Chapter 1: Engineering Economy

Introduction to Engineering Economy

Title of the Lesson

❖ Introduction
❖ Principles of Engineering Economy
❖ Engineering Economy and the Design Process

Duration
❖ 3 Hours

Introduction
Engineering Economy includes the efficient assessment of the economic
merits of proposed solutions to engineering problems. Module 1 will present the
concepts and principles of engineering economics.

Objectives/Competencies
❖ To introduce students the principles of engineering economy
❖ To allow students to interpret economic results to use in decision making

Pretest
Define the following terms:
1. Engineering Economy
2. Design Process
3. Alternatives
Enumerate the seven principles of engineering economy.

4. 7. 10.
5. 8.
6. 9.
Lesson Proper/Course Methodology

Introduction
The utilization of scientific and engineering information for our is achieved
through the planning of things we have a tendency to use. However, these
achievements don't occur without a price, financial or otherwise.
Engineering Economy involves the systematic evaluation of the economic
merits of proposed solutions to engineering problems. To be economically
acceptable or 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 ideas,
● permit identification and scrutiny of their estimated outcomes and,
● translate profitability to the “bottom line” through a valid and acceptable
measure of merit.

Principles of Engineering Economy

The development, study and application of any discipline must begin with a
basic understanding. We define the foundation for the engineering economy to be a
set of principles that provide a foundation for developing the methodology.
The following are the basic principles of the engineering economy.
1. Develop the Alternatives
Carefully define the problem. The alternatives need to be identified and
then defined for analysis.
In decision making situations, two or more alternatives must be
considered. Developing and defining alternatives for detailed evaluation is
important because of its impact on quality of the decision.
2. Focus on the differences
Only the differences in expected future outcomes among alternatives
are relevant to their comparison and should be considered in decision making.

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 Outcomes that are common to all alternatives can be disregarded in the
comparison and decision making process.
3. Use a consistent viewpoint
The prospective outcomes of the alternatives, economic and other,
should be consistently developed and viewed from a defined perspective. It is
important to define a consistent viewpoint for a particular decision, and be
consistently used in the analysis and comparison of alternatives.
4. Use a common unit of measure
Using a common unit of measurement to enumerate as many
prospective outcomes as possible will significantly simplify the analysis of
alternatives.
It is important to make as many prospective outcomes as possible that
are all directly related to each other. From an economic standpoint, using
dollars (or Peso) is a common measure. As engineers, we should always try
to translate outcomes into monetary units.
5. Consider all relevant criteria
Criteria are required for the selection of preferred alternatives. In
engineering economics, the primary criterion relates to long-term financial
interest of the owners of the firm or company. This is based on the
assumption that the available capital will yield the maximum return for the
owners.
6. Make risk and uncertainty explicit
Risks and uncertainties are inherent in estimating the future outcomes
of the alternatives and should be recognized in the analysis. The analysis of
the alternatives must involve predicting or estimating the future consequences
associated with each of them.
7. Revisit your Decisions
Improve decision making resulting from an adaptive process. A good
decision making process can result in a decision that has an undesirable
outcome. Good judgment comes from experience, and experience comes
from bad judgement.

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 Engineering Economy and the Design Process

An engineering economy study is accomplished using a structured procedure

and mathematical modelling techniques. The economic results are then used in a
decision making process that normally includes other engineering knowledge input.

Engineering Economic Analysis

Engineering Economic Design Process
Procedure

Steps Activity

1. Problem recognition, definition and

1. Problem needs to be defined.
evaluation.

2. Problems need formulation and

evaluation
2. Development of feasible alternatives.
3. Synthesis of possible solutions or
alternatives

3. Development of the outcomes and

cash flows for each alternative.

4. Selection of criterion. 4. Analysis, optimization and evaluation.

5. Analysis and comparison of

alternatives.

6. Selection of preferred alternative. 5. Specification of preferred alternative.

7. Performance monitoring and 6. Communication.

post-evaluation of results.

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Shown in the figure below is the complete design process.

Reflection/Insights
1. Reflect on ideas and knowledge you learn from the lesson and their
application for the future lesson. Write at least 5 sentences.

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Post-Test
Define the following terms:
1. Engineering Economy
2. Design Process
3. Alternatives

Enumerate the seven principles of engineering economy.

4. 7. 10.
5. 8.
6. 9.

Identification
_______________11. This involves the systematic evaluation of the economic
merits of proposed solutions to engineering problems.
_______________12. Relates to long-term financial interest of the owners of the firm
or company.
_______________13. The prospective outcomes of the alternatives, economic and
other, should be consistently developed and viewed from a defined _________.
_______________14. The analysis of the _______ must involve predicting or
estimating the future consequences associated with each of them.
_______________15. Engineering economy study is accomplished using a
structured ________ and mathematical modelling techniques.

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Final Requirements
Final requirements for this course are the following:
● Complete pretest and post-test
● Quizzes
● Midterm Exam
● Final Exam

Other Parts

Answer Key

Pre-Test:

1. The systematic evaluation of the economic merits of proposed solutions to

engineering problems.
2. A structured procedure using mathematical modelling techniques for solving
engineering economics problems.
3. Available as another possibility.
4. Develop the Alternatives
5. Focus on the differences
6. Use a consistent viewpoint
7. Use a common unit of measure
8. Consider all relevant criteria
9. Make risk and uncertainty explicit
10. Revisit your Decisions

Post Test:

1. The systematic evaluation of the economic merits of proposed solutions to

engineering problems.
2. A structured procedure using mathematical modelling techniques for solving
engineering economics problems.
3. Available as another possibility.

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4. Develop the Alternatives
5. Focus on the differences
6. Use a consistent viewpoint
7. Use a common unit of measure
8. Consider all relevant criteria
9. Make risk and uncertainty explicit
10. Revisit your Decisions
11. Engineering Economy
12. Primary Criterion
13. Viewpoint/Perspective
14. Alternatives
15. Procedure

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Chapter 2: Engineering Economy

Interests - Part 1

Title of the Lesson

❖ Simple Interests
❖ Discount

Duration
❖ 6 Hours

Introduction
Suppose a debtor loans money from a creditor. The debtor must pay the
creditor the original amount loaned plus an additional sum of money called interest.
For the debtor, interest is the payment for the use of borrowed money, and for the
creditor it is the income invested in the capital. There are two types of interest,
simple interest and compounding interest. In this module, the students will learn the
basic concepts of simple interest.

Objectives/Competencies
❖ To introduce students the principles of simple interest.
❖ To discuss the basic concepts of simple interest and how interest in economy
works.

Pretest
1. A bank charges 12% simple interest on a P 300 loan. How much will be paid
back in one lump sum after 3 years?
2. Php 4000 is borrowed for 75 days at 16% per annum simple interest. How
much will be due at the end of 75 days?

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Lesson Proper/Course Methodology

Simple Interest
Simple interest (I) in the engineering economy is defined as the interest on a
loan or principal that is based only on the original amount of the loan. This means
that the interest grows as a linear function over a period of time. It can be calculated
using the formula:

I = Pin
Where:
I = simple interest
P = principal amount loaned
i = interest per period
n = number of interest period

There are two types of simple interest, ordinary simple interest and exact
simple interest.

Ordinary simple interest - this type of simple interest is based on banker’s year.
One banker’s year is exactly 12 months with 30 days each. One banker’s year = 360
days.
d
n = 360

where d is the number of days the principal amount is borrowed. Therefore Ordinary
simple interest is:
d
I = Pi 360

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Exact simple interest - this type of interest is based on the exact number of days in
a month on a Gregorian Calendar with 365 days. This type of simple interest also
considers if the year is a leap year. To know if a year is a leap year, one must divide
the year by 4, if it is exactly divisible by 4 then the year is a leap year with 366 days.
For years that are century years (year ending in 00), we must divide the century year
by 400. If it is exactly divisible by 400, then the century year is a leap year.
d d
n=
365 or n = 366 for leap years
Therefore the formula for exact simple interest is:

d
I = Pi 365
Future worth of Simple Interest - is defined as the sum of the principal amount
borrowed and the interest earned.

F=P+I
F = P + Pin
F = P(1 + in)

Discount
Discount rate is the rate that refers to the interest rate used to determine the
present value. Consider the example below to further illustrate the concept of
discount rate.
In a department store, a Php 400 dress is marked “save 25%”, what is the
discount and what is the sale price of the dress.
We know that discount = Principal amount x discount rate
discount = Php 400 * 0.25 = Php 100
Sale Price = Php 400 - Php 100 = Php 300
Now to find the discount,
discount =Future worth F * interest or discount rate i= Php 400 - Php 300 = Php 100
= Future worth - Present worth
let d = discount rate
d*F= F - P
F −P P
d =​
F =1- F

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Remember that F = P(1 + in), in this count we consider n = 1
F = P(1 + i)
P
d=1-
P (1 + i)
1
d=1-
1+i
Example #1
Php 4000 is borrowed for 75 days at 16% per annum simple interest. How
much will be due at the end of 75 days?
Given:
P = P 4000
n = 75 days
i = 16% per annum

F = P(1+in)
75
F = P 4000(1 + 0.16*
360 )
F = P 4,133.33

Note that we use 360 days instead of 365 days. If not stated in the problem, we
assume that the interest is an ordinary simple interest.

Example #2
Agnes Abanilla was granted a loan of P 20,000 by her employer CPM
industrial Fabricator and Construction Corporation with an interest rate of 6% for 180
days on the principal collected in advance. The corporation would take a promissory
note of P 20,000 non-interest for 180 days. If discounted at once, find the proceeds
of the note.
Given:
i = 6%
P = P20,000
d=?
d = P 20,000 - P 20,000(0.06)
d = P 20,000 - P 1800
d= P 18,800

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Example #3
What will be the future worth of money after 12 months, if the sum of P 25,000
is invested today at 1% per month?
Given:
P = P 25,000
i = 1%
F=?

F = P(1+in)
F = P 25,000[1 + (0.01/month)(12 months)]
F = P 28,000

Example #4
If you borrowed money from your friend with a simple interest of 12%, find the
present worth of P 50,000 which is due at the end of 7 months.
Given:
i = 12%
F = P 50,000
n = 7 months

F = P(1+in)
P 50,000 = P(1 + .12*7/12)
P = 46, 728.97

Example #5
Annie buys a television set from a store who ask P1,250 at the end of 60
days. Annie wishes to pay now and the store computes the cash price on the
assumption that the money is worth 8% simple interest. What is the cash price?
Given:
F = P 1250
n = 60 days
i = 8%

F = P(1+in)

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 F
P = 1+in

P 1250
P=
1 + 60/360
P = 1,233.55

Example #6
A bank charges 12% simple interest on a P 300 loan. How much will be paid
back in one lump sum after 3 years?
Given:
P = P 300
i = 12%
n = 3 years
F=?

F = P(1+in)
F = P 33[1 + (0.12/year)(3 years)]
F = P 408

Reflection/Insights
1. Reflect on ideas and knowledge you learn from the lesson and their
application for the future lesson. Write at least 5 sentences.

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Post-Test
A man wants to invest a sum of P50,000 in two investments. The first
investment earns a rate of interest 4 times that of the second investment. In 3 years
the first investment grows to P37,200. For 10 years, the second investment grows to
P24,000.
1. Find the sum invested in each interest rate.
2. Find the rate of interest of each investment.

3. It is the practice of almost all banks in the Philippines that when they grant a
loan, the interest for one year is automatically deducted from the principal
amount upon release of money to a borrower. Let us assume that you applied
for a loan with a bank and P 80,000 was approved with an interest rate of
14% of which P 11,200 was deducted and you were given P 68,800. Since
you have to pay the amount of P80,000 in one year, what is the effective rate
of interest?
4. A deposit of P 110,00 was made for 31 days. The interest after deducting
20% withholding tax is P 890.36. Find the rate of return annually.

References
[1] D. Newnan, J. Lavelle and T. Eschenbach, “Engineering Economic Analysis
(Twelfth Edition)”, 2010
[2] W. Sullivan, E. Wicks and C. Koelling, “Engineering Economy (Sixteenth
Edition)”, 2012
[3] Grant, Ireson and Leavenworth, “Principles of Engineering Economy (Eight
Edition)”, 2015
[4] Kelly, Walter G., Peterson and Allan C., “The Theory of Engineering Economy”,
2010
Websites:
www.sosmath.com
http://tutorial.math.lamar.edu/
https://www.mathworks.com/
http://mathworld.wolfram.com
www.wikipedia.com

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