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Chapter 1

Introduction to
Engineering Economy

Engineering Economy, Fifteenth Edition 1-1 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.0 CONTENT

1.1 Introduction
- Definition
- Why it is important to engineer
- Roles of Engineering economy
1.2 The 7 principles of Engineering
Economy
1.3 Engineering Economy and the Design
Process

Engineering Economy, Fifteenth Edition 1-2 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

ENGINEERING?

ECONOMY?

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

Definition
Engineering Economy involves the systematic
evaluation of the economic merits of
proposed solutions to engineering problems.
Economically Acceptable Solution:
A positive balance of
long term benefits > long term costs

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

Promote Well Being and


Survival of Organization

The Creative and Innovative


solution to Technology and Idea
engineering
economy Valid and Acceptable
must:
Profitability

Allow the Estimated Outcome to


be Identify and Observe Critically

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

Why Engineering Economy is Important to


Engineers?

An engineer who is unprepared to excel at


engineering economy is not properly
equipped for his or her job
Engineering Economy, Fifteenth Edition 1-6 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction
Why Engineering Economy is Important to
Engineers?

COST

DESIGN Balance in
CIVIL the most
trade off economically
ENGINEER
BUILD manner

PERFORMANCE

Engineering Economy, Fifteenth Edition 1-7 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

Why Engineering Economy is Important to


Engineers? (cont.)

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
Engineering Economy, Fifteenth Edition 1-8 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction
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.

Engineering Economy, Fifteenth Edition 1-9 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.1 Introduction

Engineering economic analysis can play a


role in many types of situations (cont.)

Determining the optimal staffing plan for a


computer help desk.
Determining labor resource (local or foreign
workers)
To select the best bidder of Bill of Quantities
To purchase or hire machineries

Engineering Economy, Fifteenth Edition 1-10 Copyright 2012 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.2 The 7 principles of Engineering Economy

Develop the alternatives

Focus on the differences

Use a consistent view point

Use a common unit measure

Consider relevant criteria

Make uncertainty explicit

Revisit your decision

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.2 The 7 principles of Engineering Economy

1. Develop the alternatives


Carefully define the problem, then the 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.

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.2 The 7 principles of Engineering Economy

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
simplify the analysis of the alternatives.

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.2 The 7 principles of Engineering Economy

5. Consider all relevant criteria


Selection of a preferred alternative (decision making)
requires the use of a criterion (or several criteria).
The decision process should consider both the
outcomes enumerated in the monetary unit and
those expressed in some other unit of measurement
or made explicit in a descriptive manner.

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.2 The 7 principles of Engineering Economy

6. Make uncertainty explicit


risk and uncertainty are inherent in 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.

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.3 Engineering Economy and the Design Process

1 Problem definition

2 Development of alternatives (P1)

3 Development of prospective outcomes (P2,3,4)

4 Selection of a decision criterion (P5)

5 Analysis and comparison of alternatives (P6)

6 Selection of the preferred alternative


Performance monitoring and post evaluation of
7 results (P7)

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Copyright 2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Source: http://www.themalaymailonline.com/ Photo courtesy: http://english.astroawani.com/
Copyright 2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
Photo courtesy: http://english.astroawani.com/
Source: http://www.thestar.com.my/
Copyright 2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.3 Engineering Economy and the Design Process
Problem Alternatives Prospective
Definition Development Outcomes
1. Different soil Alternative 1 Safety of the society
formation for Repair and maintenance is at risk
tunneling for the sink holes and
soil depression The project is
2. Current located at different
technology Alternative 2
place
causes sink New design strategy
holes and soil Development of
depressions in Alternative 3 New Boring Machine
the area of New technology and training academy
limestone improvement
formation
Copyright 2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.3 Engineering Economy and the Design Process
Selection of Analysis and Selection of Post
Decision Comparison Alternatives Evaluation
Criterion
Alternative 2
Cost 1. Need time to redesign and
Safety make report for council
Time approval
Training 2. Skill workers needed for
maintenance work
Alternative 3
1. Need time for research and
development
2. Staff have to be train to use
the new technology
Copyright 2012 by Pearson Education, Inc.
Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
1.3 Engineering Economy and the Design Process

Electronic spreadsheets are a powerful


addition to the analysis arsenal

Most engineering economy problems can be


formulated and solved using a spreadsheet.
Large problems can be quickly solved.
Proper formulation allows key parameters to be
changed.
Graphical output is easily generated.

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
THE END, THANK YOU!

Copyright 2012 by Pearson Education, Inc.


Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.