Transcript Engineering Economics in Canada

Course Arrangement !!!
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Nov. 22, Tuesday
Last Class
Nov. 23, Wednesday
Quiz 5
Nov. 25, Friday
Tutorial 5
Nov. 29, Tuesday
Final Review
Nov. 30, Wednesday
Final Quiz
Project Report Due: Final Quiz Nov. 30,
Wednesday. This deadline is FIRM, fail to
submit on final quiz=0/25, NO EXCUSE!!!
Copyright © 2006 Pearson Education Canada Inc.
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Engineering Economics in Canada
Chapter 13
Qualitative Considerations and Multiple Criteria
13.1 Introduction
• Most of this book has been concerned
with making decisions based on a single
economic measure (e.g.PW).
• However, rarely are costs and benefits
the only consideration in evaluating a
project. (Buy a car……)
• Taking additional criteria into account
can make the process of decision
making more difficult because there is
no longer a single measure of value.
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Introduction…
• There are three basic approaches to the
problem of including both qualitative and
quantitative factors other than money into
decision making.
• Method 1: Model and analyze the costs alone.
Then deal with other considerations to be dealt
with on the basis of experience and managerial
judgment. The benefit of this approach is its
simplicity and defensibility. The liability is that
errors can be made and it can be hard to
explain why a particular decision was made.
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Introduction…
• Method 2: Convert other criteria to money, and
then treat the problem as usual. A benefit of
this approach is that it does take non-monetary
criteria into account. A drawback is the difficult
to determine a value for items such as cost of a
human life or the cost of cutting down a 3000year-old tree.
• Method 3. Use a multi-criterion decision
making (MCDM) approach. The benefit of
MCDM is that all important criteria can be
explicitly taken into account in an appropriate
manner. The main drawback is that MCDM
methods take time and effort to use.
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Introduction
• This chapter focuses on three multicriteria decision making approaches:
1. Efficiency – helps us identify a subset
of superior alternatives (required).
2. decision matrices – a widely used
version of multi-attribute utility theory
(MAUT).
3. analytic hierarchy process (AHP) – a
newer, but popular MAUT approach.
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Efficiency
• When there is one criterion, it is usually easy to
identify which is ‘best’ with respect to that one
criterion.
• When there are several criteria, how does one
make trade-offs?
– E.g. an alternative can be highly valued with
respect to one criterion and lowly valued
with respect to another.
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Example 13.1
• Simcoe Meats has several alternatives for an
effluent treatment system.
• Two criteria have been considered, present
worth and discharge purity.
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Example 13.1…
• Dominance concepts can be used to eliminate
several of the alternatives from further
consideration:
– E dominates A because E is both less costly, and it
produces higher discharge purity.
– Similarly alternatives F, B and H are dominated.
– G is dominated by E because G has lower discharge
purity for the same cost.
• Each of E, D and C are said to be efficient.
– An alternative is efficient if no other alternative is at
least equal for all criteria, and is preferred for at least
one criteria.
• The best choice between E, D and C depends
on the relative importance of each criterion.
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Example 3.2
• Consider the choice of a surveillance camera.
The criteria are:
– low-light performance
– Picture clarity
– Weight
– Price
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Example 13.2 …
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Example 13.2 …
• To determine the efficient alternatives:
1. Order the alternatives according to one criterion
(the index criterion), say cost, from best to worst.
2. Start with the 2nd preferred alternative using the
index criterion (the candidate alternative)
3. Compare the candidate alternative with each
alternative more preferred for the index criterion (for
the first candidate, there is only one.)
4. If any alternative equals or exceeds the candidate
for all criteria, and exceeds it for at least one, the
candidate is dominated. If no alternative equals or
exceeds the candidate for at least one criteria, the
candidate is efficient.
5. The next most preferred alternative for the index
criterion becomes the new candidate. Stop when
all alternatives have been considered.
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Example 13.2…
• The resulting efficient set is:
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13.3 Decision Matrices
(Sildes after this Not Required for Quiz or Final Quiz)
• Usually, not all decision criteria are of equal
importance to a decision maker.
• One way to deal with this is to associate a
numerical weight with each criterion.
• If criteria are evaluated based on a quantitative
measure of preference, then the weights and
preference measures can be combined to
determine a best alternative.
– This is referred to as multi-attribute utility
theory (MAUT).
• Several MAUT techniques are available.
• A common technique is the use of decision
matrices.
Copyright © 2006 Pearson Education Canada Inc.
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Decision Matrices…
• In a decision matrix, rows represent criteria and
columns are the alternatives.
• A separate column is used for the criteria weights.
• The cells of the matrix contain an evaluation of each
alternative on a selected preference scale.
– A scale of 0(worst) to 10(best) is common.
• For each alternative, multiply each rating by the
corresponding weight, and sum to get an overall
score.
• If the weights add to 10, and a preference scale of 0
to10 is used, then each score can be interpreted as
the percent of an ideal solution achieved by an
alternative.
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Example 13.3
• Re - consider the choice of a surveillance camera:
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Example 13.3
• After criterion weights and ratings (preference
evaluations) are determined, the problem
looks as follows.
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Decision Matrices…
• The decision matrix summarizes information
about multiple objectives
• An additive utility model permits us to calculate
an overall score for each alternative.
• A comparison of scores will indicate which is
the best alternative.
• Sensitivity analysis may reveal promising
alternatives resulting from relatively small
changes in the criteria weights.
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13.4 Analytic Hierarchy Process (AHP)
• AHP is also a multi-attribute utility theory
(MAUT) approach.
– It provides a mechanism to structure large
problems
– It also provides a good method for
determining criteria weights.
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Basic Steps of the AHP
1. Identify the decision to be made (the goal), the
various criteria to be used, and finally the
alternatives to be considered.
2. For each criterion, evaluate the relative
importance of alternatives for all possible
pairwise comparisons. The results are put in
a pairwise comparison matrix (PCM).
3. Determine priority weights for the alternatives
by normalizing the elements of the PCM.
4. Construct a PCM for each criterion.
5. Compute an overall ranking for each
alternative by multiplying alternative priority
weights by criterion priority weights.
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Summary
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Introduction to qualitative and multi-criteria
decision making.
Three common approaches to multiple criteria:
1. Efficiency
2. Decision Matrices
3. The Analytic Hierarchy Process (AHP)
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The consistency ratio for AHP
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Quiz 5 Arrangements
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Quiz: Wednesday, Nov. 23, 2005
11:30 - 12:20 (Quiz: 30 minutes)
Tutorial: Friday, Nov. 25, 2005
Based on Chapter 12 and 13
Bring: Paper, Pen, Formula Sheet,
Calculator, Student Card
• Two Problems, Wei used 173 seconds
• Write: Name, Student No. and Email
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Course Arrangement !!!
• Nov. 23, Wednesday
• Nov. 25, Friday
Quiz 5
Tutorial 5
• Nov. 29, Tuesday
• Nov. 30, Wednesday
Final Review
Final Quiz
• Project Report Due: Final Quiz Nov. 30,
Wednesday. This deadline is FIRM, fail to
submit on final quiz=0/25, NO EXCUSE!!!
Copyright © 2006 Pearson Education Canada Inc.
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• Questions?
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