Engineering Economic Analysis

18 MAKING ECONOMIC DECISIONS

There are two steps required to solve th~_pr.()ble~:First, the required thickness of each of the

alternate materials must be calculated. Then, since the problem is one of providing a fixed.output

(heat transfer through the wall limited to a fixed maximum amount), the criterion is to minimize

the input (cost).

Required Insulation Thickness

30000 _140(30)

,. L

110(30)

Foamed insulation 30,000=~

L

Cost of Insulation per Square Meter of Wall

Unit cost~ COSt/Ill3x IlJ,sulati()lJ,thickness, in..il1e.t~J:S

Unit cost. $12.50 x 0.14Ill~ $1.75/il12

Unit cost .. $14.00 X 0.11IIi-$154/IIl2

Rock wool L O.14m

L-O.llm

Rock wool

Foamed insulation-~ =-

.........!

The foamed insulation is the lesser cost alternative. However, tl1ete.lsalvilJ,talJ,giblecOn.sttailJ,ttl1at

must be considered. How thick is the available wall space? EngineeplJ,geconomy and.tljet.iil1e

valUeof money are needed to decide what the maX1.mUmheattransfershould be. Whatis the cost

of more insulation versus the cost of cooling the warehouse oVerits life?

Summary

Classifying Problems

Many problems are simple and thus easy to solve. Others are of intermediate difficulty

and need considerable thought and/or calculation to properly evaluate. These intermediate

problems tend to have a substantial economic component, hence are good candidates for

economic analysis. Complex problems, on the other hand, often contain people elements,

along with political and economic components. Economic analysis is still very important,

but the best alternative must be selected considering all criteria-not just economics.

The Decision-Making Process

Rational decision.making uses a logical method of analysis to select the best alternative from

among the feasible alternatives. The following nine steps can be followed sequentially, but

decision makers often repeat some steps, undertake some simultaneously, and skip others

altogether..

1. Recognize the problem.


2. Define the goal or objective: What is the task?


3. Assemble relevant data: What are the facts? Are more data needed, and is it worth
   more than the cost to obtain it?


4. Identify feasible alternatives.