Principles of Engineering Economy (PowerPoint)

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					Engineering Economy
Engineering Economy Cont…
   Engineering economy is applied
    microeconomics, where the fundamental
    question is :
    Is it in the best interest of the
    enterprise to invest its limited
    resources in a proposed technical
    endeavor, or would the same
    investment produce a higher return
Origins of Engineering Economy
General topics in engineering
The Relevance of Engineering
Economy to Engineering in General
Science is defined as:
 a department of systematized knowledge as
  an object of study; knowledge or a system of
  knowledge covering general truths or the
  operation of general laws esp. as obtained
  and tested through scientific method
   The Relevance of Engineering Economy to
   Engineering in General Cont…
The Accreditation Board of Engineering and Technology (ABET) is the recognized
authority for accrediting engineering and technology degree programs at colleges
and universities in the United States. ABET defines engineering as

 … the profession in which a knowledge of the
 mathematical and natural sciences gained by
 study, experience, and practice is applied with
 judgment to develop ways to utilize,
 economically, the materials and forces of nature
 for the benefit of mankind
 Engineering & Economics

Engineering = Science + Economics

Software Engineering = Computer Science + Software Economics
Fundamental Principles in Engineering
Principle 1:
Rupee now is worth more than rupee at a later time.

Principle 2:
All that counts is the differences among alternatives.

Principle 3:
Marginal revenue must exceed marginal cost.

 Principle 4:
Additional risk is not taken without the expected
additional return.
Principles of Engineering Economy
Develop the alternatives
Focus on the differences
   differences in „expected future outcomes‟
    among the alternatives are relevant to
    their comparison, and should be
    considered in the decision.
Use a consistent viewpoint
   The future outcomes of the alternatives,
    economic and other, should be
    consistently developed from a defined
    viewpoint (perspective).
Use a common unit of measure
Consider all relevant criteria
 Selection of a preferred alternative
  (decision making) requires the use of a
  criterion (or several criteria     ).
                             decisive factor

 The decision process should consider the
  outcomes enumerated in the monetary
  unit and those expressed in some other
  unit of measurement or made explicit in a
  descriptive manner.
      Systematic Decision Process
5 steps of decision making
 Define the opportunity
 Identify and analyze alternative courses

  of action
 Estimate their effects on the problem or
  opportunity choose a preferred course of
 To implement the choice
 Evaluate the results and proceed with any
  follow up if necessary
Make uncertainty explicit
   Uncertainty is inherent in projecting

    (or estimating) the future outcomes of
    the alternatives and should be recognized
    in their analysis and comparison.

       Outcome Analysis
       Risk Analysis
       Risk Management
Revisit your decisions
   Improved decision making results from an
    adaptive process; to the extent
    practicable, the initial projected outcomes
    of the selected alternative should be
    subsequently compared with actual
    results achieved.
        Decision Review
Why should we software folk care about
   The answer lies in our chances of survival
    in the capitalist environment. And that, in
    turn, depends on how high our shop sets
    the bar for its notion of software success.
 Definitions of “success” in shops
1. Success:We’re still here at the end of the project.
2. Success:We’re still here at the end of the project and
   we’ve written a bunch of code.
3. Success: We’re still here at the end of the project and
   we we’ve written a bunch of code that runs.
4. Success: We’re still here at the end of the project and
   we have a bunch of code (from various sources) that
   does something useful.
5. Success: We’re still here at the end of the project and
   we have implemented cost effective solutions to real
   business problems and cost-effective exploitations
   of real business opportunities, involving a
   combination of manual and automated systems.
software economics
 Software economics has often been
  misconceived as the means of estimating the
  cost of programming projects. But economics is
  primarily a science of choice, and software
  economics should provide methods and models
  for analyzing the choices that software projects
  must make.
 In any software project there is always a balance
  between short-term and long-term concerns . . .
  economic methods can help us make
  enlightened choices.
Software professionals are faced
with choices every day….
   “Should we even do the Alpha project?”,
   “How much testing is enough?”
    “Should the Omega project use the Rational Unified Process
    [Kruchten00] or would eXtreme Programming or one of the
    other Agile methods be better?”,
   “What algorithm should we use in module Gamma?”,
   “Should the data structure be a linked list or an array?”, and
    so on.

    Apparently safe choices can have a noticeable effect on the
    organization‟s finances.
    At a minimum, a poor choice on something as seemingly
    insignificant as an algorithm or data structure could lead to
    inadequate performance, low maintainability, or defects and
    lead to unnecessary downstream maintenance.