ENGI

NEERI
NGECONOMY

ES312b

J
eanM.
Mar
ti
n/Ry
anJ
ame
ss.
Oli
vo/Al
vi
nJohnR.
Vil
l
anue
va

2021

UNI
VERSI
TYOFSOUTHERNMINDANAO
Kaba
can
,Cot
aba
to
 ENGI
NEERI
NGECONOMY

ES312b

J
eanM.
Mar
ti
n/Ry
anJ
ame
ss.
Oli
vo/Al
vi
nJohnR.
Vil
l
anue
va

2021

UNI
VERSI
TYOFSOUTHERNMINDANAO
Kaba
can
,Cot
aba
to
Aut
hor
s’De
cla
rat
i
on

I
deas,concepts,diagr
amsa n d/
ori l
l
ustr
ati
onsdepi
ctedinthisl
earni
ngma t
eri
al
ar
ee x
ce r
ptsfr
ome stabli
shedrefer
enc e
sa ndproperl
ynote
dintheli
stofl
it
erat
ure
scit
ed
her
ei
n.Thea uthori
nt hi
slea r
ni
ngma teri
aldoesnotcl
aimful
landauthent
i
cown er
shi
pof
al
lt
hec ont
e n
tsofthisma teri
al
,norinanyma n
nerwil
lf
ul
lyi
nfr
i
ngethec opyr
ightl
awand
ot
herexis
ti
ngprovis
ionsa ppert
ai
ningthere
to.

Thisl
earni
ngma t
eri
ali
spr i
nte
df orthes ol
eus eofc l
assr
oomordista
n ce/r
emote
l
ear
ni
ngofUSMa ndisnoti
ntendedf orcomme rci
alpurposes.Anyuseorre pr
oducti
on
i
npartorinfull
,whetherel
ectroni
corme chanic
al,photocopyi
ngorrecordin
gi nany
i
nf
ormati
ons t
ora
gea ndret
ri
eval s
ystem, otherthanwha titi
sint
endedforrequir
esthe
c
onsentofaut
hori
zedandcompe t
entauthorit
yoftheUn i
ver
sit
yofSout
hernMi n
danao.

ES312b:
Eng
ineer
i
ngEc
onomy
i
v
USMVI
SI
ON

Qual
i
tya
ndrel
evanteduca
ti
onfori
tsc
li
ent
elet
obegloba
ll
ycompet
i
ti
ve,
cul
t
ure
s
ens
it
iv
ea n
dmoral
l
yrespons
ivehumanres
our
cesfors
ust
ai
nabl
edevel
opme
nt

USMMI
SSI
ON

Hel
pacce
ler
atesoci
o-
economicdeve
lopmen
t,promotehar
monyamongdi
ver
se
c
ommun i
t
iesandimprovequal
i
tyoflif
ethroughi
nst
ructi
on,r
esear
ch,e
xte
nsi
onand
r
esour
cegene
rat
i
oninSouthe
rnPhil
i
ppin
es.

UNI
VERSI
TYQUALI
TYPOLI
CYSTATEMENT

TheUn i
versi
tyofSout hernMi ndanao,a sapr e
mie runi
versi
ty
,iscommi t
tedt o
pr
ovidequali
tyin st
ructi
on ,re searchde vel
opme ntande xt
e nsi
onservi
cesandre s
ourc e
ge
ne ra
ti
ontha texce eds takeholde rs’e xpectat
ion sthr
ought hema nagementofcont
inual
i
mpr ov
eme nte f
fort
sont hef ol
lowin gi ni
ti
ati
ves.
1.Es t
abli
s hKe yRe sultAr ea sa ndpe r
forma nceindicat
orsa cr
ossa l
lma n
date d
fun
cti
on s;
2.Impleme ntquali
tye duc ati
on al programs ;
3.Gua ranteec ompe t
en teduc a t
ion alserv
icepr ovi
ders;
4.Spe arhe adn ee d-ba sedr ese arch out putsf orc omme rci
al
iz
ati
on,publi
cat
ion,
pat
en t
ing, a
n dde v
elopt e
c hn ologi
esf orf oods ec
urit
y,cl
imatechangemiti
gati
on
andimpr oveme n ti
nt hequa li
tyofl i
fe;
5.F aci
l
itatetransferoft echn ologie sgen eratedfr
omr e sear
chtothecommun it
yf or
sust
ainablede velopme nt;
6.St r
engthe nrelat
ion shipwi t
hs takeholders ;
7.Sus tai
ngoodgov erna ncea n dc ult
ures en si
ti
vi
ty;
and
8.Compl ytoc ustome r,r
e gulatorya nds tatutor
yrequirements
.

ES312b:
Eng
ine
eri
ngEc
onomy
v
PREF
ACE

Thismodul ewa sdevelope dforEn ginee

ri
ngEc on omy.Thismodul ea i
me dto
provi
deabe tt
erun der
standi
ngont heme thodsofe c
on omi ca n
alysi
sforde ci
si
onma ki
ng
amon ga l
ternat
iv
ec oursesofac t
ionine ngi
nee r
i
ngbus i
ne ssa ndgovernme ntappl
ic
ati
ons.
I
tcovert i
mev al
ueofmon ey
;e ff
ec tofinfl
ati
on;CashF low,futurea ndpr ese
ntv a
lue
;
i
n v
estme nts,de pr
e ci
at
ion,Ca pita
lF i
nanci
ng,Be nef
it-Cos tRa ti
o( BCR) ,Re t
urn on
I
n v
estme nt(ROI )andPa y
backPe ri
od;fin
anc i
alande con omicfe a
sibi
li
tyanaly
seswith
ri
sk/sensi
tivi
tyanal
y s
is.
Self–assessme ntquesti
onswe r
eincludedatthee ndofev er
yc hapt
ertoassess
thestuden t
s’understan
dingofe achc hapter.
Ac ourseguidewa salsoinc l
udedinthismodule,inor dertoguidethe
usersont hec onte
n t
,gradi
ngs ystema ndc l
asspoli
ci
esont hissubject.

ES312b:
Eng
ineer
i
ngEc
onomy
v
i
TABLEOFCONTENTS

Pa
ge
Ch
apt
er1:
Int
roduc
ti
ont
oEn
gin
eer
i
ngEc
onomy 1
1
Ch
apt
er2:Cos tCon c
e ptsandEconomicEnvir
onment
Fix
edCos t,Var
iableCost,
Incr
eme nt
alCost
Dir
ec t
,I
n di
rectand
Ov er
hea dCos t
Standard,Sunka nd
Oppor t
un i
tyCos t
Con sume randPr oducerofGoodsandSe r
vi
ces
Nece ss
iti
es,Luxuriesa
n dPri
ceDe mand
Compe titi
on

Ch
a pt
e r3: Pr inci
ple sofMon ey-
TimeRe lat
i
onship
Simpl eIntere st
Not a ti
ona n
dCa shF low
Diagr a m
Compoun dI n terest
Con tinuousCompoun dingDiscr
etePa y
me nts
TheCon ceptofEqui val
en ce
Or din aryAn nuity
Differ edAn n ui t
y
Disc oun t
I
nflationa ndPr i
c eCha nge s
Pe rspe c t
ivea ndt ermi nol
ogyofPu bli
cProj
ects
Be ne fi
t/Cos tRa t
ioMe thod
Ch
a pt
e r4: De precia ti
ona ndDe pl
eti
on
Na tur eofDe pre ci
a ti
on
Cla ss i
c alDe pr eciati
onMe t
hods
Ch
a pt
e r5: Ca pit
al Fina ncing
Type sofBus ine ssOr ganiza
ti
on
Bon dsa ndItsCl ass i
fi
c at
i
on
Ch
a pt
e r6: Ba si
cMe thodso fMa k
ingEconomicStudi
es
Ra teofRe turnMe thod
An n ua lWor thMe thod
Pre se ntWor thMe thod
F utur eWor thMe thod
Pa yba c kPe rio d
Ch
a pt
e r7: Compa ri
n gAl ternati
v es
Ther ateofRe turnonAddi ti
onalI
nvest
me nt
An n ual Cos tMe thod
Pre se ntCos tMe thod
Equi v al
e ntUn i
formAn nua l
Cos t
Chapte
r8:Na tureofRi sk,Un certai
ntyandSensi
ti
vi
tyBre
ak-
eve
nAn
aly
sis
Alge br aicMe thod
Gra phic alMe thod

ES312b:
Eng
ine
eri
ngEc
onomy
vi
i
ES312b:
Eng
ine
eri
ngEc
onomy
vi
ii
COURSEGUI
DE

CourseIn
formati
on
CourseTit
l
e Engi
neeri
ngEcon
omy
CourseCode ES312b
Pre-
requi
si
te/Co- Math101E,Ma
th121
E,ES
re
quisi
te 111,Phy
s112

Cour
seDe
scr
i
pti
on

Thiscourseexpl
oresmethodsofeconomicanal
ysi
sfordeci
si
onmaki
ngamo ng
a
lt
erna
ti
vec oursesofa ct
i
onine ngi
neer
ingbusi
nessa ndgover
nme n
tappl
ic
ati
ons
.It
c
oversti
mev a
lueofmon ey;ef
fectofin
fl
ati
on;CashF l
ow,fut
ureandpres
entval
u e
;
i
nve
stments,de pr
eci
ati
on,Capi
talFin
anci
ng,Be nef
i
t-CostRati
o( BCR)
,Re t
urn on
I
nve
stment(ROI)a ndPaybackPeri
od;fi
nanc
iala
n deconomicfe
asi
bil
i
tya
nal
yseswith
r
i
sk/sens
it
ivi
t
ya nal
ysi
s.

Cours
eObj e
c t
ives/Outcome s
Uponpass
ingthec ourse,y
oumus tbeableto:
1.Expl
ainthetimev al
ueofmon eyandmon eydiscounti
ngatnormalan
dinfl
at
ionar
y
condi
ti
on s
2.Descri
bet hec onceptofequi
val
encea n
dc al
cul
atepresentandfut
urewor t
hof
cashf lows us i
ngn ominalande f
fect
ivei nt
e r
estra t
esa ndc onti
nuous
compoun ding.
3.Demon strat
eanun derst
andi
ngofthekeyc onceptsusedtodeter
minecost
sa nd
benef
itsofane ngi
ne e
ri
ngproj
ect,
depreci
ation,a
ndde pl
eti
on
4.Makea n a
lysi
sinde ci
si
onma ki
ngusingbrea k
evena ndsensi
ti
vi
tyanal
ysi
sun de
r
uncer
taint
yc ondi
ti
ons.

Cour
seLearn
ing/
StudyPla
n/Sc
hedul
e
Week/Dat
e Topi
c Te
achingand Learn
ing As
ses
sme
nt
(De
adli
nes
) Learni
ng Mater
ial
s
Acti
vi
ties
1 Onli
neVideo VLE/Zoom/ Onl
in
eExam,
Pres
entaton On
i li
ne La
borat
ory
conf
erences ex
erci
ses
Lect
ure

2 Onl
i
neVideo VLE/Zoom/ Onl
in
eExam,
Pr
esen
taton On
i li
ne La
borat
ory
conf
erenc
es ex
erci
ses
Lect
ure

3-
8 Onl
i
neVideo VLE/Zoom/ Onl
in
eExam,
Pr
esen
taton On
i li
ne La
borat
ory
conf
erenc
es ex
erci
ses

ES312
b:En
gin
eer
i
ngEc
onomy
9
 L
ect
ure

10-
11 Onl
i
neVideo VLE/Zoom/ Onl
in
eExam,
Pr
esen
taton On
i li
ne La
borat
ory
conf
erenc
es ex
erci
ses
Lect
ure

12-
17 Onl
i
neVideo VLE/Zoom/ Onl
in
eExam,
Pr
esen
tati
on O n
li
ne La
borat
ory
conf
erenc
es ex
erci
ses
Lect
ure

Cour
seRe
qui
r
eme
nts
/As
ses
sme
nta
ndEv
alua
ti
onSc
heme
/Gr
adi
ngSy
ste
m

Wei
ght
Cour
seOut
come
s(CO) Sa
ti
sf
act
oryRa
ti
ng Ta
rge
tSt
anda
rd
(
%)
CO1 .Explai
nt hetimev alueof Atl
east60%ofth
e
mo neyandmon eydiscounti
n ga t cl
asshasa
normalandi nfl
ati
onaryc ondi
tions 30% 75% sa
ti
sfac
toryRa
ti
ng
CO2 .De scribe the c oncept of Atl
east60%ofth
e
equi
valencea ndc al
culatepr esent cl
asshasa
andf uture wor th ofc ashf l
ows 20% 75% sa
ti
sfac
toryRa
ti
ng
usi
ngn omi nala ndeffecti
vein t
e r
est
rat
esa ndc ontin
uousc ompo unding.
CO3De mon str
atean Atl
east60%ofth
e
understan
din gofthek eyc onc ept
s cl
asshasa
usedtode terminec ostsa nd 20% 75% sa
ti
sfac
toryRa
ti
ng
benefi
tsofa ne ngi
nee r
ingproj e
c t
,
depreci
ati
on ,andde plet
ion
CO4 .Ma kea nal
ysisinde ci
si
on Atl
east60%ofth
e
ma ki
ngus i
n gbreakeve na nd cl
asshasa
sensi
ti
vit
ya nalysi
sun derun cert
a i
nty 30% 75% sa
ti
sfac
toryRa
ti
ng
condi
ti
on s

ES312
b:En
gin
eer
i
ngEc
onomy
10
 Gr
adi
ngSy
ste
m
Gr
ade Gr
adeEqui
val
ent
:

CO1 Sc
oreRange Scor
eRan
ge
30% 1 98 100 3.
25 65.
625 74.
9999
1.
25 95 97.999 3.
5 56.
250 65.
6249
CO2 1.
5 92 94.999 3.
75 46.
875 56.
2499
20% 1.
75 89 91.999 4 37.
500 46.
8749
2 86 88.999 4.
25 28.
125 37.
4999
CO3
2.
25 83 85.999 4.
5 18.
750 28.
1249
20% 2.
5 80 82.999 4.
75 9.
3750 18.
7499
CO4 2.
75 77 79.999 5 0 9.3749
30% 3 75 76.999

HouseRul es/ClassPol i
cies
1.At tenda ncewi l
lbec heckede ver
yc lassme et
in
g. Provi
si
onsoftheUSMCode
regardinga tt
endanc eofs t
ude n
twi l
lbes t
ri
ctl
yimpleme n
ted.
2.We aringofc ompleteun if
ormwi l
lbes tri
ct
lyobse r
ved.
3.Che ati
ngi ss t
ri
ctl
ypr ohi
bit
e d.
An yonewhoi sca ughtcheati
ngwil
lberef
err
edtothe
guidanceof f
i
ce.
4.Re cordkee pi
ngofqui za nde x
amr es
ultsi
srecomme ndedformon i
t
ori
ngof
acade mics tandi
ng.
5.Con sult
a t
iondur i
ngpr escr
ibedsc hedulei
shighlyen c
ouraged.
6.Ma ke-upe x amwillbea ppli
cabl
ef ormissedterme xamon lypr
ovi
de dt
hatanexcus
e
sl
iporme dicalcert
ifi
cateispresen t
ed.
Theinstructorreservesther i
ghttoc hangea nypartofthi
ss y
ll
abuswithpr
iordi
scl
osur
e
tot
hes t
ude nts.

ES312
b:En
gin
eer
i
ngEc
onomy
11
 CHAPTER1
I
nt
roduc
ti
ontoEngi
nee
ri
ngEc
onomy

I
nt
ende
dLe ar
nin
gOutcome s
Byt
heendofthi
stopi
c/c
hapt
er,
youmustbeabl
eto:
1.Beint
roducedtot
hePri
nci
pl
esofEn
ginee
ri
ngEconomy

2.Bei
nt
roduc
edt
otheEn
gin
eer
i
ngEc
onomyDe
signPr
oce
ss

Pr
i
nci
pl
esofEn gi
neer
ingEconomy
1.
DeveloptheAlter
nati
ves
2.
Focusont heDif
fer
en c
es
3.
UseaCon si
sten
tViewpoin
t
4.
UseaCommonUn i
tofMeasure
5.
ConsiderAllRel
evantCri
ter
i
a
6.
MakeRi skandUn c
ertai
nt
yEx pl
i
ci
t
7.
Revis
itYourDe ci
si
on

Appl
ytoa
nex
ampl
epr
obl
em

Rodrigon e
eds57l i
t
e rsofgasol
inetot
opoff( f
ul
ltank)hi
sa utomobi l
e’
sga sta
nk.
I
fhedriv
e sane xtr
a14k m( roundtri
p)t
oaga sstat
ionont heoutski
rtsoft own,Stancan
savePhp3. 00pe rli
teront hepr i
ceofgasol
in
e( Php3. 00/l
it
eroff).Suppos egasol
ine
cost
sPhp50. 00perli
teran
dSt an
’scarget
s10.6kmpe rli
terf
orin-towndr i
vi
ng.Should
Rodri
goma ket hetri
ptoge tlessexpensi
vegasol
i
ne ?Eve r
y3k i
lome terthatStandri
ves
cre
ateson ek i
loofc a
rbondi oxi
de(CO2).Eachkil
oofCO2ha sac ostimpactofPhp
2.
23ont hee n v
ir
onme nt
.Wha tot
herfac
tor
s(costa ndotherwi
se )shouldSt a
nc onsi
der
i
nhisdecisi
onma ki
ng?

1.De
vel
opt
heAl
t
ern
ati
ves

Probl
em:Rodri
goneedst
otopoffhi
saut
omobil
eby57li
ter
s.
TheAlter
nat
iv
e:Dri
veanext
ra14kmtos a
vePhp3.00perl
i
ter.
Defi
ne:I
fhepurs
uestodri
veanext
ra14km,anaddi
ti
ona
lcostf
ortra
vel(10.
6
kmpe rl
i
ter
)andcostofc
reat
i
ng(CO2)(Php2.
23/ki
l
o)woul
dbei n
curre
d.

2.F
ocusont
heDi
f
fer
enc
es

Di
f
fer
enc
e:Cos
toft
oppi
ngof
fRodr
i
go’
saut
omobi
l
e’
sga
sta
nk.

ES312
b:En
gin
eer
i
ngEc
onomy
12
 NetSavi
ngs(
NOTAv ai
li
ngthePhp3.
00/l
it
erof
f)=None
Savi
ngs
:(57LxPhp3.00/L)–(14k
mx1k g/3kmxPhp2.23/kg)=Php160.
59
Cost-Dri
vi
ngExtr
a14km: (
14km÷10.6k m/l
i
ter
)x(Php50.
00/li
t
er)=Php
66.
04
NetSavi
ngs=160.
59-
66.04=Php94.55

3.Us
eaCon
sis
ten
tVi
ewpoi
nt

Vi
ewpoi
nt
:Iti
sthepe
rspe
cti
veofRodr
i
go(t
heautomobi
leowner
)onwhe
the
rhe
wi
l
ldri
veanext
ra14kmtosavePhp3.
00perl
i
terofgas
oli
ne.

4.UseaCommonUn itofMeasure
Wha taretobeMe asured?-Int
hiscas
ethet
hingsthataret
obeme as
ure
da r
ethe
gasol
ineandthecarbondioxi
deproduc
edfr
omt heautomobil
e.
Wha tUnitofMeasuretobeUs ed?-Si
ncegas
olin
e( l
it
ers
)andCO2(kg)a
reof
dif
fer
entme asur
e,i
tisbett
ertof
indacommonme asure
me n
tfort
hemandtha
tis
thecost(Php).

5.Con si
de rAllRele
van tCr iteria
Crit
e r
ia:I
nthisproblem, thec ri
teriaofRodr i
goforc hoosi
nga nal
ter
n a
tiv
ei stohave
thebe stfi
na nc
ial
out comef orbot hchoices.
Choice1: Rodr i
godoe sn otdri
v ea nde x
tra14kmt oa vai
lalesse
rga sol
in
epr ice
(Php3.00/ l
i
terOff),Ther e s
ultisNOs av
ings
Choice2( Alte
rnat
ive): Thes avi
n gshei ncur
redfromdr i
v i
ngane x
tra14k mt oa v
ail
a
gasoli
nepr i
c ewit
hPhp3. 00/ l
it
erof fisaboutPhp160. 59(withdeducti
onf or
envi
ron men ti
mpa ct–2. 23k gofCO2pe r3k mofdr ivi
ng).
Thecostofdrivin
ga n
extr
a14k mi sPhp66. 04. The r
e f
or e,t
hea l
ter
nati
veha sthebe s
tfi
nanc i
aloutcome
sin
cet hes avin
gsfromt hea lt
erna t
iveishi
ghertha nit
sc ost
.Net=(160.59-66.04=
+94.55)

Theonl
ycr
i
ter
i
aconsi
der
edi
nthepr
obl
emistomaxi
miz
ehissav
ings.Othe
rcr
i
ter
i
a
t
hatcoul
dbecons
ide
redi
stomi
ni
mizef
ina
nci
all
osshewi
l
li
ncurf
romt heti
mehespent
i
ndriv
ing

6.
Mak
eRi
ska
ndUn
cer
tai
nt
yEx
pli
ci
t

ES312
b:En
gin
eer
i
ngEc
onomy
13
 Rodri
go’
sdeci
si
onma yals
obei n
fl
uence
dbyc os
tf orac
c i
den
ts.Thus,
ques
ti
ons
wi
ll
a r
isei
fhewouldmakethetr
ipofdri
vi
nganextr
a14k mbe causeri
skandunce
rta
int
y
i
nac c
ident
sispr
esent
.Assumingtha
titi
sbestf
orRodri
go’sfi
nanci
ali
nt
e r
estt
odri
vean
ex
tra14k mtoavai
lal
essergas
oli
nepri
ce,t
henquest
i
ona bouti
tsfr
equencywoul
dari
se
(
i.
e.Howoftenwoul
dIdri
veanextr
a14k mtoavai
lt
helesserpri
ce?)

7.
Rev
isi
tYourDe
cis
ion

Theexamplepr
obl
emy i
el
dedaresul
tonhowRodri
gos houl
ddec
idean
dthati
s
t
otr
ave
lane x
tra14kmf orthegasol
i
newithPhp3 .
00/
li
te
roff.Hi
sdeci
si
onshoul
d
a
lwa
ysbere
vie
we dsi
ncet
herear
ecir
cumsta
ncestha
twil
lchan
ge.

Co
nsi
dert
hi
sex
ampl
e.

Supposethatafte
rsome ti
me ,Rodrigor ea
li
zesthathewillspendsomemon ey
formai
ntenanc
e(i.
e.Ti
res,en
gineoil
s,etc.
)fore ver
ykmhet ravel
s.Hee s
ti
matedt ha
tthe
ma i
nt
enancecostforever
ykmhet r
a ve
lsisa boutPhp8.00
Savi
ngs:(
57LxPhp3. 00/L)–( 14k m x1kg/3km xPhp2. 23/
kg)–( 14k mx
Php8.00/km)=Php48. 59
Cost:
(14km÷10. 6km/ l
i
ter
)x( Php50. 00/
li
te
r)=Php66.04
Theref
ore,t
hea l
t
ernati
veisnotgoodf orRodr i
go’
sfin
anci
alin
tere
s t
.(Net=-17.45)an
d
heshouldnowrevi
s ehi
sde ci
si
on.

Whati
f
?Theenvi
ronment
alcosti
ncr
eas
esbyPhp3.
00/
kg;Thegasol
in
epri
ce
c
han
gei
nt
oPhp43.
00/
li
t
er.Thi
swhatif
swoul
dinf
l
uen
ceRodr
i
goonhisde
cis
ionmak
ing.

TheSe
venPr
i
nci
pl
esa
ret
heba
sisf
ort
heEn
gin
eer
i
ngEc
onomyDe
signPr
oce
ss

STEPS-En gi
ne e
ri
ngEc on omicAn aly
sisProc e
dure
1.Pr
oblemrecognit
i
on ,
de fi
n i
t
ion,andevaluat
ion.
2.Devel
opmentofthefea sibl
ea l
tern
ati
ves
3.Devel
opmentoftheout c ome sandca shfl
owsfore a
chal
t
ern
ati
ve.
4.Sel
ect
ionofac r
it
eri
on( orc ri
t
e r
i
a).
5.Anal
ysi
sandc ompa r
isonofa l
ter
nati
ves
6.Sel
ect
ionoftheprefer
re da l
tern
ati
ve
7.Per
for
ma ncemon i
tor
inga ndpost-ev
a l
uat
ionofresul
ts

Appl
ytoa
nex
ampl
epr
obl
em
I
MAGINE: Youa reafina
n ci
aladvi
sora ndacli
entcamet oaskf oradvi
ce.Youwi l
lnowt r
y
tohel
phi m usingthes te
pspr esentedhere.Yourc l
i
ent’
sna mei sNoynoya ndt hisa r
e
thefa
c t
s:Noy n
oyboughta napart
me ntcomplexn earUSMf orPhp2M. Hea ppli
edf ora
housi
ngloani nBDOk abacanfora boutPhp1.5Ms i
ncehega vetheprevi
ousown era
Php500kdown paymen t
,theloanwa sa pproved.Thea nn
ua l(year
l
y)pa yme ntt othe
bankisfix
eda tPhp150k .Noynoya l
soe st
imatedthatthea n n
ualma i
ntenancef orthe
apar
tme ntcompl e
xisPhp72k .The r
ea r
es ix(6)apart
me ntswiththre
e( 3)be drooms
eachinthea par
tme ntcomplexthatcane achber ent
edforPhp2. 5k.Wec ann owa ppl
y

ES312
b:En
gin
eer
i
ngEc
onomy
14
t
hes
eve
n-s
teppr
oce
dur
etoa
nswe
rtheque
sti
ons
.

F
romt
hee
xampl
e,t
hef
ol
lowi
ngque
sti
onsa
re:

a)Doe sy ourc l
i
enthaveaprobl
e m?Ifso,whati
sit?
b)Wha tarehisa l
t
ernat
i
ves?(I
denti
fyatle
astthr
ee)
c)Estima tetheeconomicconsequencesandotherrequi
reddat
afortheal
t
ernat
ive
s
i
nPa rt(b).
d)Se l
ec tac r
it
eri
onfordi
scri
min
a ti
ngamon galt
ern
ati
ves,andusei
ttoadvi
seyour
cli
entonwhi c hcours
eofacti
ontopur sue.
e)Attemptt oa nal
yzeandcompa rethealt
ernat
i
vesinvie
wofa tl
eastonecr
i
teri
onin
addit
iont ocos t
.
f)Wha ts houldyourcl
i
entdobas eontheinfor
ma t
i
ony ouandhimhavegener
ated?

a
)Doesyourc
li
entha
veapr
obl
em?I
fso,
wha
tisi
t
?
L
et’
sse
e:

AnnualExpenses
:Php150k+Php72k=Php222k
AnnualI
ncome :
(6xPhp2.5kx12)=Php180k
NetI
ncome :Php180k-Php222k=Php-42k(l
oss
!)
Ther
efore
, y
ourcli
entha
saprobl
em

b)Whatar
ehisalt
ernati
ves
?( I
dent
if
yatleastt
hree)
Opti
on1:Rai
setherent.
(Wil
lthemarketbearthei
ncrease
?)
Opti
on2:Lowerma i
nt
enancee x
penses(butnotsofarastocauses
afe
ty
pr
obl
ems)
Opti
on3:Sel
lt
hea par
tmentbuil
di
ng.(
Wha taboutaloss?)
Opti
on4:Abandonthebuil
di
ng(badforyourcl
ient
’
sr eput
ati
on)

c
)Es ti
ma t
et hee con omicc onseque ncesa ndotherr
equireddataforthe
al
terna t
iv
e sinPa rt(b).
Option1: Ra i
set hemon thl
yr ent.
Mon thlycos t
:(Php222k /12)=Php18. 5k
Mon thlyI
n comef r
omRe nt
:(6xPhp2. 5k)=Ph p15k
AdditionalPa y
me ntforRe nt:Php18.5k–Php15k=Php3. 5k
I
nc r
e aseinRe n tforthe6Apa rt
me nt
:Php3. 5k/6=Php583~Php600
There f
ore,forthisopt i
on,cha ngethere n
tfromPhp2. 5ktoPhp3. 1k,afai
r
i
nc r
e aseofa bout24%. Forprac t
ical
purpos esyoucana dvi
seyourc l
ie
nttos e
tit
at3.5kpe rmon thpe rapa r
tme ntwhichha sals
oaf a
irin
c r
easeofa bout40%.
Option2: L owerma i
n t
ena ncee xpens
es( butnotsofarastocauses afet
y
problems )–L owe rt
hemon thlye x
pens essothati
twill
bec over
edbymon thl
y
revenue( rent
).

ES312
b:En
gin
eer
i
ngEc
onomy
15
 Monthl
ycost:
(Php222k/12)=Php18.
5k
Monthl
yMa i
nt
enanceExpense(MME):
(Php72k/
12)=Php6k
Monthl
yExpensew/outMME: Php18.
5k–Php6k=Php12.5k
Monthl
yInc
omef r
omRe n t
:(6xPhp2.
5k)=Php15k
Reduct
ionofMME:Php15k–Php12. 5k=Php2.5k

Bas e
donthec a
lcul
ati
ondone,theori
gi
n a
lMMEofPhp6kn eedstobel ower
ed
toPhp2.5k.Thi
sr educt
ionisa l
most60%whi c
hc oul
dpos si
bl
yc auses af
ety
probl
ems.Ther
efore,
thi
sopti
oni snoti
nthebestfi
nanc
ial
int
erestofyourcl
ient
.
The r
e’
snotmuc ht obedon ea bouttheannuall
oanpayme ntcostun l
essa
fa
v or
abl
eref
in
ancingopport
uni
typresen
tsit
sel
f
.

Opt
i
on3:
Sel
lt
hea
par
tme
ntbui
l
di
ng.
(Wha
tabo
utal
oss
?)

As sumption:Supposethea par
tmentcomplexi
sinoper
ati
onfort
we l
ve
(12)mon ths(1ye a
r),
andont he13thmon t
hwhenhereali
zestha
tthere
we r
elos s
e si
nhisr e
venue.
Down pa y
me n t
:Php500k
An nualLosses:Php42k( f
orthefi
rstyea
r)
Pric
e( Apa r
tme ntComplex):Php500k+Php42k=Php542k
Thes ucce s
sivepaymentsforthel
oa ni
nBDOwi l
lbeshoul
deredbythe
newown er.

Opti
on4: Abandonthebui
l
di
ng(badforyourcli
ent
’sreput
ati
on)
Wa l
kawayfromt heven
tur
eandcryinpai
na syouk i
ssgood-byet
oyour
i
nvest
me nt.
The
bankwouldli
kel
ya ss
umepossess
ion(re
po)throughforecl
osur
eandmaytryt
o
col
le
ctfees
fr
omy ourcl
ien
t.Thi
sopti
onwoul
da l
sobev erybadforyourfr
ie
nd’
scre
ditr
ati
ng.

d) Selec
tac r
it
eri
onfordis
crimi
nati
nga monga l
t
erna
ti
ves
,andusei
ttoa
dvi
se
yourcl
ien
tonwhi chcourseofacti
ontopursue.
On ecr
it
eri
oncouldbetomi ni
miz
et heexpect
edlos
sofmoney.
Int
hi
scase
,you
mightadvi
seyourcl
ie
n tt
opursueOpt i
on(1)orOpti
on(
3).

e
)Attemptt oan a
lyzeandc ompa rethealt
ernat
ive
sinv i
ewofatl
eastone
c
ri
teri
onina ddi
ti
ont ocost.
F
ore x
a mple,l
et’
sus e“cr
e ditwor
thi
ness”asa naddi
t
ional
cri
t
eri
on.Opti
on(
4)i
s
i
mme diat
elyrul
edout .
Exer ci
si
ngOption(3)coul
da l
soharmyourcl
ien
t’
scr
edi
t
r
ati
ng.Thus,Options(1)an d(2)maybehi sonl
yreal
i
s t
i
candaccepta
ble
a
lt
ernati
ves.

ES312
b:En
gin
eer
i
ngEc
onomy
16
 f
) Wha tshouldyourcl
ientdoba s eonthei nf
ormati
ony ouandhi mhave
ge nerat
ed.
Yourfri
ends houl
dpr oba bl
ydoama rke
ta nal
ysi
sofcompa r
ablehousi
ng
(survey)i
nt heare
at oseeifther entcouldberai
s e
d(Opt i
on1).Maybeafres
h
coa tofpai
n twoul
dma kethea pa r
tmentsmorea ppeal
in
gt oprospe
c t
i
verent
ers.
I
fs o,therentcanprobablybe
rai
s edwhilekeepi
ng100%oc cupa ncyofthes i
xapart
me nts.

SUMMARY:

Thepr oblemsdi sc
uss edhe reshowe dt hei mporta nc eofdoi nge ngineeri
ng
economi canalysi
swhi chwa sba s edont hes evenpr i
ncipl
esde scri
be dont hef i
rstpa r
t.
Thes i
mpl eil
l
ustrat
ionofho wthes e venpri
n cipl
eshe lpedRodr i
goi nas eeminglys i
mple
probl
emofwhe t
he rhewou l
da vail
thePhp3. 00/l
it
e roffbydoi nga14k mtri
p( roundtri
p)
ornot.Thes econ dpr oblems howsy ouhowt ouset hes tepsofe n gi
neeri
n ge conomic
procedures.Youwe r
et oldtoima gi
n ethatyoua r
ea“ financi
ala dvis
or ”andgivea dv i
ceto
ac l
i
en t
,Noy noy,bygi vi
n ghim optionsan da dv i
si
nghi m wha thes houlda f
tertheb e s
t
choi
cei sma de .Base dont het wodi ff
erentc ri
ter
iapr esent
e di nthepr obl
e m,theb e s
t
choi
ceisopt i
on1s i
nc eitbecameagoodc an didat
ef orthetwoc r
it
eria.
Alt
hought hepr oblemsh eredon otrefl
ec tther eal
-li
f
es ituat
ion ,i
tgi vesy oua n
underst
a ndi
ngonhowt ous ee ngineeri
nge con omyt oy oura dva nt
age .Real-l
i
fes i
tuati
on
al
way sinvol
vedt hec onceptoftimet omon e ywhi chwi l
lbedis cus s
e dinlatertopics.

EXERCI
SES:

SHOWYOURSOL
UTI
ONS.
Proble
m 1:StanMoneymakerneeds15ga l
l
onsofgasol
i
netotopoffhi
sautomobi
le’
s
gastank.I
fhedri
vesa
ne xt
rae i
ghtmil
es(
roundtr
ip)t
oagasstat
i
onontheoutski
r
tsof
town,Stancansave$0.
10pe rgal
lonont
hepr i
ceofgas
oli
ne.
Supposegas
olin
ec os
ts
$3.90pergal
l
onandStan’
scargets25mpgforin
-towndr
i
vin
g.
1.
Comput
ethesav
ingshewouldhav
eifhec hoset
oavai
lt
he$
0.10pe
rga
ll
onof
fof
ga
sol
i
nepr
i
ce.Wi
l
li
tbegoodforhi
sfi
nanc
ial
int
eres
t?Why
?
2.
Howmuc
hist
hec
ostofga
sol
i
nef
ort
het
ri
p?
3.
Suppos
ethathereal
i
zest
hatheneedstoin
cor
por
atet
hema
int
ena
ncec
ostof$
0.2
pe
rmil
es.
Wil
li
tsti
l
lbegoodf
orhi
sfi
nan
cia
lin
ter
est
?Why?

Probl
em2: Tyl
erj
ustwrec
kedhi
sn e
wNi ssa
n,andthea c
ciden
twa shisf
ault
.Theown e
r
oftheot
herv ehi
cl
egottwoesti
matesfort
herepai
rs:onewa sfor$803a n
dt heothe
r
wa sf
or$852.Tyl
eri
sthi
nki
ngofkeepi
ngtheins
urancecompa ni
esoutoftheinci
den
tto
keephisdr i
vi
ngr e
cord“cl
ean
.”Tyler
’
sde duct
ibl
eonhi scomprehensi
vec over
age

ES312
b:En
gin
eer
i
ngEc
onomy
17
i
nsura
nceis$ 500,a
ndhedoe snotwa nthi
spremium t oin
creasebeca useoft he
ac
c i
dent
.I
nthi
sregar
d,Tyl
erest
i
matesthathi
sannualpr
emi umwill
ri
seby$ 60ifhefi
les
aclai
ma gai
nsthisi
nsur
ancecompany.Invi
ewoft hea bovei
nformat
ion
,Ty le
r’
sinit
i
al
deci
si
onist
owr i
teapers
onalc
heckfor$803paya
bletotheown eroft
heothe rvehi
cl
e.
1.Assumingt
hathewi
l
lke
eptheNis
sanca
rfor5mor
ey ea
rs,howmuchwoul
dbet
he
costofsubmi
t
ti
ngacl
ai
mfort
hein
suran
cecompan
y?I
sitagoodmove?Why?
2.Assumingt
hathewi
ll
keept
heNi
s s
ancarfor10mor
ey ear
s,howmuchwoul
dbet
he
costofsubmi
t
ti
ngacla
imfort
hei
nsur
anc
ec ompany?I
sitagoodmove
?Why ?
3.Assumin
gthathi
ssemi
-
annua
lpremi
umwil
lr
is
eby$ 60andk
eeptheNi
ssa
ncarf
or5
mo r
ey ear
s,how muchwoul
dbet hecos
tofs ubmi
tt
in
gac l
ai
mf ort
heins
ura
nce
compa n
y?Isi
tagoodmove
?Why ?
Probl
em3:Aty
picaldi
scount
edpric
eofaAAAba t
teryi
s$0.
75.I
ti
sde si
gne
dtoprov
ide
1.
5v ol
t
sa n
d1.0a mpsf oraboutanhour.Nowwemul ti
pl
yvol
tsa n
da mpstoobt
ain
powerof1.
5watt
sfromt hebat
ter
y.Thus
,itcos
ts$
0.75f
or1.5Watt
-hour
sofener
gy.
1.
Howmuc
hwoul
ditc
ostt
ode
li
veron
eki
l
oWa
tt-
hour
?
2.Howman yti
meswil
litbec
ostl
yc ompa
redt
othec
ostofe
ner
gyf
rom y
ourl
oca
l
el
ect
ri
cut
i
li
tyat$0.
10pe
rk i
l
oWatt
-hour?
Probl
em 4:Studi
eshaveconc
ludedtha
tac ol
l
egedegre
ei saver
ygoodinvest
ment.
Supposethatacoll
egegra
duat
ee ar
nsabout75%moremon eyperhourt
hanah i
gh
school
graduat
e.I
ft
heli
fe
ti
meea r
ni
ngsofahi
gh-sc
hool
graduat
eave
rage$1,
200,
000,
1.
Howmuc
hist
hei
ncr
eas
ed?
2.
Howmuc
hist
hee
xpe
cte
dea
rni
ngsofac
oll
egede
gre
ehol
der
?
Probl
em 5:Thema n
ufa
ctur
erofBr
andAautomobil
eti
rescl
ai
mstha
tit
sti
recansave
110gall
onsoffue
lover55,
000mil
esofdr
i
ving,a
sc ompar
edtoapopul
arcompe
ti
tor
(Bra
ndB).
1.I
fgas
oli
necost
s$4.
00pergal
l
on,howmuc
hpe
rmi
l
edr
i
vendoe
sthi
sti
r
esa
vet
he
cus
tomer(
Bra
n dAver
susBr
andB)?
2.I
fga
sol
i
nec
ost
s$4.
00pe
rga
ll
on,howmuc
hwoul
dthec
ust
ome
rsa
vei
fheus
es
Bra
ndA?
3.
Wha
tfr
act
i
onofape
nnywoul
dhes
avef
ore
achmi
l
ethec
ust
ome
rus
esBr
andAt
i
re?

ES312
b:En
gin
eer
i
ngEc
onomy
18