Engineering Economy: Suggestions To Update A Stagnant Course Curriculum

Examining engineering economy textbooks from earlier this century and today reveals that the curriculum appears to be stagnant. This is supported by the fact that the material is virtually unchanged and in a variety of cases, the number of topics covered has actually declined. This may be attributed to an emphasis on economic equivalence and a de-emphasis on the decision process. Unfortunately, this is seen as a disservice to a student that will eventually perform engineering economy studies. This paper suggests ways in which to enhance the curriculum, including teaching engineering economy in the context of decision and design processes and integrating research advances into course material. Introduction If one compares an engineering economy textbook from early in this century 3,7,11 with a new edition from today, 4,8,10 they may be shocked to notice that the material has not really changed. Rather, in some cases, the amount of material has declined. It can be argued that the only innovation in engineering economy has been the utilization of spreadsheets to perform mundane calculations. Topics such as cost estimation have been virtually eliminated while relevant research breakthroughs from the past fifty years have not found their way into textbooks, and presumably, the classroom. The reduction in material may be attributable to an emphasis on time value of money fundamentals and a movement away from decision analysis. For economic analysis, the decision process may be summarized in the following six steps: 1. Problem recognition and definition. 2. Generation of solution alternatives. 3. Development of feasible solution alternative cash flows. 4. Economic evaluation of alternative cash flows. 5. Selection and implementation of best solution alternative. 6. Post-implementation analysis and evaluation. Despite these six steps, engineering economy courses tend to narrowly focus on Steps 4 and part of 5. That is, students are provided with cash flows and are taught to perform an evaluation (present worth, internal rate of return, etc.), selecting the best alternative from the given choices. Some texts provide methods in which to develop cash flows, however, the estimation means are quite simplified. It is argued here that engineering economy is a vital part of a decision process and thus should be taught in this context. The entire process of evaluating a project, from its inception (Step 1) to its completion (Step 6), should be emphasized. In this context, the principles of engineering P ge 344.1 economy provide the foundation for these decisions. Associations with the design process, which is closely related, are also addressed in this paper. In addition to a re-emphasis of the decision process, it is also argued that engineering economy educators must integrate research advances into the curriculum. While a variety of breakthroughs have occurred with relevant applications in replacement analysis and capital budgeting, it appears that these advances do not make it into the classroom. College and university educators have the responsibility to disseminate the important advances of our field. The goal of this paper is to provide both motivation and a procedure in which to revitalize the engineering economy curriculum. Teaching engineering economy principles in the context of decision and design processes is discussed and a general course outline is presented. Additionally, some research advances are highlighted for integration into curriculums emphasizing the most advanced solution procedures available. It should be noted that the author teaches “Engineering Economy and Decision Analysis” as a 3hour, semester course usually consisting of second semester juniors, which may bias the views of the author. Engineering economy is taught earlier in the curriculum at a majority of institutions, however, it is believed that the suggestions in this paper should be valid nonetheless. Also, the author is an avid researcher and educator in the area of replacement analysis, further motivating this discussion. Engineering Economy and the Decision Process The fundamentals of engineering economy allow one to analyze and prioritize projects according to cash flows. Unfortunately, teaching these fundamentals overshadow defining the problem, possible solutions, and their implementation. While cash flow analysis is important, one must consider each step in the decision process when performing an engineering economy study. With this motivation, the six steps presented earlier are reviewed and discussed here with relevant topics for an undergraduate engineering economy course. The desire here is to emphasize engineering economy fundamentals in a decision-making context. 1. Problem recognition and definition. A considerable amount of time is not required on this subject, however, it should not be ignored. Most engineering courses (problem solving courses) generally assume that the problem is “a given.” Since this is not a trivial step in the process, students must learn to recognize problems and formulate definitions, including understanding the difference between “problems” and “symptoms.” 2. Generation of solution alternatives. This step is very germane to human decision making. Techniques such as brainstorming, the nominal group process and/or the Delphi method, may be discussed to illustrate methods for developing solution alternatives. It must be emphasized that this is a solution generation step and not an evaluation or elimination step. 3. Development of feasible solution alternative cash flows. This section is concerned with the estimation of costs and their associated cash flows. Traditional methods, such as indexing, should be covered but additionally, the application of forecasting tools (i.e. exponential smoothing or regression) should be mentioned. Fabrycky et al. 5 present simplified estimation P ge 344.2 tools based on fitting curves to data which may be suitable for engineering economy. Inflation and taxes should also be considered here, as they are integral components of cash flows and influential in nearly all decisions. 4. Economic evaluation of alternative cash flows. This step is traditionally covered in detail in textbooks and would still constitute a majority of the course. Different evaluation methods, including PW, IRR, payback period, etc., should be discussed. 5. Selection and implementation of best solution alternative. This step is also generally considered in traditional engineering economy courses, however, it should be expanded in this context. While the best alternative may be selected according to economic criteria, discussions should also include non-traditional factors with costs and benefits that are not easily quantified. Ranking methods, AHP and/or utility theory may be discussed in order to evaluate these considerations. Canada and Sullivan 2 provide an excellent reference for these topics. Following these evaluation methods, alternative analyses such as breakeven, optimization or cost-benefit may be taught. Finally, methods to compensate for uncertainty or risk in decisions should be incorporated, including discussion of variance in estimates, sensitivity analysis, and/or decision trees, etc. 6. Post-implementation analysis and evaluation. This final step, which is generally ignored, plays a vital role in engineering economy for three reasons. First, a good engineering economy study needs data, which requires maintenance of a cost database. As with the cash flow estimation part of the course, this section should review the necessary costs that should be tracked over time. Second, costing practices, including traditional accounting practices and activity based costing should be emphasized here while stressing data collection methods. Finally, engineering reports, common with evaluations, may be discussed here. As discussed, these decision steps provide an outline for a course in engineering economy where fundamental concepts are not sacrificed. For application to the classroom, the initial weeks can be spent on introductory cost concepts and time value of money calculations. This introductory material can then be followed by the decision process context in the order presented. Towards the end of the course, case studies or projects may be assigned to reiterate the process of taking a project from its inception to its completion. Relation to Engineering Design Process The engineering design process is closely related to the decision process presented here. Its steps include problem recognition and definition, generation of possible solutions, analysis, evaluation and selection of the preferred alternative. Due to these similarities and its inherent relationship with all engineering disciplines, there has been a movement to integrate design issues into the engineering economy curriculum. 12 The author has been fortunate in having taught classes using this methodology and strongly encourages and supports its continuance. In light of this statement, it is believed that the design process should not replace the decision process, but rather, complement it. Consider the following problem: A shipping company is running short on dock space due to a recent surge in demand, causing delays to customers and lost revenues. There are a variety of solutions, but for P ge 344.3 simplicity, consider the following options: (1) Build a new dock at the current facility, (2) Extend the current dock with a permanent dock structure, (3) Extend the current dock with a temporary dock structure, (4) Purchase another dock, (5) Lease another dock, or (6) Do nothing but continue operations at current capacity. These options, may also be explored simultaneously, such as expanding a current dock while also building a new dock. Regardless of the options, the cash flows of these alternatives must now be estimated for analysis.