SM 300

Engineering Economics
 Engineering Economy and the Design Process
The Engineering Design Process

An engineering
economy study is
accomplished using
structured procedure
and mathematical
modeling techniques.

The economic results

are then used in a
decision situation that
normally includes
other engineering
knowledge and input.
 Engineering Economy and the Design Process (Contd.)
The General Relationship between the
Engg. Economic Analysis Procedure and Engineering Design Process

Note: There are feedback loops within the procedure

 Seven Principles of Engineering Economy
i. Develop the alternatives
ii. Focus on the differences
iii. Use a consistent viewpoint
iv. Use a common unit of measure
v. Consider all relevant criteria
vi. Make uncertainty explicit
vii. Revisit your decisions
 Seven Principles of Engineering Economy (Contd.)
Principle 1: Develop the alternatives
The choice (decision) is among alternatives. The
alternatives need to be identified and then defined for
subsequent analysis.
 Why is this step important?

Doing nothing or Status quo can also be a feasible solution in

some decision situation… it should also be considered…

For eg. Different sources of electricity generation can be using

coal, water, solar, wind, tide.
 Seven Principles of Engineering Economy (Contd.)
Principle 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.
 What will happen if all the outcomes of the different
feasible alternatives were exactly the same?
 Can you think of a scenario where only the differences in
expected future outcomes would be considered for
taking a decision?
 Seven Principles of Engineering Economy (Contd.)
Principle 3: 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 is often that of the
owners of the firm….
Yet it is important that the viewpoint for the particular decision
be first defined and then used consistently in the description,
analysis, and comparison of alternatives…

 Can you think of examples where viewpoints other than that

of the owner may be considered for the decision making.
 Seven Principles of Engineering Economy (Contd.)
Principle 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.
For economic consequences, a monetary unit such as Dollars or
Rupees is the common measure.
One should try to translate other outcomes (which do not initially
appear to be economic) into the monetary unit…
 Think of some cases where one can translate other outcomes to
monetary terms.
 What should one do if it is almost impossible to convert outcomes
to monetary terms?
 Seven Principles of Engineering Economy (Contd.)
Principle 5: Consider All Relevant Criteria
Selection of a preferred alternative (decision making)
requires the use of a criterion (or several criteria).
 When will there be more than one criteria?
Normally an alternative that will best serve the long-term
interests of the owners of the organization is selected.
In Engineering Economic Analysis, the primary criterion relates
to the long-term financial interests of the owners… based on
the assumption that available capital will be allocated to
provide maximum monetary returns to the owners….
However, there can be other objectives as well… growth,
satisfaction