ECONOMIC DECISION MAKING 

    INTRODUCTION:

What is the meaning of  engineering economics :

Engineering economics was earlier known as engineering economy. It is a part or subset of economics . Engineers find out solution of some technical problems with objectives :-

• Development of new input , process and final products.
• Development of technologies with the objective of maximizing output/input ratio. But they don't assess their financial profitability. It is the work of engineering economics.

In between the engineers and engineering economics comes the role of accountant. Accountant provides information on the past financial performance of the project. The engineers deals with technological possibilities out of which management may make a selection for a future action and engineering economics helps management to make actual decision.

So engineering economics is an economics evaluation of the technically possible engineering alternatives.

Economic decision making

• Decision making is the pre - planned course of action taken for a particular time period for a particular time period for meeting some specific objectives.
• Economic decision making are the future course of action for any economic activity which has a definite outcome in the economy and for the society.
• Economic decision making is the process of evaluating various alternatives within some constraints (obstacles) to get valuable result for which economy of a country will get benefited.

Example:-

Problems in economic decision making

Economic decision making is not an easy task it has many factors that are to be considered such as certainty , uncertain situations , risk factors and output of the decision.

project appraisal decision is very important task for business firm because it need a huge investment. So financial manager must have an analytical ability.

A firm has to face various problems :-

• Certainty -  certainty means information of the project should be proper and result should be positive which can be projected with certainty. Eg :- decision maker has complete information regarding all the available alternatives and has a position to choose the best alternative. 
• Uncertainty :- Uncertainty in economic decision making arises if relevant and complete information are not fully available to get result of each alternatives.
• Risk :- Risk is uncertain future probable events which you may have to face at the time of actual happenings of the financial events. Greater is the risk more is the expected return. Risk is the variability of return which may occur in future periods. If you want to invest a part of your income after 2 years there is a risk of interest rate.
• Scarcity of resources :- Every firm has to face scarcity of resources like human resources or cash  or  capital or any other resources .Hence within these scarcity of firm has to pan and have to take decisions so that they can maximize their value as profit.

Role/Scope of economic decision making 

The role of engineers in decision making process is limitless as they are the architecture of economics decision making process. The role and importance of economic decision making process are discussed below.

The different types of decisions that as an engineer has to take :-

• Make or buy decision :- An engineer has to evaluate the cost of manufacturing goods and has to compare it with supplier cost. If supplier price is lower than manufacturing cost then the  company should purchase the goods to maximize profit.
•  Purchase of asset or taken on leases :- If lease rent and number of years of lease is more than the purchasing cost of that asset and number of years owned by the owner. Then owner should purchase the asset. It is also a decision of engineer.
• Replacement of an asset or heavy repair and maintenance :- In the decision making of replacement or repair of machine .'Old' machine are known as 'Defender' and new one called as 'Challenger'. If 'Challenger' prices to be most economical in terms of cost capacity efficiency , speed then challenge should be accepted.
• Depreciation on the basis of historical cost on the basis of current market price :- Depreciation is a provision made for replacement if assets. If depreciation charge or historical cost basis then there is a shortage of provision for depreciation and firm has to face problem of cash at the time of replacement of asset. So depreciation should calculate on the basis of current market price of assets.
• Time values of cash in flow :- Money has a time value. The value of one Rupee today is not same with 2 years later. To know about net present value (NPV) initial. Investment should deduct from present value of all cash inflows. If NPV is positive cash inflows .If NPV is positive then project is acceptable.
• The effect of inflation of assets and probability of the company :- Inflation means a continuous price rise before evaluation of a project the effect of inflation must have to be consider. During inflationary  condition , the cost of project is bound to increase on all like material , labour and overall cost.
• Payback period of a machine or project :-  Payback period calculate the time of recovery of original cost of an asset or of a project. By this payback  period techniques various alternative projects are evaluated.
• Ratio analysis , Breakdown analysis , fund flow , cash flow statement simulation techniques and decision tree theory :-

1. Accounting ratio analysis:- Accounting ratio is quantitative and qualitative relationship between any 2 accounting figure expressed in different way such as percentage in different areas of strength and weakness in different areas of business is judged with the help of these ratios.
2. Break even analysis :- Break even point is that point where total cost of a particular level of output is exactly equal to total sales revenue , i.e. , it is the no profit , no loss area. It gives some valuable information to management for taking decisions.
3. Fund flow analysis :- Fund flow statement is a statement which is prepared to reflect the changes in financial resources of an entity for a period of time. Fund which come in the firm are inflow and funds utilize by the firm are outflow of fund.
4. Cash flow statement :- Cash flow statement shows the various sources of inflows of cash and also shows the areas where the cash outflows has been made.
5. Simulation :- It is a computerized mathematical model in order to represent actual decision making under conditions of  Uncertainty for a evaluating alternative causes of action based upon facts and assumptions . For example :- Simulation is widely used bin space flight or charting of satellite simulation provides a trial and error movement towards the optimal solution.
6. Decision tree :- It is the pictorial representation shown in tree from which they are used for taking decision making  in risky capital project.

• Risk and Uncertainty of a project :- Risk is the variability of returns which may occur in future periods and is uncertain depends on future happenings and may change unfavourably with the actual returns. 

Economic decision making process/step making :- 

Decision making process is not an easy task analyst has to consider many things like available resources , valuable data's , constraints cost and benefit , time , value , inflationary factors etc. Steps or processes are :-

• Identify the problems :- A organization has to take many types of decision such as lease or purchase of assets , replacement of machinery or not expansion of a factory , expansion of market etc. So decision making analyst has to recognize the problems first.
• Analyze the problems :- 2nd step is analyzation of of the problem or known about the real cause of the problem .Eg :- Why should the firm replace the machinery ? Is it become absolute or working efficiency has been decreased or any other reason.
• Develop the alternatives :- After analysis the problem , the next step is to develop the alternative by which the problems can be solved. The alternative made or but or replaced the machine or lease etc. So analyst has to collect information or relevant data .
• Evaluation of alternatives :- The next step is to evaluate the alternatives by knowing the plus and minus point if all alternatives . Finally the most appropriate alternative is selected. Evaluation of alternatives is done by the following methods.
• Quantitative factors :- Factors which can be measured in numerical times such as logical explanation , prediction , trade off among alternatives etc.
• Qualitative  factor :- Factors that are difficult to measure in numerical terms such as goodwill , brand value , good labour relationship etc.
• Cost effective analysis :- This analysis include cost and benefit analysis , while analyzing cost and benefit and monetary terms the effect of time value of money and inflation are to be considered. Analyst should select the alternative which give highest net profit and lowest cost.
• Marginal analysis :- This is a very important technique for comparison of additional revenue from additional costs for a project.
• Differential analysis :- Total cost and total revenue is analyzed in this method .Under this analysis that alternative is closed which gives us the highest net gain(Revenue - cost ).
• Select the best alternative :- After evaluation of all alternatives the best alternative is selected which fives the highest result under given condition. It is the chosen on the basis of past experience research experimentation etc.
• Implementing the decision :- Decision taken by the manager are generally carried out by their subordinates. So the decision have to be communicated properly to those who expected to implement them.
• Follow up action :- Follow up action means revising the past decisions, constant monitoring and follow up should be made after implementation of the decision and problems should be immediately solved. Example :- labour agitation for implementing a new project should be immediately solved.