Question

The Palm Tree Café is considering to buy a new Coffee blending machine.  Since there are many offerings, the manager asks for your professional opinions.

Which Engineering Economics Principles can be applied in this problem? Give 3 principles and their reasons.

Answer 1

Engineering economy:

This is the extended form of economy which evaluates alternatives in scientific ways for the evaluation of existence and finding positive net benefits for long-term purpose.

Which?

Principle of alternatives: as the above definition suggests, engineering economy focuses on alternative. There may be several blending machines; each of which has different initial cost, service life, and maintenance cost; therefore, it becomes necessary for evaluating them separately in order to get the alternative having the minimum cost; that alternative should be selected.

There may be make-or-buy decision in offering – either blending could be done in-house or this could be purchased from a supplier. If making cost is lower than the buying cost, the making would be done; or vice versa.

Principles:

No.1) Principle of alternative: there must be some alternatives in each decision making process – as the examples given above; or there may be a choice between capital-intensive or labor-intensive program. Finding the best benefit is the key and this is the reason why engineering economy is used.

No.2) Principle of consistency: there must not be any change in decision making during the course of evaluating alternatives. Suppose a decision has been taken that an alternatives gives highest profit should be considered; this should not be changed either, like an interim decision has been taken in favor of the lowest-cost alternative; such change in decision creates ambiguity; therefore, this should be avoided.

No.3) Same unit of measurement: each alternative must be presented in common unit of outcomes – such as alternatives are showing benefits in dollar value, or these are presented in production units. If these are not common, comparison between them cannot be done.