The Best Engineering Economics Essay

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Introduction

Years ago were the most important obstacles to technology engineers. The
things the engineers wanted to do, they just did not know how to do it or
did not develop the tools that should be done. There are many other
challenges, such as those of modern engineers. However, Blank and Tarquin
(2008) allude to the fact that we achieved a point in mechanical engineering,
where it is no longer possible to design and construct only the design and
construction of goods for their design and construction. Natural resources
(of which we have to build things) are becoming increasingly rare and
expensive. We are much more aware of the negative side effects of
engineering innovations (eg air pollution by cars) than ever before.
For these reasons, engineers are increasingly responsible for placing their
project ideas in a wider environmental environment on a particular planet,
country or region. Brown (2016) says that engineers should ask if a
particular project will offer some net benefits to people who will impact on
the project, taking into account the benefits and other externalities plus
costs, both in the price for they must be paid. , and to realize that once they
are used for this project, they will no longer be available for any other
project.

Simply put, engineers must decide whether the project's benefits exceed
their costs and to do so in a unified framework. The framework in which
this comparison is made in the field of engineering economics that aims to
answer these questions accurately and perhaps even more. The
Accreditation Board for Engineering and Technology (ABET) states that
engineering is "a profession in which the knowledge of mathematical and
natural sciences acquired through study, experience and practice applies to
the consideration of the development of ways to economically promote
materials and natural forces exploited for the benefit of humanity. "

Economic studies, both private and public

Economic studies that are much more common outside the engineering
economics are still used to determine the feasibility and usefulness of some
projects. However, they do not respond to the "general understanding" of
economic studies that rely on macroeconomics with which engineers have
little interaction. Studies in engineering economics are thus focused on
specific companies and limited projects within these companies. Most are
expected to do some viability studies by private companies for the
government or other affairs, but again fundamental of the overall nature of
real economic studies. The studies have several important steps that can be
applied to virtually all kinds of situations, as follows (Brown, 2016):
• Planning and screening - In particular, review the goals and problems that
can be experienced.

• Reference to standard economic studies - Consultation of standard forms.

• Estimation - Cost speculation and other variables.

• Reliability - Ability to estimate correctly.

• Compare actual and planned performance - Confirm savings, review

errors, make sure suggestions are valid, and add to future studies.

• Analyzer Objectivity - Ensure that advanced design or analysis does not

predict certain results

Historical Context

At the beginning of the 20th century, E.L. Grant and W.G. Ireson apud
Gonçalves (2009) as cited by Junkes et al (2012) conducted the system of
investment product analysis and this study created the term engineering
economics. The term was born essentially because engineers were the first
to address systematic problems with investment alternatives that are part of
major engineering projects. However, its implementation depends on the
analysis of macroeconomic and microeconomic aspects, as factors such as
inflation and tax influence significant results (Junkes et al., 2012).
Engineering economics developed during the twentieth century by
incorporating concepts from other disciplines. According to the Institute of
Industrial Engineers (IIE), engineering economics is defined as the
application of economic analysis and synthesis or mathematical or
engineering decisions to a set of knowledge and techniques involved in
valuing the value of goods and services in terms of costs and methods to
estimate data. In this sense, we mean a set of techniques that allow money
quantification and economic evaluation of investment alternatives and
provide the necessary information and knowledge for decision making
(Watts and Chapman, 2016). The decision-making process of alternative
investments includes steps that are considered useful for analyzing
alternatives and selecting options. It starts with the identification and
presentation of the problem to be solved or the function to be followed,
followed by a set of technically and economically viable alternatives,
including the decision to do nothing. The next step is to highlight each
alternative, highlighting the main features, constraints and expected results
for each alternative created in the previous step (Brown, 2017). The main
objective of the engineering economy is the economic analysis of
investment decisions and relatively extensive applications, as investments
of companies, individuals or government agencies can be. It is also known
that economic factors in most engineering activities are considered to be
strategic. For this reason, a greater acceptance of responsibility to
determine whether technical proposals are technical and economic, and to
evaluate cost and value propositions, contributed to the increasing
confidence in professional engineering (Park et al., 2007).

Engineering is a profession in which knowledge of mathematical and natural

sciences is obtained by applying learning experience and practice with
judgment on ways to economically exploit the material and forces of nature
in favour of humanity (Brown, 2016). Engineering economics is essential for
engineers. This is because it helps people understand the need for
knowledge of economics. After all, they are an effective manager and
decision-maker (Brown, 2016).

Economic theories are used to make decisions about an uncertain and

changing business environment. Watts and Chapman (2016) say that
economic theory deals with the principles of demand, prices, costs,
production, competition, business cycles and national income, and so forth.
Park et al (2007) say that as the construction and manufacturing process
becomes more complex, the engineer decides that the money contains more
than ever. Competent and successful engineers must now better understand
the principles of the economy. The engineering economics deals with the
systematic evaluation of project benefits and costs, including design and
analysis.

The engineering economics quantifies the benefits and cost of engineering

projects to determine if they will save enough money to ensure their capital
investments. The engineering economy requires the use of technical designs
and analysis principles that provide goods and services that satisfy
consumers at an affordable price. Engineering economics is also relevant to
the designer's considered material selection.

Engineers are designers and builders. They are also problem solvers,
managers and decision-makers. At the beginning of the 20th century,
engineers mainly dealt with the design, construction, operation of machine
structures and processes (Brown, 2016).

They gave the least attention to the human and physical resources that
provided the final products. Many factors have contributed to the expansion
of engineering responsibilities and interests. In addition to conventional
works, engineers expect not only to create a new technology solution but
also to make a smart financial analysis of the impact of implementation.
Engineering economics includes a systematic assessment of the economic
benefits of proposed solutions to technical problems. The engineering
economics involves a technical analysis with the emphasis on economic
aspects and aims to help with decision making.

Decision Making

The engineering economy is closely linked to conventional microeconomic

technology. It is committed to problem-solving and decision-making at an
operational level. Such "engineering economics refers to the aspects of the
economy and its analytical tools that are the most important for the
decision-making process of an engineer."

Decision-making process (Junkes et al., 2012):

The procedures used in the seven steps for decision making are:

1. Recognition, definition and evaluation of the problem.

2. Find possible and practicable alternatives.

3. The inclusion of access to basic cash flow.

4. The decision must serve the organization's long-term interest.

5. Analysis of economic aspects of a technical problem.

6. The preference alternative is based on the overall effort.

7. Make sure feedback is provided to improve traffic.

Distinctive features

For a clear understanding of the subject, Brown (2016) postulates that it is

necessary to know the special characteristics of engineering economics:

1. The economics of engineering is now in line with conventional

microeconomics.

2. Engineering economics is committed to problem-solving and decision-

making in the field of operations.

3. Economics of engineering can lead to suboptimization of conditions

where solutions achieve tactical goals at the expense of strategic efficiency.

4. Engineering economics is useful to identify the alternative use of scarce

resources and to choose the preferred mode.
5. Engineering economics has a pragmatic character. Remove complicated
abstract problems of economic theory.

6. Economics of Engineering uses mainly a set of economic concepts and

principles.

7. The engineering economics integrates economic theory with engineering

practice.

Definition

Engineering economics is a collection of techniques that simplify the

comparison of alternatives on an economic basis (Blank and Tarquin, 2008).
The engineering economy takes place after identifying possible alternatives
and the "economy" is the only criterion for choosing the best alternative
among them. Real-world decisions are usually based on the analysis of more
features, where other factors such as safety, environmental impact,
compliance with company strategy, risk, etc. Considered.

Engineering economics is considered as a set of techniques that allow

currency quantification and economic evaluation of investment alternatives
so that the manager can acquire the necessary knowledge of information to
support decision making. Engineering techniques used for project analysis
aim at explaining and quantifying the pros and cons of each investment
alternative. The entire investment project involves identifying and
analyzing the implications that lead to decisions about the use of capital
resources (Junkes et al., 2012). This impact varies from project to project
but usually includes financial and economic aspects.

In this context, the analysis or evaluation of projects involves a set of

techniques that set the viability parameters. These parameters are
expressed as PBP (Return Rate), IRR (Internal Rate of Return) or Net Present
Value (NPV). NPV is the sum of discounted cash flows (ie future values
expressed in equivalent current values) deducted from the initial
investment. Engineering economics plays an important role in investment
analysis, especially if it expresses the pros and cons in monetary terms if
you want to invest capital or buy capital goods to manage all technically
feasible alternatives to investment.

Fundamentals of Engineering Economics (Desai et al., 2016)

The foundation of engineering economics is a set of principles or concepts

that provide a solid foundation for the development, study and application
of tools used to analyze and/or evaluate projects (Junkes et al., 2012):

• Recognize and define alternatives: Decisions are alternatives;

• The need to consider the consequences: the decision must be based on

the expected consequences of different alternatives. All these consequences
can occur in the future;

• It is necessary to decide which approach should be adopted before the

project formulation and evaluation procedures are drawn up.

• An inconsistency of aspects common to all alternatives: for comparisons

only differences between alternatives are important.

• Resolution: If possible, divisive decisions must be made separately;

• The need for decision-making criteria: It is desirable to have a decision

criterion or, where applicable, various criteria;

• Choose the main criterion: The choice between alternative investments in

tangible goods must take into account the best possible use of scarce
resources;

• The need for a systemic view: There are often side effects that are
overlooked when individual decisions are made. To properly consider these
side effects, it may be necessary to investigate the interrelationships
between the various decisions before any individual decision can be taken.

Another related point is that the whole foundation of the engineering

economics relies on financial mathematics; To support cost, investments
and sensitivity analyze, account must be taken of the time value of money.

Equivalent time value of money

The concept of equivalence is closely linked to the ability to generate

money or money (ie interest rates). It is not possible to compare absolute
values of money at different dates or times. This comparison will depend on
the interest rate allocated to the money. It can be assumed that money can
be invested in any productive activity that ensures a certain interest, which
will be the investment performance. The minimum return on investment is
judged about the financial market situation and the risk of the investment.
The minimum "attractive return" of the investment is therefore completely
subjective and can vary from one company to another, from business to
business, etc. (Brown, 2016). In this sense, knowledge of the engineering
economy is required to recognize the time value of money: the currency
unit in the day is not directly comparable to the same currency unit on a
different date. For this reason, the importance of cash flow in the
engineering economy is important. The interest rate can be defined as the
money that is paid using the borrowed money. On the other hand, there is
an interest that can be obtained from productive capital investment (Blank
and Tarquin, 2008).

All money has a time value. Loan money has a time value equal to interest
payments on the loan, while the money invested has a time value equal to
the income or income deriving from the investment. Cash held in cash or
unrecognized accountants has a time value because disposing of money or
profits or interest that can be earned if invested in another way. When an
organization considers an investment involving more than one option, the
time value of money may affect the decision. This is true regardless of the
source of funding (Desai et al., 2016).

It is not necessary that the borrowed funds are involved, or the funds must
be disposed of visibly because they are taken out of an interest-bearing
account. Therefore, the cost analyst should take into account the time value
of money when comparing the cost of two or more alternatives with
outdated payouts and/or income. It is based solely on investment return
(ROI), which, as usual, does not recognize the time value of money, is not
applicable.

It is often said that money makes money. This statement is true because if
we decide to invest money today, we expect that it will have more money in
the future. If a person or company borrows money today, it will owe more
than the original borrower tomorrow. This fact is also explained by the time
value of money.

Cash flow

Estimated earnings (income) and cash outflows (cash) are called cash flows.
These estimates are the core of engineering economic analysis. Park et al
(2007) add that they are also the weakest part of the analysis because most
of them judge what will happen in the future. Who can predict the next
week's oil price accurately next week next year, next year or next decade: So
no matter how sophisticated the analysis technique is, the result is as
reliable as the data on which it is based.

Methods of analysis
Primary tools or methods of analysis used by engineering economics to
decide between alternative investments are (Desai et al., 2016):

Payback

To determine how much time (the unit of time is generally considered as a

year) is required for the investor's broker to return the invested capital. A
rough estimate of the payout can be obtained by dividing the sum of the
investments, costs and expenses generated by dividing the sum of the
profit/loss.

Net Present Value (NPV)

Define as the algebraic sum of the discounted cash flow associated with the
project. In other words, the difference between the current value of revenue
and the current cost price. It should be emphasized that the project will be
viable if the NPV is positive. This project viability indicator is calculated
according to the following formula:

NPV = F0 + F1/(1+r) + F2/(1+r)2 + F3/(1+r)3 +......... + Fn/(1+r)n

Where: F0 = initial investment; F1, F2, F3, ….Fn = cash flow during the
periods of the project life; r = discount rate: cost of capital/ opportunity
cost of the investment.

Internal Rate of Return (IRR)

It is calculated from the cash flows of the project, with no need to arbitrate
a discount rate. It is a demonstration of the profitability of the project, and
the higher the IRR is, the more advantage the project is in financial terms. A
project, to be acceptable, must have an IRR exceeding the opportunity cost,
at least the basic rate of interest established by the monetary authorities
(Central Bank of Brazil). The IRR can be evaluated with the aid of financial
calculators, computers and/or through a process of trial and error when the
net present values of outflows (cost of investment) and cash inflows (net
profits) is equal to zero. It is estimated from the following formula:

IRR = F0 + F1/1 + r * + F2/(1+r* ) 2 +......+ Fn/(1+r* ) n = 0

Where: r* matches the desired internal rate of return, and F0, F1, F2, …Fn is
the cash flows of the project.

Breakeven point:

It is the minimum level of production associated with the level of sales

which cover the costs i.e. without losses. It is the point that defines the
exact amount of sales (or production quantity) in which a productive unit
neither gains nor loses money: above this point, the productive unit begins
presenting profits; below, suffers losses. Thus, the lower is the breakeven
point, the greater is the stability of the project against the fluctuations in
income and costs. The breakeven point is estimated from the following
formula:

Breakeven point (value) = Fixed Costs / Contribution Margin in percentage

Where: Contrib. Marg. % = (Revenues – Variable Costs) / Revenues

Sensitivity and risk analysis

An approach in which the model/projection is investigated by changing the

value of one of its variables to see what happens to the result. This allows
you to know how to influence the variation of the key factors of production
in the expected results of the project. It can know the meaning of each input
and each output variable of the production unit. Sensitivity analysis makes
it possible to define the profitability of a project according to each of its
variables and to monitor the change reflected in the profitability of each
change of variables. In other words, the sensitivity of the project
(profitability) can be determined for each variable (Blank and Turquin,
2008).

Financial analysis

It is an important tool to support the decision-making process. This makes

it possible to determine the effect of certain facts on the company's
financial position regarding the financial aspects of the manager's
management of all variables associated with the company's payment
capacity, liquidity and solvency (Watts and Chapman, 2016).

Cost-benefit analysis (cost-benefit analysis)

In a cost-benefit analysis, the current value of all costs and benefits for all
stakeholders must be combined to create the NPV. Externals arising from
the project must be considered. It consists of social costs or benefits that
are outside the project area and affect the welfare of third parties without
any monetary compensation. If a project requires or deserves to be graded
by a public entity, the external effects must be taken into account. The
assessment of the project from the perspective of the private sector does
not affect the impact on third parties arising from related externalities.
However, the external effects created within the project are difficult in
many cases to quantify.

It is extensively used and its interpretation as it is relatively easy compared

to the other indicators. It is calculated dividing the discounted benefits by
the discounted costs of the project. The project would be rejected by this
criterion if the BC ratio is below the unit (i.e. B/C).
Therefore, outside the company's perspective, external factors must also be
considered. The project aims at delivering goods and services that can
increase the company's well-being. Supporting decision-making through
cost-benefit analysis can meet these requirements by allocating social value
to all effects of a particular project (Park et al., 2007).

Value Analysis

Correct value analysis is based on the fact that industrial engineers and
managers not only need to simplify and improve processes and systems but
also to make the logical simplification of designs for these products and
systems. Although it is not directly related to engineering economics, price
analysis is still important and engineers can properly manage new and
existing systems/processes to make them easier and save money and time
(Brown, 2016). Value analysis also helps to combat common "excruciating
barriers" that can be caused by drivers or engineers. Speech such as "The
customer wants this way," is shaken by questions like: Was the customer
aware of cheaper alternatives or methods? "If the product is changed,
machines will be unbreakable due to lack of work" can be fought; can
management find a new and profitable use for these machines? Such
questions are part of engineering economics because they offer actual
studies or analyzes.

Linear programming

Linear programming is the use of mathematical methods to find optimal

solutions, either minimized or maximized in nature. This method uses a
series of sequences to create a polygon and determine the largest or
smallest point of the shape. Manufacturing operations often use linear
programming to reduce costs and maximize profit or production (Brown,
2016).

Interest and relationships between money and time

About the overcapitalization of the capital to be borrowed for a certain

period provided that it is returned to the investor, the money-to-time ratios
will analyze the costs associated with these types of actions. Equity must be
divided into two different categories, equity and debt capital. The share
capital is money that is already available to the company and is mainly
derived from profits and is therefore not too worry because it does not have
owners who require a return on interest. Debt capital owns the owner and
requires that his use is returned by "profit", otherwise known as interest
(Desai et al., 2016). The interest paid by the company will be a cost, while
capitalists will receive interest as a profit that can confuse the situation. To
do this, you will add any change in the income statement status.

Interest and financial ratios enter the game when the capital required to
complete the project is borrowed or deducted from reserves. Leasing brings
the question of importance and value created by the completion of the
project. When we capitalize on reserves, we refuse it for other projects that
can deliver more results. Interest in the simplest terms is determined by
multiplying the principle, time units and interest rates. The complexity of
interest calculations, however, is much higher, such as factors such as the
composition of interest or annuity (Blank and Tarquin, 2008).

Depreciation and Valuation

The fact that property and material in the real world eventually break out
and fall apart is a situation that needs to be quantified (Blank and Tarquin,
2008). Depreciation itself is defined by a decrease in asset value even
though there are certain exceptions. A valuation can be considered as a
basis for depreciation in the basic sense, as any impairment will be based
on the original value. The idea and existence of depreciation are particularly
relevant to engineering, and project management is the fact that capital
assets and assets used in the operation slowdown in value, which also
coincides with the increase in the likelihood of machine failure. Therefore,
recording and calculation of depreciation are important for two main
reasons.

1. To give an estimate of "recovery capital" that has been put back into
the property.

2. To enable depreciation to be charged against profits that, like other

costs, can be used for income tax purposes.

Both of these reasons, however, cannot make up for the "fleeting" nature of
depreciation, which makes direct analysis somewhat difficult. To further
add to the issues associated with depreciation, it must be broken down into
three separate types, each having intricate calculations and implications.

 Normal depreciation, due to physical or functional losses.

 Price depreciation, due to changes in market value.

 Depletion, due to the use of all available resources.

Calculation of depreciation also comes in several forms; straight line,

declining balance, sum-of-the-year's, and service output. The first method
being perhaps the easiest to calculate, while the remaining have varying
levels of difficulty and utility. Most situations faced by managers in regards
to depreciation can be solved using any of these formulas, however,
company policy or preference of individual may affect the choice of model.

Capital budgeting
Capital budget about the engineering economy is the correct use and use of
capital to achieve project goals. It can be fully defined by a statement as a
series of decisions by individuals and companies about how much and
where resources will be recovered and spent on achieving future goals
(Brown, 2016). This definition explains virtually the capital and its general
relationship with engineering, although some special cases may not be such
a brief explanation. The actual acquisition of this capital has many different
ways, from equity to securities, to unpaid profits, each having unique
strengths and weaknesses, especially about income tax. Factors such as the
risk of capital loss, together with potential or expected returns, should also
be taken into account when preparing the capital budget. For example, if the
company invests $ 20,000 in a series of high, medium and low-risk projects,
the decision will depend on the extent to which the company is willing to
take over and if the returns offered by the individual categories are settled
become this risk. If high risk yields only 20% returns, while returning a
modest 19% return, engineers and managers are likely to select a low-risk
project, as its return is much more favourable to its category. The high-risk
project did not deliver proper returns that could guarantee its risk status. A
more complex decision can be between a slight risk that offers 15%, while
low risk offers a return of 11%. The decision will be much more conditioned
by factors such as company policy, additional capital and potential
investors.

Park et al (2007) say that the company should generally estimate the
opportunities for the projects, including the investment requirements and
expected returns of each of them, which should be available for the coming
period and then be available for the highest quality project, the return on
available capital will be the minimum acceptable rate of return for analysis
of all projects during this period.
Minimum cost formulas

One of the most important and most important activities in engineering

economics is to reduce costs in systems and processes (Watts and Chapman,
2016). Time, resources, labour and capital must be minimized when placed
in any system so that returns, products and profits can be maximized.
Therefore there is a general equation;

where C is the total cost, a b and k are constants, and x is the variable
number of units produced.

There are a great number of cost analysis formulas, each for particular
situations and is warranted by the policies of the company in question or
the preferences of the engineer at hand.

References

Brown, T., 2016. Engineering economics and economic design for process
engineers. CRC Press.

Watts, J.M. and Chapman, R.E., 2016. Engineering economics. In SFPE

handbook of fire protection engineering(pp. 3137-3157). Springer, New York,
NY.

Desai, D.J., Jain, T.H., Dwivedi, A.A. and Attar, A.D., 2016. Engineering
Economics and life cycle cost analysis.

Park, C.S., Kim, G. and Choi, S., 2007. Engineering economics (Vol. 22).
Prentice Hall: Upper Saddle River, NJ, USA.

Blank, L.T. and Tarquin, A.J., 2008. Basics of engineering economy. McGraw-
Hill Higher-Education.
Junkes, M.B., Tereso, A.P. and Afonso, P., 2012. The role of engineering
economics in the evaluation of investment projects by the Bank of Amazon-
Brazil. In International Conference on Industrial Engineering and Operations
Management 2012 (ICIEOM2012).