Engineering Economics

1. Introduction

Eng. Econ. 1
1.1 Engineering Economics and Engineers

Engineers are planners and builders. They are also problem solvers,
managers, and decision makers. Engineering economics touches each of
these activities. Plans and production must be financed. Problems are
eventually defined by dollar dimensions, and decisions are evaluated by
their monetary consequences.

Riggs J.L., Bedworth D.D., Randhawa S.U. , Engineering Economics,

McGraw-Hill

In the U.S. Engineering Economics is a topic on the Fundamentals of

Engineering examination, and questions might also be asked on the
Principles and Practice of Engineering examination; both are part of the
Professional Engineering registration process.
Eng. Econ. 2
1.2 Engineerings Economics and Finance

Public Finance
Personal Finance
Corporate Finance
includes Project Appraisal, Investment Appraisal, Capital
Budgeting

Engineering Economics involves formulating,

estimating and evaluating the economic outcomes,
particularly when alternatives are available.
Blank e Tarquin (2005), Enginnering Economy, McGraw-
Hill, 6th. edition

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 Differences in terminology between
corporate finance and engineering
economics

EngEcon Worth Present Worth, Net

Present Worth, Future Worth
CorpFin Value Present value, Net present
value, Future value

EngEcon ROR Rate of return

CorpFin IRR Internal rate of return
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 Typical problems:
Investment decisions
.
Invested >?> Benefits or outcomes of the
capital investment

Replacement decisions: when and how to

replace an asset?
Financing / fund raising liabilities (bank
loans, suppliers, bonds) or equity (retained
earnings, amortizations, stocks)?
Eng. Econ. 5
1.3 Fundamental Principles in Engineering Economics
source: Chan Park (2009), Fundamentals of Engineering
Economics, Pearson International Edition, 2nd ed.

1. A nearby dollar is worth more than a distant dollar

2. All that counts is the differences among alternatives

3. Marginal revenue must exceed marginal cost

4. Additional risk is not taken without the expected

additional return

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 3 key concepts in Engineering Economics

Cash flow

Time

Interest rate

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1.4 Historical facts

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 Hirschleifer, J. (1958), On the Theory of the Optimal
Investment Decision, Journal of Political Economy, 66,
329-352.

Fisher, I. * (1965), The Theory of Interest, AM Kelly

Pub., N. Y.
Reprint of the 1930s book (online in The Library of Economics and Liberty)

*Author of a very known phrase pronounced just before the 1929 crisis:
"Stock prices have reached what looks like a permanently high plateau

Pegolotti (1340), a merchant from Florence 1st. table

for computing interests .
Eng. Econ. 9
 Same important dates in Economics ...
Adam Smith, The Wealth of Nations, 1776.

John M. Keynes, The General Theory of Employment,

Interest and Money, 1936.

Paul Samuelson, Foundations of Economic Analysis

and Economics, 1947 and 1948.

Milton Friedman, Studies in Quantity Theory of

Money and A Monetary Story of the United States,
1956 and 1963.
Eng. Econ. 10
 and in Engineering

Arthur Mellen Wellington, The Economic Theory of

Location of Railways, 1887 - Engineering Economics.

The Engineering Economist A journal devoted to

the problems of capital investment and A joint
publication of the Engineering Economy Divisions of
the American Society for Engineering Education and
the Institute of Industrial Engineers, June 1955.

11
Eng. Econ.
Progression in practice ...
computers

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The birth of personal computers

Apple ][ 1977

IBM PC 1981

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 and software ...

June 1980 IBM agrees on outsourcing the operating

system for its pcs to Bill Gates (MS-DOS).

1978 , Dan Bricklin conceives Visicalc: The idea for

the electronic spreadsheet came to me while I was a
student at the Harvard Business School, working on
my MBA degree, in the spring of 1978.

1979, Dan Bricklin: Software Arts was founded on

January 2, 1979, by me and Bob Frankston.

Eng. Econ. 14
 Harvard
Business School :

Eng. Econ. 15