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The document outlines the engineering economic analysis procedure for evaluating alternatives and selecting a preferred option. It involves 7 steps: 1) defining the problem, 2) developing feasible alternatives, 3) estimating outcomes and cash flows for each alternative, 4) selecting evaluation criteria, 5) analyzing and comparing alternatives, 6) choosing the best alternative, and 7) monitoring performance. The goal is to use a structured process and mathematical modeling to inform decisions between two or more alternatives based on engineering and economic factors.
The document outlines the engineering economic analysis procedure for evaluating alternatives and selecting a preferred option. It involves 7 steps: 1) defining the problem, 2) developing feasible alternatives, 3) estimating outcomes and cash flows for each alternative, 4) selecting evaluation criteria, 5) analyzing and comparing alternatives, 6) choosing the best alternative, and 7) monitoring performance. The goal is to use a structured process and mathematical modeling to inform decisions between two or more alternatives based on engineering and economic factors.
The document outlines the engineering economic analysis procedure for evaluating alternatives and selecting a preferred option. It involves 7 steps: 1) defining the problem, 2) developing feasible alternatives, 3) estimating outcomes and cash flows for each alternative, 4) selecting evaluation criteria, 5) analyzing and comparing alternatives, 6) choosing the best alternative, and 7) monitoring performance. The goal is to use a structured process and mathematical modeling to inform decisions between two or more alternatives based on engineering and economic factors.
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