Engineering Economy

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 What you can expect for the next 6 lecture sessions!
• Lecture 1: Introduction and Decision-making Process
• Lecture 2: Life-cycle Cost Analysis and Behavior
• Lecture 3: Determination of Minimum Attractive Rate of
Return for Investment Analysis
• Lecture 4*: Investment Analysis- with/ without Time-
value of Money
• Lecture 5*: Internal Rate of Return and Investment
Analysis in the Public Sector
• Lecture 6: Investment (last words)

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Source: https://marketingnabbed.wordpress.com/2010/09/19/do-price-sales-work-in-high-involvement-purchases/
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• Decisions to invest (whether it plans to buy or make, ………..) are more
complex than a consumer’s decision to buy
• Firms rely on external finance (e.g., loans, bonds, etc.) as well as internal
finance (e.g., retained earnings) when conducting investment analysis.
Consumers likewise looks at his/her saving or income from work to analyze
whether he/she should buy.
• Firms’ investment decisions to solve engineering problems likely focus
more than one year. 4
 Exercise 1: 5-minute Reflection
• How can Lion Air Group make it work?

Headline: Boeing and the Lion Air Group on Tuesday announced the airline's
purchase of 50 of Boeing's new 737 MAX 10 planes, worth approximately
US$6.24 billion at list prices -- the largest order to date of the MAX 10.
Source: http://www.thejakartapost.com/news/2018/04/10/lion-air-group-purchases-50-boeing-737-max-10-planes.html

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 Finance Investment Operations
Capital • Cash inflows from
products and
services
Firms Investments • Cash outflows
Investors Projects for from resource
and revenue
Lenders enhancement consumption (e.g.,
and cost
materials, labor,
management
Return on Capital Return on Investment depreciation,
(Principal + Interest) (Meeting Minimum utility as part of
Attractiveness of
operation and
Return)
maintenance)
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Adapted from Bussey and Eschenbach (1992)
 Roles of an Engineer in Investment and Operation Management

Future cash flows from the Future cash flows from the
firm as an investment to project to consume
the project resources for operations

Anticipated future net Anticipated future net

cash inflows to the firm cash inflows to the
from the project project from the sales
of goods and services
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Investment Risk:
• Probability of earning lower returns than initial
estimates and impacts on the project’s operations
as well as the firm’s reputation and well-being
• More possible uncontrollable factors or events, the
greater the risk will be
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Exercise 2: 10-minute Reflection
• Identify a purchase of “one-time” item that you have made during the past
week
• Identify evaluation criteria for your purchasing decision and for any
constraint that you have encountered

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Often, a company’s decision to invest depends on customer’s preference,
evaluation criteria, and behavior.

Evaluation Criteria Frequency

1. Cost (what we pay)
2. Appearance
3. Convenience
4. Flexibility
5. Reputation
Total:
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 Exercise 3: 10-minute Reflection
Scenario: Your friend asks to borrow money from you to help pay for the
family’s trip to Malang from Padang, your friend promise to make three
payments (due to the large sum that he/she has to borrow from you).
• Identify what criteria you use to loan your friend. What do you need to
investigate so that you know he/she can pay you back this loan.
• If you friend promises to make three payments in one year VS three
payments over three years, is there anything you have to consider when
loaning your friend. You realize that this loan is important to you as you
also need to have this money for the future obligations such as
accommodation and foods. 11
Scope and Definition of Engineering Economy

Source: Blank and Tarquin (2012) 12

Key Points in Engineering Economy:
• Comparison when evaluating the options or alternatives
• Evaluation of economic outcomes from available alternatives
• Solution to engineering problems

Comparison  Fairness Engineering Problems  Clear Needs

Economic Outcomes  Financial and Non-financial Benefits

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Implications from Engineering Economy:
• Spending capital or money to solve the problem
• Evaluation must be justifiable.
• Economic outcomes must be acceptable.

Where does the capital or How do we quantify economic

money come from? outcomes for a fair comparison?

How do we justify our decision (to buy or

purchase or spend money to solve the problem?

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Engineering Economy Investment for Operation Management

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Source: Daft (2015)
Investment for
Service Improvement

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