Lecture No.

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Chapter 1
Contemporary Engineering Economics
Copyright © 2020

Contemporary Engineering Economics 5th edition, (c) 2010 1

What is all about an Engineering
Economic Decision?
 Learning Objectives
 An overview of a variety of engineering
economic decision problems.
 Understanding the term “engineering
economic decision.”
 Understanding the fundamental principles of
engineering economics.

Contemporary Engineering Economics 5th edition, (c) 2010 2

Role of Engineers in Business
Create & Design

• Engineering Projects

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk

Contemporary Engineering Economics 5th edition, (c) 2010 3

Engineering Manufacturin
g
Economic Profit

Decisions
Plan for the
acquisition of
equipment (capital
Planning
expenditure) that will
enable the firm to Investment
design and produce
products
Marketing
economically

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What Makes Engineering Economic
Decisions Difficult?
 Estimating a Required
investment
 Forecasting a product
demand
 Estimating a selling price
 Estimating a
manufacturing cost
 Estimating a product life

Contemporary Engineering Economics 5th edition, (c) 2010 5

Accounting vs. Engineering Economy
Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

Past Future
Present

Contemporary Engineering Economics 5th edition, (c) 2010 6

Common Types of Strategic
Engineering Economic Decisions
 Equipment or process selection
 Equipment replacement decisions
 New product and product expansion
 Cost reduction
 Improvement in service or quality

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Fundamental Principles of Engineering
Economics
 Principle 1: A nearby dollar is worth more than a distant
dollar
 Principle 2: All it counts is the differences among
alternatives
 Principle 3: Marginal revenue must exceed marginal cost
 Principle 4: Additional risk is not taken without the
expected additional return

Contemporary Engineering Economics 5th edition, (c) 2010 8

Principle 1: A nearby dollar is worth more
than a distant dollar

Today 6-month later

Contemporary Engineering Economics 5th edition, (c) 2010 9

Principle 2: All it counts is the differences
among alternatives
Option Monthly Monthly Cash Monthly Salvage
Fuel Cost Maintena outlay at payment Value at
nce signing end of
year 3
Buy $960 $550 $6,500 $350 $9,000

Lease $960 $550 $2,400 $550 0

Irrelevant items in decision making

Contemporary Engineering Economics 5th edition, (c) 2010 10

Principle 3: Marginal revenue must exceed
marginal cost
Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

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Principle 4: Additional risk is not taken
without the expected additional return
Investment Class Potential Expected
Risk Return
Savings account Low/None 1.5%
(cash)

Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

Contemporary Engineering Economics 5th edition, (c) 2010 12

Two Factors in Engineering Economic
Decisions

• Time
• Uncertainty

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