TIN 302

Engineering Economics
Hilma Raimona Zadry, Ph.D
Feri Afrinaldi, Ph.D

Department of Industrial Engineering

Andalas University
Ch 1 The economic decision
making process
The contents of this lecture are based on
Newnan, D.G., T.G. Eschenbach, and J.P.
Lavelle (2011). Engineering Economic
Analysis, (12th ed.), Oxford University Press,
Oxford.

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 Contents
• Problems
– Problem classification
• The role of engineering economic analysis
• Decision making process
– Rational decision making
• Importance of ethics in engineering and
engineering economy

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 PROBLEMS
• A problem exists when?
– Standard or expectation is not being met
• Goal or objective?
– Standard or expectation we wish to meet

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 PROBLEM CLASSIFICATION
• Simple problems
– No need much time and effort to solve
• Intermediate problems
– Have higher level of complexity
• Complex problems
– Mixture of economic, political, and humanistic
elements

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 THE ROLE OF ENGINEERING
ECONOMIC ANALYSIS
• Engineering economic is suitable for:
– Intermediate problems
– Economic aspect of complex problems
• Example of questions that can be answered by
engineering economic analysis:
– Which engineering project is worthwhile?
– Which engineering project should have a higher
priority?
– How should engineering project be designed?

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 DECISION MAKING PROCESS
• In decision making
– At least we need to have 2 alternatives
– If only 1 alternative?
• Nothing to decide
• Decision making is?
– Choosing the best alternative
– A complex process

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 RATIONAL DECISION MAKING
1. Recognize the problem
2. Define goal and objective
3. Assemble relevant data
4. Identify feasible alternative
5. Select the criterion to determine the best
alternative
6. Construct a model
7. Predict each alternative's consequences
8. Choose the best alternative
9. Audit the result
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 RATIONAL DECISION MAKING
• Example 1:
• In the design of a cold-storage warehouse, the
specifications call for a maximum heat transfer through the
warehouse walls of 300,000 Joules per hour per m2 of wall
when there is a 30 °C temperature difference between the
inside surface and the outside surface of the insulation. The
2 insulation materials being considered are as follows:
Material Cost per m3 Conductivity (J·m/(m2·C·h))
Rock wool $12.5 140
Foamed insulation $14 110

Which insulation should be selected?

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 RATIONAL DECISION MAKING
• Problem
– Which material should be selected
• Objective
– Choose the best material
• Relevant data
– Cost data and thermal conductivity data
• Alternative
– Rock wool and foam
• Criterion
– Lowest cost

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 RATIONAL DECISION MAKING
• Construct a model
Q = heat transfer(J/hrm2)
K T K = conductivity (Jm/(m2Chr))
Q ∆T = temperature difference (C)
L
L = thickness (m)

• Predict alternative consequence

– Rock wool = $0.175/m2
– Foam = $0.154/m2
• Choose the best alternative
– Foam is the best
• Audit the result
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 RATIONAL DECISION MAKING
• Criteria in engineering economic

Decision making
Input = Cost($) Output = Revenue ($)
process

• Input or cost is fixed

– Maximize output or revenue
• Output or revenue is fixed
– Minimize input or cost
• Input (cost) and output (revenue) are not fixed
– Maximize profit or productivity
• Profit = Revenue – Cost
• Productivity = Output  Input

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IMPORTANCE OF ETHICS IN ENGINEERING
AND ENGINEERING ECONOMY
• Ethics
– Concept of distinguishing between right and
wrong in decision making.
• Ethics includes beliefs and moral obligations,
values and fairness, duties and guidelines for
conduct.
• Example of code of ethics: Code of Ethics of
the National Society of Professional Engineers
(NSPE).

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IMPORTANCE OF ETHICS IN ENGINEERING
AND ENGINEERING ECONOMY
• According to NSPE’s fundamental cannon of ethical
behavior for engineering, engineers shall:
– Hold paramount the safety, health and welfare of the
public
– Perform service only in areas of their competence
– Issue public statements only in an objective and truthful
manner
– Act for each employer or client as faithful agents or trustee
– Avoid deceptive acts
– Act honorably, responsibly, ethically and lawfully to uphold
the honor, reputation and usefulness of the profession

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IMPORTANCE OF ETHICS IN ENGINEERING
AND ENGINEERING ECONOMY
• What role should ethics play?
– Financial considerations should never dominate or
contradict ethical considerations
– Apply personal, professional, and corporate standards
• E.g., NSPE criteria
• Ethically difficult situations
– Favors for influence – e.g., “bonuses” from vendors;
the line is not distinct (lunch vs. a vacation?)
– Tradeoff between cost, quality and functionality
– Environmental issues
– Tradeoff between safety and cost

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END OF CHAPTER 1

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