EMT 341/3

Management for
Engineers
Part II : Economics
Sem 2 2020/21
 Course Summary
Coursework
Ability to create
Activities Week Tentative Date
and analyze
economic scenarios Assessment
10 28-31/12/2020
and integrate 1
decision making Assignment
12 11-15/01/2021
process to 4
engineering project 29/01/2021
TEST 2 14
and business (9.30-11.30 pm)
ventures. PROJECT B 15 01-05/02/2021
 Teaching Plan
Foundations of Decision Making
• The concepts of economic
Basics of Engineering Economics equivalence and interest formula.
& Accounting • Analysis of economic alternatives
• Introduction to Engineering using annual worth, present
Economics worth, internal rate of return and
• Basic Accounting discounted cash flow.
• Interest, money and time • Effect of depreciation.
relationship • Methods of financing
• Cash Flow investments, cost of capital,
evaluation of investment
alternatives and decision making.
Reference Book
Engineering
Economy

7th edition

Leland Blank
Anthony Tarquin
Accounting VS Engineering Economic
Evaluation and
Evaluation of past
Prediction of Future
performance
events

Accounting Engineering Economic

Post Future
Present
 Outline
Stage 3
Stage 1 Stage 2
Making better
Fundamental Basic Analysis Tools decisions
• Foundations of • Present, Future and • Effect of Inflation
Engineering Annual Worth • Depreciation
Economy Analysis for • Tax and Exchange
• Time & interest Choosing Rate
affect money Alternatives
• Cash Flow
 Learning Outcomes
1. Definition [keywords]

2. Basic Engineering Economy Concept

3. Ethics

4. Concept of Time Value of Money

5. Interest Rate (Simple, Compound and Effective)

6. Cash Flow Diagram

1.Definition [Engineering , Economic]
A branch of Science and Technology
concerned with the design, building,
Engineering
manufacturing, use of engines,
machines and structures.

• The study of how limited resources is

used to satisfy unlimited human wants
Economic • The study of how individuals and
societies choose to use scarce
resources that nature and previous
generations have provided.
1.Definition [Engineering , Economic] All gifts of nature, such as: water, air, minerals,
Land sunshine, plant and tree growth, as well as the land
itself which is applied to the production process.

The efforts, skills, and knowledge of people

Labor
which are applied to the production process.

Real Capital (Physical Capital )

Tools, buildings, machinery -- things which have been
produced which are used in further production
Capital Financial Capital
Assets and money which are used in the production
process
Human Capital
Education and training applied to labor in the
production process
2.Basic Engineering Economy Concept

What is

Economic?
Engineering
 • Involves formulating, estimating, and
evaluating the expected economic
What is
outcomes of alternatives designed to
Engineering
accomplish a defined purpose.
Economic?
• Mathematical techniques simplify the
economic evaluation of alternatives.

Easy-to-use Estimates of economic

Math techniques outcomes can be
simplify the deterministic or
evaluation stochastic in nature
2.Basic Engineering Economy Concept
ENGINEERING
ECONOMY AND THE
DESIGN PROCESS

• An engineering economy study is

accomplished using a structured procedure
and mathematical modeling techniques.
• The economic results are then used in a
decision situation that involves two or more
alternatives and normally includes other
engineering knowledge and input.
2.Basic Engineering Economy Concept

Why Engineering
Economy is Important to
Engineers?
https://www.youtube.com/watch?v=H7VJgwlR9tA
 Designing
involves
economic Engineers
decisions design and
Engineers must be
able to incorporate create
economic analysis
into their creative
efforts Why Engineering
Economy is Important
to Engineers?
Often engineers must
select and implement from Understanding and applying
multiple alternatives time value of money,
economic equivalence , and
cost estimation are vital for
engineers
2.Basic Engineering Economy Concept

What are the

Principles
of Engineering
Economics ?
 What are 1. Develop 2. Focus on 3. Use a
the the Consistent
the Alternatives Differences Viewpoint
Principles
of 4. Use a 5. Consider 6. Make
Common Unit All Relevant Uncertainty
Engineering of Measure Criteria Explicit
Economics
? 7. Revisit
Your
Decisions
1. DEVELOP THE ALTERNATIVES
The final choice (decision) is among
alternatives. The alternatives need
to be identified and then defined for
subsequent analysis.
2. FOCUS ON THE DIFFERENCES
Only the differences in expected
future outcomes among the
alternatives are relevant to their
comparison and should be
 3. USE A CONSISTENT VIEWPOINT
The prospective outcomes of the
alternatives, economic and other, should
be consistently developed from a defined
viewpoint (perspective).
4.USE A COMMON UNIT OF MEASURE
Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will make easier the
analysis and comparison of alternatives.
5. CONSIDER ALL RELEVANT CRITERIA
Selection of a preferred alternative
(decision making) requires the use of a
criterion (or several criteria). The decision
process should consider the outcomes
enumerated in the monetary unit and those
expressed in some other unit of
measurement or made explicit in a
descriptive manner.
 6. MAKE UNCERTAINTY EXPLICIT
Uncertainty is inherent in projecting (or
estimating) the future outcomes of the
alternatives and should be recognized in
their analysis and comparison.
7. REVISIT YOUR DECISIONS
Improved decision making results from an
adaptive process; to the extent practicable, the
initial projected outcomes of the selected
alternative should be subsequently compared with
2.Basic Engineering Economy Concept

How to perform the

engineering economy
study?
 Step 1: Problem
Description / Objective
statements
One or more
Step 2: Available data approaches to meet
[Alternative for
objective • Expected Life
solutions]
• Revenues
Step 3: Cash Flows & • Costs
other estimates • Taxes
• Project Financing
How to
Step 4: Measure of PW, perform the
worth criterion ROR,
engineering
B/C,
etc economy
Step 5: Engineering
economic analysis study?
Consider :
• Noneconomic factors
Step 6: Best alternative
• Sensitivity analysis selection
• Risk Analysis
Step 7: Implementation
& Monitoring
New
Time passes Step 1: New problem engineering
description economy study
begins
2.Basic Engineering Economy Concept
Objective 2
Objective 1
To determine the To provide a
cost of products or rational basis for
services Modern
Moderncost
cost
pricing goods or
services
accounting
accounting Objective 4
Objective 3 Objectives
Objectives To provide
information on
To provide a means
which operating
for controlling
decisions may be
expenditures
based and the
results evaluated
 What is Engineering Ethics?
3.Ethics

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 Personal morals or et
als hics
l o r c o m mon mor Beliefs that an individu
Universa al has
tal beliefs: and maintains over tim
da m e n e; how a
Fun
, ly in g, h arming or universal moral is inte
rpreted
stealing the r are wron
g and used by each pers
g an o on
murderin
3.Ethics

Professional or engineering
ethics
Formal standard or code th
at
guides a person in work
activities and decision makin
g
 Why Engineering Ethics is
3.Ethics

important?
 Why Engineering Ethics is
important?
3.Ethics
 Code of Ethics for Engineers

- All disciplines have

a formal code of
ethics.
- National Society
3.Ethics

of Professional
Engineers (NSPE)

https://www.nspe.org/resources/ethics/code-ethics
4. Concept of Time Value of Money
5. Interest Rate (Simple, Compound and Effective) Interest is paid when a
Definition : the person or organization
manifestation of the time borrowed money
value of money (obtained a loan) and
repays a larger
amount over time

Interest is earned
when a person or
organization saved,
invested, or lent
money and obtains a
Interest = ending amount– beginning amount return of a larger
amount over time.
Interest = amount owed now – principal
5. Interest Rate (Simple, Compound and Effective) Interest rate – Interest paid rate of return (ROR)
over a time period expressed
return on investment (ROI)
as a percentage of principal

Interest paid over time to lender. Interest earned over time by investor.
 Cash inflows = receipts, revenues, incomes, and savings
generated by project and business activity. [+]

Cash outflows = costs, disbursements, expenses, and taxes

caused by projects and business Cash flow activity. [+/-]
6. Cash Flow Diagram

Net cash flow (NCF) = cash inflows (R) - cash outflows (D)
6. Cash Flow Diagram

A typical cash flow time scale for 5 years.

future (F)

Example of positive and negative cash flows.

6. Cash Flow Diagram
Types of Cash Flows

Single
Cash
Flow
6. Cash Flow Diagram
Types of Cash Flows

Multiple
Cash
Flow
 P = value or amount of money at a time designated as the
present or time 0. Also P is referred to as present worth
(PW), present value (PV), net present value (NPV),
discounted cash flow (DCF), and capitalized cost (CC);
monetary units, such as dollars
Terminology / Symbol

F = value or amount of money at some future time. Also F is

called future worth (FW) and future value (FV); dollars
A = series of consecutive, equal, end-of-period amounts of
money. Also A is called the annual worth (AW) and
equivalent uniform annual worth (EUAW); dollars per year,
euros per month
n = number of interest periods; years, months, days
i = interest rate per time period; percent per year, percent per
month
t = time, stated in periods; years, months, days
 Economic Equivalence = Combination of
interest rate (rate of return) and time
value of money to determine different
amounts of money at different points in
time that are economically equivalent
Terminology / Symbol

Minimum Attractive Rate of Return

(MARR) = reasonable rate of return
(percent) established for evaluating
and selecting alternatives
MARR Characteristics
• MARR is established by the financial
managers of the firm
• MARR is fundamentally connected to the
cost of capital (for e.g. interest charged by
the bank for the loan).
•MARR usually considers the risk inherent Size of MAAR relative to other rate of return
to a project values.