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ENGINEERING

ECONOMY AND
DESIGN PROCESS
ENGINEERING ECONOMY STUDY

Accomplished using a structured


procedure and mathematical
modeling techniques

Results are used in a decision


situation that involves two or more
alternatives and that includes other
engineering knowledge and inputs
ENGINEERING ECONOMIC
ANALYSIS PROCEDURE
1. Problem recognition, definition and
evaluation
2. Development of feasible alternatives
3. Development of the outcomes and
cash flows for each alternative
4. Selection of criterion (or criteria)
5. Analysis and comparison of alternatives
6. Selection of the preferred alternative
7. Performance monitoring and post
evaluation of results
PROBLEM DEFINITION
Provides basis for the rest of the
analysis
Problem
Must be well understood
Stated in explicit form before the
team proceed with rest of the
analysis
Stimulated by internal or external
organizational needs or requirements
DEVELOPMENT OF ALTERNATIVES

Two primary actions in procedure:


1. Searching for potential alternatives
2. Screening them to select a smaller group
of feasible alternatives for detailed
analysis
Limitations that may exist in searching for
alternatives:
3. Lack of time or money
4. Preconceptions of what will or will not
work
5. Lack of knowledge
EXAMPLE
The management team of a small furniture
manufacturing company is under pressure to
increase profitability in order to get a much
needed loan from a bank to purchase a more
modern pattern cutting machine. One
proposed solution is to sell waste wood chips
and shavings to a local charcoal manufacturer
instead of using them as fuel space heaters
for office and factory areas. Define the
problem, reformulate the problem in variety of
ways. Develop at least one potential
alternative for reformulated problems
The companys problem appears that
revenues are not sufficiently covering
costs. Several reformulations can be
posed:
1. The problem is to increase revenues
while reducing cost
2. The problem is to maintain revenues
while reducing cost
3. The problem is an accounting system
that provides distorted cost information
4. The problem is that a new machine is
not needed, a loan is not needed
1. The problem is to increase
revenues while reducing cost
Alternatives:
.Sell wood chips and shaving
.Discontinue manufacture of
specialty items and focus on
standardized volume products
.Get services of local company in
providing services
DEVELOPMENT OF ALTERNATIVES
There are two approaches for
developing an investment alternatives:
1. Classical brainstorming. Detailed
procedure for successful
brainstorming:
. Preparation
Participant selection and problem
statement
. Brainstorming
Idea generation
. Evaluation
DEVELOPMENT OF ALTERNATIVES

2. Nominal Group Technique


Developed by Andre P. Delbecq
and Andrew H. Van de Ven
Involves a structured group
meeting designed to incorporate
individual ideas and judgments into
group consensus
When properly applied, the
technique:
. Draws creativity of individual
. Reduce dominance of two or more
participants and suppression of
DEVELOPMENT OF ALTERNATIVES
Basic format of NGT session:
. Individual silent generation of ideas
. Individual feedback and recording of
ideas
. Group clarification of each idea
. Individual voting and ranking to prioritize
ideas
. Discussion of group consensus results
DEVELOPMENT OF PROSPECTIVE
OUTCOMES
Incorporates principles 2,3, and 4
Uses cash flow approach
Net cash flow for an alternative is
different between inflows (receipt
or savings) and cash outflows
(cost or expenses) during each
time period
Nonmonetary factors (attributes)
play a significant role in final
recommendation
DEVELOPMENT OF PROSPECTIVE
OUTCOMES
Examples of objectives other than profit
maximization or cost minimization that
can be important to an organization:
Meeting or exceeding customer expectations
Safety of employees or public
Improving employee satisfaction
Maintaining production flexibility to meet
changing demands
Meeting or exceeding environmental
requirements
Achieving good public relations or being an
exemplary member of community
SELECTION OF DESIGN
CRITERION
Incorporates principle 5
Decision maker will normally
select the alternative that would
best serve long term interest of
the owners of organization
Criterion should reflect a
consistent and proper viewpoint
ANALYSIS AND COMPARISON OF
ALTERNATIVES
Analysis of economic aspects largely
base on cash flow estimates
A substantial effort is normally required
to obtain forecast of cash flows and
other factors
Consideration of future uncertainties
(Principle 6)
When cash flow and other estimates are
determined, alternatives can now be
compared through monetary unit (peso)
SELECTION OF PREFERRED
ALTERNATIVE
Result of total effort
Soundness of the technical
economic modeling and analysis
techniques dictates quality of
results obtained and
recommended course of action
PERFORMANCE MONITORING AND
POSTEVALUATION OF RESULTS

Principle7
Accomplished during and after
the time that results are achieved
from selected alternatives
Monitoring project performance
during operational phase
improves achievement of goals