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MGTS 301 – Engineering ECONOMY

Hari Charan Ghimire


Department of Mechanical Engineering
School of Engineering

Course Objectives:

This course covers the basic topics of engineering economic analysis


upon which the practice of financial project analysis is built and tools
to evaluate engineering projects. Engineering economy is the heart of
decision-making. This will eventually provide students a sound
understanding of the principles, basic concepts and methodology of
engineering economy and help them develop proficiency with these
methods and with the process for making rational decisions regarding
situations they are likely to encounter in professional practice.

Lecture Arrangements:

For CE + CS

Tuesday 9.00-11.00 hrs


Wednesday 9.00-11.00 hrs

For EE

Tuesday 2.00-4.00 hrs


Friday 10.00-12.00 hrs

Course Materials:

Students are strongly advised and encouraged to refer the textbooks


and other reference materials from university library and web pages.
Reference materials for the lectures and discussions shall be taken
from the following book and web site.
WG Sullivan et al, Engineering Economy, PEA 2001
URL: www.prenhall.com/sullivan_engineering
Chan S. Park, Contemporary Engineering Economics
URL: www.prenhall.com/park
Assessments:

Students will be evaluated continuously based upon their


performances in the classes, quizzes, case studies and other
woks/assignments allocated during the course work. Class tests will
carry less than 50%; case studies and assignments will carry more
than 40%, and class activities/participation/attendance will carry 10%
of the total internal marks. Students are required to do the numerical
problems (assignment) in Excel and as well as in the hard copy. Some
of the tests will be also taken in the computer. At the end of the
semester, the students will be required to select a live project and the
economic analysis of the project is required to be done. As per the KU
law, students maintaining less than 75% attendance will not be eligible
to appear in the end-semester examination.

Lesson Plan:

The course has been divided in to different modules. Approximately 50


lectures will be taken for completing the course.

Module 1
Introduction to Engineering Economy
Origin, principles, engineering economy and design process,
engineering economic analysis procedure, accounting and engineering
economic studies , types of organization

Module 2
Method of raising capital, Cost Concepts and Design Economics
Introduction, cost estimating and cost terminology, the general
economic environment, break-even point, cost-driven design
optimization

Module 3
Money-Time Relationships and Equivalence
Introduction, simple and compound interests, Equivalence-concept,
cash flow diagrams, simple interest formula for present, future and
annual equivalents
Module 4
Applications of Money-Time Relationships
MARR, PW, FW and AW method, IRR and ERR method, payback period
method

Module 5
Comparing Alternatives
Useful lives equal to study period, useful lives are different among
alternatives, capitalized worth method, mutually exclusive
combinations of projects

Module 6
Depreciation and Income Taxes Introduction, depreciation concepts
and terminology, classical depreciation Methods.Taxation in Nepal-
Taxation laws, corporate tax structure, individual tax structure and
depreciation rates in taxes

Module 7
Cost Estimation Techniques Integrated approach to develop the net
cash flows, parametric cost estimating, cost estimation in the design
process, value engineering

Module 8
Price Changes and Exchange Rates Consumer price index and the
producer price index, foreign exchange rates, price inflation or
deflation, project analysis with price changes

Module 9
Replacement Analysis Reasons and factors for replacement studies,
economic life

Module 10
Dealing with Uncertainty
Risk and uncertainty, sensitivity analysis, risk adjusted MARR

NOTE: FOR THE NUMERICAL PORTION, THE WAYS OF SOLVING PROBLEMS


IN EXCEL WILL ALSO BE DISCUSSED IN THE CLASS.
Module 1 introduces the subject of engineering economy, discusses its
critical role in engineering design and analysis and discusses the basic
principles of the subject. It also discusses about the different types of
organization.

Module 2 describes some of the basic cost terminology and concepts


that are used in this course and illustrates how they should be used in
engineering analysis and decision-making. It also describes about the
ways of raising of funds.

Module 3 discusses the return to capital in the form of interest (or


profit) and illustrates how basic calculations are made with respect to
time value of capital in engineering economy studies.

Module 4 illustrates various basic methods for making engineering


economy studies considering the time value of money and describes
briefly underlying assumptions and interrelationships among these
methods.

Module 5 develops and demonstrates methodology for the economic


analysis and comparison of mutually exclusive design alternatives for
an engineering project.

Module 6 discusses some of the concepts and mechanics of


depreciation and depletion and describes their role in after-tax
analysis.

Module 7 describes an integrated approach used to develop cash flows


for the alternatives being analyzed in a study and delineates and
illustrates selected techniques that will be useful in making such
estimates.

Module 8 introduces a methodology for dealing with price changes


caused by inflation and deflation and develops and illustrates proper
techniques to account for these effects in engineering economic
analysis.

Module 9 discusses the considerations involved in replacement studies


and addresses the key question of whether an asset should be kept
one or more years or immediately replaced with the best available
challenger.
Module 10 presents and discusses methods that are useful in analyzing
the economic consequences of engineering projects where uncertainty
exists.