Engineering Economics

Course Instructor:
Engr. Hassaan Bin Younis
AE (Mechatronics), KRL/
Lecturer, KICSIT
(for Dr. Salman Iqbal)

Lecture # 1
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Instructor’s Introduction
 B. Sc. (Mechatronics and Control Engineering) from
University of Engineering and Technology, Lahore
 M. S. (Mechatronics Engineering) from National
University of Sciences and Technology, Islamabad
 Working as Assistant Engineer in Dr. A. Q. Khan
Research Laboratories (KRL)
 Previous Experience
 Government College University, Faisalabad
 National Textile University, Faisalabad
 Contact
 hassaanbinyounis@yahoo.com
 0347-7788623
 Office
 Room No. 04, Admin Block, Y-Cross campus, KICSIT
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Course Objective
The primary objective of the course is to provide
engineering students an understanding of the
economic fundamentals and principles of decision
making involved in engineering projects. They learn
about cash flows, time value of money and evaluation
of investments and projects. Moreover they will be
able to demonstrate engineering economy techniques,
primarily related to performing analysis, synthesizing
and coming to a conclusion/solution on projects of all
sizes covering a wide range of engineering economics
oriented examples.
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Course Learning Outcomes (CLO’s)

After successful completion of this course, the students
will be able to:
• Demonstrate the financial/economical language,
economics fundamental and an economics specialization
to the solution of engineering economic problems

• Analysis of resource optimization, cost/benefit

analysis, analyzing different investment opportunities to
reach the substantiated conclusion using different cost
management ideas

• Evaluate, Appraise and critique Engineering Projects

economically
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Recommended Text(s)
• Recommended Book
▫ Engineering Economy by William G. Sullivan, Elin
M. Wicks, C. Patrick Koeling
• Reference(s)
▫ Contemporary Engineering Economics by Chan S.
Park
▫ Contemporary Engineering Economics by Chan S.
Park
▫ Engineering Economy, 7th edition Leland Blank
and Anthony Tarquin
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Introduction to Engineering Economy

• The technological and social environments in which we
live continue to change at a rapid rate

• The utilization of scientific and engineering knowledge

for our benefit is achieved through the design of things
we use. However, these achievements don’t occur
without a price, monetary or otherwise

• 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.
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Introduction to Engineering Economy

• Engineering economy involves the systematic
evaluation of the economic merits of proposed
solutions to engineering problems.
• To be economically acceptable (i.e., affordable),
solutions to engineering problems must
demonstrate a positive balance of long-term benefits
over long-term costs, and they must also
▫ Promote the well-being and survival of an organization
▫ Embody creative and innovative technology and ideas
▫ Permit identification and scrutiny of their estimated
outcomes
▫ Translate profitability to the “bottom line” through a
valid and acceptable measure of merit
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The Principles of Engineering Economy

1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Risk and Uncertainty Explicit
7. Revisit Your Decisions
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The Principles of Engineering Economy

• 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
▫ One alternative that may be feasible in a decision
situation is making no change to the current
operation or set of conditions
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The Principles of Engineering Economy

• 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
▫ If all prospective outcomes of the feasible
alternatives were exactly the same, there would be
no basis or need for comparison
▫ Outcomes that are common to all alternatives can
be disregarded in the comparison and decision
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The Principles of Engineering Economy

• Use a Consistent Viewpoint
▫ The prospective outcomes of the alternatives,
economic and other, should be consistently developed
from a defined viewpoint (perspective)
▫ The perspective of the decision maker, which is often
that of the owners of the firm, would normally be used
▫ However, it is important that the viewpoint for the
particular decision be first defined and then used
consistently in the description particular decision be
first defined and then used consistently in the
description
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The Principles of Engineering Economy

• 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
▫ It is desirable to make as many prospective
outcomes as possible commensurable
▫ For economic consequences, a monetary unit such
as dollars is the common measure
▫ What should you do with the outcomes that are
not economic?
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The Principles of Engineering Economy

• Consider All Relevant Criteria
▫ Selection of a preferred alternative 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
▫ In engineering economic analysis, the primary
criterion relates to the long-term financial
interests of the owners
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The Principles of Engineering Economy

• Make Risk and Uncertainty Explicit
▫ Risk and uncertainty are inherent in estimating the
future outcomes of the alternatives and should be
recognized in their analysis and comparison
▫ The magnitude and the impact of future outcomes of
any course of action are uncertain
• Revisit Your Decisions
▫ Improved decision making results from an adaptive
process
▫ The initial projected outcomes of the selected
alternative should be subsequently compared with
actual results achieved
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Engineering Economy and the Design

Process
• Problem Definition
• Development of Alternatives
▫ Searching for Superior Alternatives
▫ Developing Investment Alternatives
• Selection of a Decision Criterion
• Analysis and Comparison of Alternatives
• Selection of the Preferred Alternative
• Performance Monitoring and Post-evaluation of
Results
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Engineering Economics Analysis

Procedure
• Problem Definition
▫ The first step of the engineering economic analysis
procedure
▫ A problem must be well understood and stated in an
explicit form before the project team proceeds with the
rest of the analysis
▫ Once the problem is recognized, its formulation should
be viewed from a systems perspective
▫ Evaluation of the problem includes refinement of
needs and requirements In fact, redefining the
problem until a consensus is reached may be the most
important part of the problem-solving process
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Engineering Economics Analysis

Procedure
• Development of Alternatives
▫ The two primary actions in this procedure are:
 Searching for potential alternatives
 Screening them to select a smaller group of feasible
alternatives for detailed analysis
 Searching for Superior Alternatives
The difference between good alternatives and great
alternatives depends largely on an individual’s or
group’s problem-solving efficiency. Such efficiency
can be increased in the following ways:
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Searching for Superior Alternatives

(contd...)
1. Concentrate on redefining one problem at a time in Step 1
2. Develop many redefinitions for the problem
3. Avoid making judgments as new problem definitions are
created
4. Attempt to redefine a problem in terms that are dramatically
different from the original Step 1 problem definition
5. Make sure that the true problem is well researched and
understood
In searching for superior alternatives or identifying the
true problem, several limitations invariably exist
▫ lack of time and money
▫ Preconceptions of what will and what will not work
▫ lack of knowledge
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EXAMPLE: Defining the Problem and

Developing Alternatives
The management team of a small furniture-manufacturing
company is under pressure to increase profitability to get a
much-needed loan from the bank to purchase a more
modern pattern-cutting machine. One proposed solution is
to sell waste wood chips and shavings to a local charcoal
manufacturer instead of using them to fuel space heaters
for the company’s office and factory areas.
(a) Define the company’s problem. Next, Reformulate
the problem in a variety of creative ways
(b) Develop at least one potential alternative for your
reformulated problems in Part (a). (Don’t concern
yourself with feasibility at this point)
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EXAMPLE: Defining the Problem and

Developing Alternatives (Solution)
(a) The company’s problem appears to be that
revenues are not sufficiently covering costs.
Several reformulations can be posed:
1. The problem is to increase revenues while reducing
costs
2. The problem is to maintain revenues while reducing
costs
3. The problem is an accounting system that provides
distorted cost information
4. The problem is that the new machine is really not
needed (and hence there is no need for a bank loan)
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EXAMPLE: Defining the Problem and

Developing Alternatives (Solution)
b) Based only on reformulation 1, an alternative is to
sell wood chips and shavings as long as increased
revenue exceeds extra expenses that may be
required to heat the buildings. Another alternative
is to discontinue the manufacture of specialty
items and concentrate on standardized, high
volume products. Yet another alternative is to pool
purchasing, accounting, engineering, and other
white-collar support services with other small
firms in the area by contracting with a local
company involved in providing these services
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Engineering Economics Analysis

Procedure
▫ Developing Investment Alternatives
 It takes money to make money
 Most investment alternatives created by good
engineering ideas are drawn from a larger population of
equally good problem solutions
 Designers and problem solvers tend to pursue a few ideas
that involve “patching and repairing” an old idea
 The following two approaches have wide acceptance in
industry for developing sound investment alternatives by
removing barriers to creative thinking
1. Classical Brainstorming
2. Nominal Group Technique (NGT)
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Engineering Economics Analysis

Procedure
▫ Classical Brainstorming
 It is based on the fundamental principles of deferment of
judgment and that quantity breeds quality
 There are four rules for successful brainstorming:
1. Criticism is ruled out.
2. Freewheeling is welcomed.
3. Quantity is wanted.
4. Combination and improvement are sought.
 A classical brainstorming session has the following basic
steps:
1. Preparation.
2. Brainstorming.
3. Evaluation
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Engineering Economics Analysis

Procedure
▫ Nominal Group Technique (NGT)
 Developed by Andre P. Delbecq and Andrew H. Van de
Ven
 Involves a structured group meeting designed to
incorporate individual ideas and judgments into a group
consensus
 By correctly applying theNGT, it is possible for groups of
people to generate investment alternatives or other ideas
for improving the competitiveness
 The technique, whenproperly applied, draws on the
creativity of the individual participants, while reducing
two undesirable effects of most group meetings:
1. The dominance of one or more participants
2. The suppression of conflicting ideas
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Nominal Group Technique(contd...)

The basic format of an NGT session is as follows:
1. Individual silent generation of ideas
2. Individual round-robin feedback and
recording of ideas
3. Group clarification of each idea
4. Individual voting and ranking to prioritize
ideas
5. Discussion of group consensus results