrick Koeling, Prentice Hall International USA, 2014

 Other references
1. Fundamentals of Engineering Economy, by Chan S Park, Prentice Hall
2004.
2. Engineering Economy, 7th Edition By Leland Blank and Anthony Tarquin,
McGraw Hill, Singapore, 2012.
3. Small Business: Entrepreneurship and Beyond, Timothy S. Hatten, Mary
K. Coulter, Prentice Hall, 1997.
4. Entrepreneurship for Engineers, by Kenji Uchino, CRC Press 2010.

 Online sources
 https://www.nst.com.my/business

 https://biz.thestar.com.my/

 http://online.wsj.com/public/asia
 Moving towards Active Learning
7

 Students will be divided and expected to work in teams

 Team formation will be decided based on the data provided in the
registration list
 All online resources will be made available either through
ucampus, google drives, todaysmeet or padlets.
 All groups will be required to update/share submission online
through the padlets: https://padlet.com/gdb3023/ n5ollah2n4cu
 Online quizzes will be announced and conducted using socrative
https://b.socrative.com/login/student (room:KARSITI6809)
 Tutorial Assignment
8

 1-2 questions will be chosen from

Tutorial assignhment, to be discussed
and presented by the team.
 All students will be required to send
in ALL assignments at the end of the
session.
 Any submission outside of the
tutorial will not be considered for
assessment.
 Feedback on Padlet
9

 Students get to send feedback to instructor via

< https://padlet.com/gdb3023/ n5ollah2n4cu>
Password: money

 Identify yourself using Student ID as Title of Padlet post

 Feedback will be recorded and used as attendance
 Unique question posted at each lecture
Give 3 reasons why engineering economy is
important in daily life.
 Reference: Sullivan W. G., Wicks
E. M., Koelling C. P. (2014),
NO TOPICS Engineering Economy, Sixteenth Date
Edition, Prentice Hall
International, USA
1 Introduction to Engineering Economy Chapter: 1

2 Cost Concepts and Design Economics Chapter: 2/3 (selected parts)

3 The Time Value of Money Chapter: 4

Evaluating a Single Project:

Present Worth Analysis
Annual Worth Analysis
Chapter: 5
Future Worth
4
Rate of Return Analysis: One Project

Rate of Return Analysis: Multiple

Alternatives

5 Comparison and Selection among Alternatives Chapter: 6

6 Replacement Analysis Chapter: 9

7 Breakeven and Sensitivity Analysis Chapter: 11

8 Capital Budgeting process Chapter: 13 (selected parts)

Module 1: Introduction to Engineering
Economy
 Chapter Objectives

At the end of this chapter, you will be able to:

• Discuss the role of engineering economy in design process

• List the principles & methodology used in design economy

• Describe the need to evaluate benefits over costs

12
 Case Study – Model T Ford

• Henry quit his job as engineer at Edison General

Electric Company in 1890 to work on combustion
engine automobiles.
• Henry Ford Motor Company founded 1901 with 12
investors holding 1000 shares. In 1902 Ford chalked
profits of $35,000.
• Model T Ford was introduced as an affordable car
priced at $350 as compared to other car models
offered at $800-1000 in 1915.
• Assembly system introduced managed to increase
production from 32,000 cars in 1910 to 735,000 cars
in 1916. The company posted a capital surplus of $60
million.
• In 2018 Ford is ranked 11th of Fortune 500 companies
with revenues at $156.7 billion.
 Defining Engineering Economy
.. involves the systematic evaluation of the economic merits
of proposed solutions to engineering problems.
To discuss…
 Rational Decision- making
Process
 The Engineer’s Role in
Business
 Types of Strategic
Engineering Economic
Decisions
 Fundamental Principles in
Engineering Economics
 Rational Decision-Making Process
15

1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion
to use
6. Select the best alternative
 Case 2 - Which Car to Lease?
Saturn vs. Honda
16

1. Recognize a decision  Need a car

problem
2. Define the goals or  Want mechanical
objectives security
3. Collect all the relevant  Gather technical as well
information as financial data
4. Identify a set of feasible  Choose between Saturn
decision alternatives and Honda
5. Select the decision  Want minimum total
criterion to use cash outlay
6. Select the best alternative  Select Honda
Case 2 - Which Car to Lease?
Saturn vs. Honda
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 Engineering Economic Decisions
18

Manufacturing Profit

Planning Investment

Marketing
 Engineering Solutions

Solutions to engineering problems must

 promote the well-being and survival of an organization,
 embody creative and innovative technology and ideas,
 permit identification and scrutiny of their estimated
outcomes, and
 translate profitability to the “bottom line” through a valid
and acceptable measure of merit.
 Role of Engineers in Business
20

Create & Design

• Engineering Projects

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
 Economics Analysis

Engineering economic analysis can play a role in many

types of situations.
 Choosing the best design for a high-efficiency gas furnace.
 Selecting the most suitable robot for a welding operation on an
automotive assembly line.
 Making a recommendation about whether jet airplanes for an overnight
delivery service should be purchased or leased.
 Determining the optimal staffing plan for a computer help desk.
 Economic Analysis

Steps in engineering economic analysis

 Problem definition
 Development of alternatives
 Development of prospective outcomes
 Selection of a decision criterion
 Analysis and comparison of alternatives.
 Selection of the preferred alternative.
 Performance monitoring and postevaluation of results.
 Predicting the Future
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The factors of time and uncertainty are the defining aspects of any
engineering economic decisions
 Estimating a required investment
 Forecasting a product demand
 Estimating a selling price
 Estimating a manufacturing cost
 Estimating a product life
Accounting Vs. Engineering Econ.
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Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

Past Future
Present
 A Large-Scale Engineering Project
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 Requires a large sum of investment

 Takes a long time to see the financial outcomes
 Difficult to predict the revenue and cost streams
(Remember Cash flow discussed earlier)
 Manufacturing Sector
26
Majority of engineering graduates expect to start a career in manufacturing
industry
 Service Improvement
 Equipment and Process Selection
 Equipment Replacement
 New Product and Product
Expansion
 Cost Reduction
 Case 3 – Levi: Self Improvement
How many more jeans would Levi need to sell to justify the
cost of additional robotic tailors?

27
 Case 4 – SMC Plastics: Material and Process
Selection
28

 How do you choose between the Plastic SMC and the Steel sheet
stock for an auto body panel?
 The choice of material will dictate the manufacturing process for an
automotive body panel as well as manufacturing costs.
Case 5 – TNB Generation: Equipment Replacement
Decision
29

 Now is the time to replace the old machine?

 If not, when is the right time to replace the old
equipment?
 Case 6 – Boeing: New Product and Business
Decision
30

 Shall we build or acquire a new facility to meet the

increased demand?
 Is it worth spending money to market a new product?
 Case 7 - MACH 3 Project
31

Gillette’s MACH3
 R&D investment:
$750 million Project
 Product promotion:
through advertising $300 million
 Priced to sell:
at 35% higher than Sensor Excel
(about $1.50 extra per shave).
 Question 1: Would consumers pay
$1.50 extra for a shave with greater
smoothness and less irritation?
 Question 2: What would happen if the
blade consumption dropped more than
10% due to the longer blade life of the
new razor?
Cost Reduction
32

 Should a company buy

equipment to perform an
operation now done manually?
 Should spend money now in
order to save more money
later?
 Service Sector
33

Service industry remain the largest economic sector of the nation

 Retails
 Electronic Markets and Auctions
 Financial Engineering
 Commercial Transportation
 Logistics and Distribution
 Hospitality and Entertainment
 Customer Service and
Maintenance
 Healthcare Industry
 Case 8 - Health Information Systems (HIS)
34
 R&D investment:
$100 million
 Product promotion:
$10 million
 Priced to sell:
at 35% higher than standards
rate

 Question 1: Would
patient/insurance agency pay
extra for accurate diagnosis
and faster recovery rate?

 Question 2: What would

happen if the current system
become obsolete?
 Fundamentals of Engineering
Economy

There are seven fundamental principles of

engineering economy.
 Develop the alternatives
 Focus on the differences
 Use a consistent viewpoint
 Use a common unit of measure
 Consider all relevant criteria
 Make uncertainty explicit
 Revisit your decisions
 Choosing Alternatives
36

All it counts is the differences among alternatives

Option Monthly Monthly Cash Monthly Salvage

Fuel Cost Maintenan outlay at payment Value at
ce signing end of
year 3
Buy $960 $550 $6,500 $350 $9,000

Lease $960 $550 $2,400 $550 0

Irrelevant items in decision making

 Revenue-Cost Analysis
37

Marginal revenue must exceed marginal cost

Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue
 Risk Assessment
38

Additional risk is not taken without the expected

additional return

Investment Class Potential Expected

Risk Return

Savings account Low/None 1.5%

(cash)
Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

 Electronics Spreadsheets

Electronic spreadsheets are a powerful addition

to the analysis arsenal.
 Most engineering economy problems can be formulated and
solved using a spreadsheet.
 Large problems can be quickly solved.
 Proper formulation allows key parameters to be changed.
 Graphical output is easily generated.
 Summary
40

 The term engineering economic decision refers to all

investment decisions relating to engineering projects.

 The five main types of engineering economic decisions are

(1) service improvement, (2) equipment and process
selection, (3) equipment replacement, (4) new product and
product expansion, and (5) cost reduction.

 The factors of time and uncertainty are the defining aspects

of any investment project.