Engineering Economics

Overview
Module I

Purpose of the Module

In this module the learners will understand and apply time value of money , the
economic techniques to the evaluation of design and engineering alternatives in order to
construct and implement a proper economic analysis in terms of engineering economic
decision making that refers to engineering projects.

Module title and Descriptions

The module entitles Engineering Economics that consist the topics, like
Principles of Engineering Economy, Engineering Economy and the Design Process,
Cost Concepts for Decision Making. In order that you will understand and apply the
knowledge of Engineering economics.

Module Guide

In this module, the students will engage to read other books and use internet to
sort some activities and examples. Aside from the given examples and activities in this
module.

Module Outcomes

Propose and construct a plan with problem based on the application and
evaluation of foundation of engineering economy in Process of Decision Making
Analysis.

Module Requirements

At the end of this module, you will propose and construct a plan with
problem based on the application and evaluation of foundation of engineering economy
in Process of Decision Making Analysis.
Course Pre-assessment
1. Propose and construct a plan with problem based on the application and evaluation
of foundation of engineering economy in Process of Decision Making Analysis.

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Key Terms
Engineering Economy - is the application of economic factors and criteria to evaluate
alternatives by computing a specific measure of worth of estimated cash flows over a
specific period of time.

The role of engineering economics – is to asses appropriateness of a given projects,

estimate its value, and justify it from an engineer standpoint.

Engineering economic decision- refers to all investment decisions relating to

engineering projects.

Professional or engineering ethics – Formal standard or code that guides a person in

work activities and decision making.

Learning Plan
Let’s Try This
I. List down all the process in decision making.
( Write your answers on the given space below.)

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 II. Discuss and explain the role of Engineers in business.
( Write your answers on the given space below.)

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Lets Learn This!

Engineering Economy

 Involves the systematic evaluation of the economic merits of proposed solutions to

engineering problems.

 Engineering Economy involves the systematic evaluation of the economic merits of

proposed solutions to engineering problems. Engineering Economy is the
application of economic factors and criteria to evaluate alternatives by computing a
specific measure of worth of estimated cash flows over specific period of time.

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

1. Develop the Alternatives - The final choice (decision) is among alternatives. The
alternatives need to be identified and then defined for subsequent analysis.

2. Focus on the Differences - Only the differences in expected future outcomes

among the alternatives are relevant to their comparison and should be considered in
the decision

3. Use a Consistent Viewpoint - The prospective outcomes of the alternatives,

economic and other, should be consistently developed from a defined viewpoint
(perspective).

4. Use a Common Unit of Measure - Using a common unit of measurement to

enumerate as many of the prospective outcomes as possible will make easier the
analysis and comparison of alternatives.

5. Consider All Relevant Criteria - Selection of a preferred alternative (decision

making) requires the use of a criterion (or several criteria).

6. 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.

7. 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.

Why Engineering Economy is Important to Engineers?

 Engineers design and create

 Designing involves economic decisions
 Engineers must be able to incorporate economic analysis into their creative
efforts
 Often engineers must select and implement From multiple alternatives
 Understanding and applying time value of money, economic equivalence, and
cost estimation are vital for engineers
 A proper economic analysis for selection and execution is a fundamental task of
Engineering.
Opening Story
Bose Corporation
• Dr. Amar Bose, a graduate of electrical engineering, an MIT professor, and
Chairman of Bose Corporation.
• He invented a directional home speaker system that reproduces the concert
experience.
• He formed Bose Corporation in 1964 and became the world’s No.1 speaker maker.
• He became the 288th wealthiest American in 2002 by Forbes magazine.EMR301

A Little Google History4

1995
• Developed in dorm room by Larry Page and Sergey Brin,
graduate students at Stanford University
• Nicknamed Back Rub (reflecting great taste… )

1998
• Raised $25 million to set up Google, Inc.
• Ran 100,000 queries a day out of a garage in Menlo Park
2005
• Over 4,000 employees worldwide
• Over 8 billion pages indexed
• Estimated market value over $100 billion
• As of today, the value of Google is likely to be in the
hundreds of billions range

General Steps for Decision Making Processes

1. Understand the problem – define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply sensitivity analysis
6. Select the “best” alternative
7. Implement the alternative and monitor results

Two Factors in Engineering Economic Decisions

Objectives, available sources, time and uncertainty are the key defining
aspects of all engineering economic decisions.

The factors of time and uncertainty are the defining aspects of any
engineering economic decisions.

Simple Example:

Car to Lease – Saturn or Honda?

Recognize the decision problem Need to lease a car

Collect all needed (relevant) information Gather technical and financial
data

Identify the set of feasible decision alternatives Select cars to consider

Define the key objectives and constraints Wanted: small cash outlay,
safety, good performance,
aesthetics
Select the best possible and implementable
decision alternative Choice between Saturn and
Honda (or others)
 Select a car (i.e., Honda, Saturn
or another brand)

Engineering Economic Decisions

Planning Invest

Manufacturing Marketing

Profit
Predicting the Future

• Estimating a Required investment

• Forecasting a product demand
• Estimating a selling price
• Estimating a manufacturing cost
• Estimating A product life and the profitability of continuing production

Role of Engineers in Business

Create & Design

Engineering Projects
 Evaluate Evaluate
Analyze  Expected  Impact On
Production Methods Profitability Financial
Engineering Safety  Timing Of Cash Statements
Environmental Flows  Firm’s Market
Impacts
 Degree Of Value
Market Assessment
Financial Risk  Stock Price

A Large Scale Engineering Project

 Requires a large sum of investment

 Takes along time to see the financial outcomes
 Difficult to predict the revenue and cost streams
 Can be very risky

Types of Strategic Engineering Economic Decisions in Manufacturing Sector

 Service Improvement
 Equipment and Process Selection
 Equipment Replacement
 New Product and Product Expansion
 Cost Reduction
 Profit Maximization

Engineers have to make decisions under resource constraints, and in presence of

uncertainty.

Equipment Replacement Problem

 Now is the time to replace the old machine?

 If not, when is the right time to replace the old equipment?

New Product and Product Expansion

 Shall we build or acquire a new facility to meet the increased demand?

 Is it worth spending money to market a new product?

Cost Reduction

 Should a company buy equipment to perform an operation now done manually?

 Should spend money now in order to save more money later?

Let’s Try This

List down the process in decision making.

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Let’s try once more!

Please write the appropriate answer in the Blank.

1. _____________________________ 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.

2. _____________________________ Selection of a preferred alternative (decision

making) requires the use of a criterion (or several criteria).

3. _____________________________ Uncertainty is inherent in projecting (or

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

4. ______________________________ The final choice (decision) is among

alternatives. The alternatives need to be identified and then defined for
subsequent analysis.

5. _______________________________ Only the differences in expected future

outcomes among the alternatives are relevant to their comparison and should be
considered in the decision.

6. _______________________________ The prospective outcomes of the

alternatives, economic and other, should be consistently developed from a
defined viewpoint (perspective).

7. _______________________________ Using a common unit of measurement to

enumerate as many of the prospective outcomes as possible will make easier the
analysis and comparison of alternatives.
Summary

The term engineering economic decision refers to all investment decisions relating to
engineering projects.

The five main types of engineering economic decisions are:

• (1) service improvement,

• (2) equipment and process selection,
• (3) equipment replacement,
• (4) new product and product expansion, and
• (5) cost reduction.

• The factors of time and uncertainty are the defining aspects of any investment
project.

Suggested Reading
 [Link]
[Link]

 [Link]
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 [Link]

Assessment

Please send a copy or a power point presentation of your output that you will propose
and construct a plan in Process of Decision Making with the application and evaluation
of foundation of engineering economy in this module. Thank you and God Bless!!!

References

 Basics of Engineering Economy By: Leland Blank

 Engineering Economy By: Hipolito B. Sta. Maria