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Week #1 (1)
Suhaida Mohd Sood Institute of Energy Policy and Research
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1995
Developed in dorm room by Larry Page and Sergey Brin, graduate students at Stanford University Nicknamed BackRub (reflecting great taste ) Raised $25 million to set up Google, Inc. Ran 100,000 queries a day out of a garage in Menlo Park Over 4,000 employees worldwide Over 8 billion pages indexed Estimated market value over $100 billion As of today, the value of Google is likely to be in the hundreds of billions range
1998
2005
Figure 1.1 A helicopter lowers towers for high-voltage power lines into place. Many say the country needs to build more of these lines to move renewable power and become more efficient.
Sole proprietorships - single owner who will be legally responsible for all the business debts. Partnerships - shared ownership by two or more partners. The business profit/loss and debts are shared according to their agreed proportion.
Limited companies or Corporation Created by law and are regarded as separate entity from the owner. The liabilities of the business debts are limited to the amount of investment in the business. Two types:
Private limited - ownership limited to amongst family member or friends. Public limited - ownership is open to the public.
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Types of business
Trading - the business which buy products and then selling those products to customers e.g. wholesalers and retailers Service industries - provide service to customers such as doctors, lawyers, accountants etc. Manufacturing - the business which convert raw material into finished product and sell the finished products to customers e.g. factory manufacturing electrical goods, foods, cars etc.
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Need to lease a car Gather technical and financial data Select cars to consider Wanted: small cash outlay, safety, good performance, aesthetics, Choice between Saturn and Honda (or others) Select a car (i.e., Honda, Saturn or another brand)
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Financial planning
Marketing
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Estimating the required investments Estimating product manufacturing costs Forecasting the demand for a brand new product Estimating a good selling price Estimating product life and the profitability of continuing production
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Engineering Projects
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Accounting
Past
Engineering Economy
Future Present
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Objectives, available resources, time and uncertainty are the key defining aspects of all engineering economic decisions
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Service Improvement Equipment and Process Selection Equipment Replacement New Product and Product Expansion
Cost reduction or profit maximization can be seen as generic (common, eventual) objectives In the most general sense, we have to make decisions under resource constraints, and in presence of uncertainty not only in the EEA context
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service providers
patients
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Key question: When is the right time to replace an old machine or equipment?
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Shall we build or acquire a new facility to meet the increased (increasing forecasted) demand? Is it worth spending money to market a new product?
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Should a company buy new equipment to perform an operation that is now done manually? Should we spend money now, in order to save more money later? The answer obviously depends on a number of factors.
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Commercial Transportation Logistics and Distribution Healthcare Industry Electronic Markets and Auctions Financial Engineering and Banking Retail Hospitality and Entertainment Customer Service and Maintenance
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1: An instant dollar is worth more than a distant dollar 2: Only the relative (pair-wise) difference among the considered alternatives counts 3: Marginal revenue must exceed marginal cost, in order to carry out a profitable increase of operations 4: Additional risk is not taken without an expected additional return of suitable magnitude
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Principle 1
An instant dollar is worth more than a distant dollar
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Principle 3 Marginal (unit) revenue has to exceed marginal cost, in order to increase production
Marginal cost Manufacturing cost
1 unit
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Principle 4 Additional risk is not taken without a suitable expected additional return
Investment Class Potential Risk Lowest Moderate Expected Return 1.5% 4.8%
Stock (equity)
Highest
11.5%
A simple illustrative example. Note that all investments imply some risk: portfolio management is a key issue in finance
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Summary
The term engineering economic decision refers to any investment or other decision related to an engineering project The five main types of engineering economic decisions are (1) service improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product and product expansion, and (5) cost reduction The factors of time, resource limitations and uncertainty are key defining aspects of any investment project Notice that all listed decision types can be seen and modeled as a constrained decision (optimization) problem
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