Chapter 1

Making Economic Decisions

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Types of Problems
Role of Engineering Economic Analysis
Problem-Solving / Decision-Making
Process
Ethical Dimensions in Engineering
Decision-Making
Chapter Outline
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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
Learning Objectives
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This course develops the tools to properly
analyze and solve the economic problems that
are commonly faced by engineers.
Making Economic Decisions
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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?
Which CNC machine should the company purchase?
Complex Problems
Feasibility study of a new automobile plant.
Planning for new highways
A Sea of Problems
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A systematic tool for comparing alternatives by
their economic merits. Most suitable for
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.
Role of
Engineering Economic Analysis
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1. Recognize Problem / Opportunity
2. Define Goals/Objectives
3. Assemble Relevant Data
4. Identify Feasible Alts
7. Predict Alts Outcomes
8. Choose the Best Alt. 9. Audit the Results
Overall Mission
/ Objectives
5. Select the Criterion
6. Construct a Model
Decision-Making Process
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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)
SWOT (Strengths, Weaknesses, Opportunities,
and Threats) Analysis
Investment/Financing
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Decision-Making Process
2. Define Goals/Objectives
General or specific goals
Systems perspective
Limiting factors
Multiple goals
Conflicting goals
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Decision-Making Process
3. Assemble Relevant Data
Importance of Data Collection
Relevance of Information
Dollar Amount and Time Horizon
Sources of Information
Financial Accounting System
Cost Accounting Records
Market Research
Quotations
Economic Indicators
Other Published Information
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Example 1-1
Assemble Relevant Data
Vast information
What is relevant?
From whos viewpoint?
From the Manager of Shipping Dept.
Alt. 1 $793.00 /30,000 copies (Printing Dept.) vs.
Alt. 2 $688.00 /30,000 copies (Comm. Printer)
From General Manager
Alt. 1 $793.50 / mo (Printing Dept.) vs.
Alt. 2 ($793.50-$294.00)+688.50 / mo (Comm.
Printer)
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Decision-Making Process
3. Assemble Relevant Data
Financial Consequences (Costs & Benefits):
Market Consequences: has established prices
Extra-Market Consequences: prices could be
assigned by indirect means
Intangible Consequences: 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 output fixed
Maximize the profits (Value of outputs
cost 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.

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Decision-Making Process
7. Predict Alternatives Outcomes
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

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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

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Code of Ethics
National Soc. of Professional Eng.
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)
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Ethical Dimensions in
Engineering Decision Making
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
determine best alt
Considering only monetary consequences
when other significant consequences exist
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Ethical Dimensions in
Engineering Decision Making
Decision Process Step Example Ethical Lapses
6. Construct a model Using a short horizon that favors one alt
over another
7. Predict alts outcomes Using optimistic estimates for one alt. and
pessimistic ones for the other alts
8. Choose the best alt Choosing an inferior alt, one that is
unsafe, adds unnecessary cost for user,
harms the environment
9. Audit the result 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
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 alt can be identified.
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Decision-Making for Current
Costs
Example 1-2
Linear Programming Model
Minimize $3.00X + $4.40Y
Subject to: (0.25)X + (0.40)Y 0.31
X + Y = 1
X, Y 0
Where X = portion from 1st source of material
Y = portion from 2nd source of material
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Example 1-3
Decision-Making for Current Costs
Concept of Sunk Cost
Only the remaining production is considered
Is the assumption of other costs as
variable reasonable?

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Example 1-4
Decision-Making for Current Costs
Intangible constraint
The thickness of wall space
Further Study
Trade-off between insulation and energy cost

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