ENGR1025 - Lecture 18

Engineering Economics in Product Design

• Focuses on financially responsible decision-making.
• Optimizes product value and performance throughout its life cycle.
• Emphasizes environmental and social impacts.
• Guides engineers to design technically feasible products.
• Ensures economic and environmental sustainability.

Cost Analysis

• Understanding and estimating costs associated with:
  • Development
  • Manufacturing
  • Operating
  • Maintaining
  • Disposing of products.
• Direct Costs: materials, labor, etc.
• Indirect Costs: overhead, R&D expenses.

Value Analysis and Engineering

• Assesses product functions relative to costs.
• Aims to:
  • Improve value by increasing functionality at the same cost.
  • Maintain functionality at a reduced cost.

Life Cycle Cost Analysis (LCCA)

• Evaluates total cost of ownership over the product's lifespan:
  • Acquisition costs
  • Operating costs
  • Maintenance costs
  • Disposal costs.

Risk and Uncertainty Assessment

• Identifies potential risks in the design process.
• Quantifies impacts on project costs and outcomes.

Benefit-Cost Analysis (BCA)

• Compares benefits of design decisions to their costs.
• Justifies investments effectively.

Return on Investment (ROI) and Payback Analysis

• Calculates expected returns on investment and recoup time.

Sustainability and Environmental Impact

• Considers:
  • Resource use
  • Energy efficiency
  • Recyclability.

Optimization

• Seeks best possible design solution that minimizes costs while maximizing efficiency and effectiveness.

Decision-Making Examples

• CI-700 example:
  • More development time for multi-platform availability vs. cost of delay.
  • Choice between print media types.
  • Increased spending for enhanced reliability.

Elements of Economic Analysis

• Quantitative Analysis:
  • NPV (Net Present Value):
  • Measures cash inflow vs. cash outflow.
    $NPV = \sum<em>{t=0}^{n} \frac{C</em>t}{(1+r)^t}$
  • Rarely captures dynamic environments; need qualitative measures.
• When to Perform Economic Analysis:
  • At various development stages: Planning, Concept, Development, Design Testing, Production Ramp-Up, etc.

Economic Analysis Process

1. Build a base-case financial model.
2. Perform sensitivity analysis on key assumptions.
3. Assess project trade-offs.
4. Include qualitative factors in the analysis.

Building Financial Models

• Cash Flow Categories:
  • Development cost (design, testing, refinement).
  • Ramp-up cost.
  • Marketing costs.
  • Production costs.
  • Sales revenue.

Refinements to Financial Model

• Breakdown production costs into direct and indirect costs.
• Include taxes, capital requirements, and salvaged costs.

Sensitivity Analysis

• Answers "what if" questions regarding varying factors in the financial model.
• Example:
  • Increase in development cost leads to NPV decrease.
• Assess interactions between various influences on profitability.

Limitations of Quantitative Analysis

• Focuses on measurable factors, limiting analysis of intangible assets.
• Depends on assumptions and accuracy of data.
• Acknowledges that bureaucracy can stifle productivity.

Qualitative Factors in Analysis

• Interdependencies:
  • The effect of one project on others (e.g., learning from previous projects).
  • Strategic fit with firm goals and resources.
• External Factors:
  • Competitors and market trends.
  • Government regulations and economic shifts.
  • Social trends impacting product demand.

Conclusion

• Effective economic analysis in product design balances quantitative metrics with qualitative insights to ensure successful outcomes.