E 01 Presentation

Engineering Economy
Course No.: IPE 231

Lecture No.: 01
SHANTA SAHA
Assistant Professor,
Dept. of IPE, SUST
July, 2018
Lecture No.01 Contains :~
Key Point Course Outline Course In-Detail

Engineering
Economy
Economics
1.1 Engineering Economy
Principles Of Engineering Economy
1. The Role of Engineers
INTRODUCTION
Role of Engineers In Business
in Business & Few Examples In Different
Corporation Environments
Example of an Engineering Economic
Problem
ENGINEERING
The accreditation Board for Engineering and Technology states that,
ENGINEERING
“is 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”
In this definition the economic aspects of engineering are emphasized as
well as the physical aspects.

ECONOMY
Economy can have two meanings:
1st: an economy is a social system or network where people and the firms they
create exchange goods and services, usually with currency. Markets and all
of the suppliers (workers, firms) and demand (households, firms) involved
form an economy, including a government if it regulates it.
2nd: economy can be used as a synonym for efficiency. Fuel economy measures
how many miles per gallon a vehicle consumes. To be economical means you
are very efficient (not lazy) and frugal (not cheap).
An economy or economic system consists of the production,

distribution or trade and consumption of limited goods and
services by different agents in a given geographical location.
ECONOMICS
Economics is the study of
the production and consumption of goods
the transfer of wealth to produce and obtain those
goods
A focus of the subject (economics) is

how economic agents behave or interact and
how economies work
Engineering Economy
 Concerned with the Economic Aspects of Engineering
 Involves the systematic evaluation of the costs and benefits of

proposed solutions to engineering problems
Origin:
Engineering economy, the analysis of the economic consequences of engineering decisions,
was originated by A. M. Wellington in his The Economic Theory of Railway Location,
published in 1887.
Eugene L. Grant can truthfully be called the father of engineering economy. (published
“Principles of Engineering Economy”, 1930)
Engineering economic analysis can play a role in many types of situations.

 Choosing the best design for a high-efficiency gas furnace.
 Selecting the most suitable robot for a welding operation on an automotive assembly line.
 Making a recommendation about whether jet airplanes for an overnight delivery service
should be purchased or leased.
 Determining the optimal staffing plan for a computer help desk.
Principles Of Engineering Economy
Principle1. • The choice (decision) is among alternatives. The alternatives need to be
Develop the Alternatives identified and then defined for subsequent analysis.
Principle 2. • Only the differences in expected future outcomes among the alternatives
Focus on the Differences are relevant to their comparison and should be considered in the decision.
Principle 3.
• The prospective outcomes of the alternatives, economic and other, should
Use a Consistent Viewpoint be consistently developed from a defined viewpoint (perspective)
Principle 4. • Using a common unit of measurement to enumerate as many of the

Use a Common Unit of prospective outcomes as possible will make easier the analysis and
Measurement comparison of alternatives.
Principle 5. • Selection of a preferred alternative (decision making) requires the use of a

criterion (or several criteria). The decision process should consider the
Consider All Relevant outcomes enumerated in the monetary unit and those expressed in some
Criteria other unit of measurement or made explicit in a descriptive manner.
Principle 6. • Uncertainty is inherent in estimating the future outcomes of the alternatives

Make Uncertainty Explicit and should be recognized in their analysis and comparison.
Principle 7. • Improved decision making results from an adaptive process; to the extent
practicable, the initial projected outcomes of the selected alternative should
Revisit Your Decisions be subsequently compared with actual results achieved.
Role of Engineers in Business
• In business environments, many if not all, decisions are justified using monetary
criteria such as “profit”. Such decisions are made at the managerial level and many
engineers become managers in manufacturing environment.
• Their responsibilities are consists of:
– Participate in a variety of decision-making processes, ranging from

manufacturing, through marketing, to financing decisions
– Plan for the acquisition of equipment
– Design products from the concept to shipping
• In today’s competitive world of business it has become essential that engineers

should practice financial project analysis for engineering projects and make
rational decisions.
Role of Engineers in Business (cont..)
Create & Design
• Engineering Projects
Analyze
• Production Methods
• Engineering Safety
• Environmental Impacts
• Market Assessment
Evaluate Evaluate
• Expected • Impact on
Profitability Financial
• Timing of Statements
Cash Flows • Firm’s Market
• Degree of Value
Financial Risk • Stock Price
Few Examples In Different Environments
 Business Environment: A small manufacturing company needs to buy a forklift truck for
material handling. Two different brands, say A and B, are being considered. Which truck
should be bought? The decision will probably be based on minimization of cost.
 Non-profit Organizations: A project for widening a two lane highway to four lanes is being
considered by the county board. A four lane highway may reduce the traffic accident rate
but is expected to lower property values in the immediate neighborhood of the highway.
Should the proposed highway be built? The county board must weigh the relative
benefit of lower accident rates against the possible loss in value of homes as well as
the construction cost.
 Individuals: A new college graduate needs a new car. Should this new car be bought or
leased? Methods of engineering economy can be used for determining the best choice.
Example of an Engineering Economic
Problem
• You wrecked your car!
• You ruled out any other forms of transportation.
• A wholesaler offers $2,000 for the wrecked car and $4,500 if it is repaired.
• The car has a mileage standing of 58,000 miles.
• Your insurance company offers you $1,000 to cover the cost of the accident.
• To repair the car costs $2,000.
• A newer second-hand car costs $10,000 with a mileage standing 28,000miles.
• A part-time technician offers to repair the car for $1,100, but it takes one month.
• In the meanwhile you will need to rent a car for $400 per month.
What should you do?

Problem (cont…) SOLUTION
Step 1. Define the problem
The problem: You need a car.
Step 2. Develop alternatives

 A1: sell wrecked car then buy the newer car.
 A2: repair the car.
 A3: repair the car, then sell it, and then buy the newer one.
 A4: Let the part-time technician repair it and then keep the
car.
 A5: Let the part-time technician repair the car, and then sell
it to buy the newer one.
Step 3. Estimate the cash flows
A1: sell wrecked car then buy the newer
A1: - $7,000 (Get the newer car)
– 2,000: for the wrecked car
car.
– 1,000: from insurance company
– -10,000: buy new car
A2: -$1,000. (Keep the old car). A2: repair the car.
– -2,000: to repair
A3: -$6,500. (Get the newer car). A3: repair the car, then sell it, and then
– 1,000: from insurance company buy the newer one.
– -2,000: to repair
– 4,500 sell repaired car
A4: -$500. (Keep the old car).
A4: Let the part-time technician repair it
– -1,100: to repair buy part-time and then keep the car.
mechanic
– -400: to rent a car in one month
A5: -$6,000. (Get the newer car). A5: Let the part-time technician repair
– -500: Option A4 the car, and then sell it to buy the newer
– 4,500 sell repaired car one.
Step 4. Use a consistent criterion
Dollar value in this perspective.
Step 5. Compare the alternatives

» A1: $10,000-$7,000=$3,000
» A2: $4,500-$1,000=$3,500 A1: - $7,000 (Get the newer car)

A2: -$1,000. (Keep the old car)
» A3: $10,000-$6,500=$3,500 A3: -$6,500. (Get the newer car)
A4: -$500. (Keep the old car)
» A4: $4,500-$500=$4,000 A5: -$6,000. (Get the newer car)
» A5: $10,000-$6,000=$4,000
Step 6. Consider uncertainties and decide

Choose A5!
Step 7. Monitor and evaluate the decision
Road test the newer car, and confirm your decision

DEFINITION (with brief description)
Different Types of Investments:
 Mutually Exclusive Investments
 Mutually Independent Investments
 Interdependent Investments
 Private Investments
 Public Investments
First, Fixed and Variable Cost
Incremental and Marginal Cost
Operation and Maintenance Cost
Recurring and Nonrecurring Cost
Lifecycle Cost
Opportunity Cost
Sunk Cost
Salvage Value
THE END…………………

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Engineering Economy

Course No.: IPE 231

Key Point Course Outline Course In-Detail

“is 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”

In this definition the economic aspects of engineering are emphasized as

well as the physical aspects.

of the suppliers (workers, firms) and demand (households, firms) involved

form an economy, including a government if it regulates it.

are very efficient (not lazy) and frugal (not cheap).

An economy or economic system consists of the production,

A focus of the subject (economics) is

 Involves the systematic evaluation of the costs and benefits of

Engineering economic analysis can play a role in many types of situations.

Principle 4. • Using a common unit of measurement to enumerate as many of the

Principle 5. • Selection of a preferred alternative (decision making) requires the use of a

Principle 6. • Uncertainty is inherent in estimating the future outcomes of the alternatives

• Their responsibilities are consists of:

– Participate in a variety of decision-making processes, ranging from

– Plan for the acquisition of equipment

– Design products from the concept to shipping

• In today’s competitive world of business it has become essential that engineers

should be bought? The decision will probably be based on minimization of cost.

the construction cost.

• You ruled out any other forms of transportation.

• The car has a mileage standing of 58,000 miles.

• To repair the car costs $2,000.

• A newer second-hand car costs $10,000 with a mileage standing 28,000miles.

What should you do?

Step 2. Develop alternatives

Step 5. Compare the alternatives

» A2: $4,500-$1,000=$3,500 A1: - $7,000 (Get the newer car)

Step 6. Consider uncertainties and decide

Step 7. Monitor and evaluate the decision

Road test the newer car, and confirm your decision

First, Fixed and Variable Cost

Incremental and Marginal Cost

Operation and Maintenance Cost

Recurring and Nonrecurring Cost

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