LECTURE 1

INTRODUCTION

ES ECON
Dyanne Brendalyn M. Cavero, MEng
 Overview
Engineering, as defined by ABET (Accreditation
for Engineering and Technology), as the
profession in which the knowledge gained in
physics, chemistry, life sciences, and
mathematics is applied to make products in
large scale that increase the prosperity of man.
This must be achieved with a judicious choice of
materials, at the lowest cost in a manner that is
benign to the environment, and that keeps all
the stakeholders safe.
 Overview
Economy consists of the sum total of all income
from goods produced and services offered in a
state or nation. It deals with the interaction
between people and wealth.
 Overview
Engineering Economy is the study of feasibility
and evaluation of the cost of possible
solutions to engineering problems.

When benefits outweigh costs, the alternate

becomes an acceptable one.
 Overview
Engineering Econ allows us to compare money
spent or received (cash flows) in the future to
an amount of money spent today.

As engineers, we are constantly faced with

decisions based on an investment today vs a
benefit in the future.
 Seven Principles
of
Engineering Economy
 Seven Principles of Engineering
Economy

1. Develop the alternatives

– Carefully define the problem
– Make a list of alternates : Plan A, B, C, etc
– The alternatives need to be identified and then
defined for subsequent analysis
 Seven Principles of Engineering
Economy

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 is different among the alternates?
 Seven Principles of Engineering
Economy

3. Use a consistent viewpoint

– Be clear on what you want
– The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint (perspective).
– It is important, however, that the viewpoint for
the particular decision be first defined and then
used consistently in the description, analysis, and
comparison of the alternatives.
 Seven Principles of Engineering
Economy

4. Use a common Unit of Measure

– Developing common performance measures
– Using a common unit of measurement to enumerate
as many of the prospective outcomes as possible will
simplify the analysis of the alternatives
– It is desirable to make as many prospective outcomes
as possible commensurable (directly comparable)
 Seven Principles of Engineering
Economy

5. Consider all Relevant Criteria

– Meet all relevant criteria
– Selection of a preferred alternative (decision making)
requires the use of a criterion (or criteria).
– The decision process should consider both the
outcomes enumerated in the monetary unit and those
expressed in some other unit of measurement or
made explicit in a descriptive manner.
 Seven Principles of Engineering
Economy

6. Make Risk and Uncertainty Explicit

– Weigh the risk against the projected rewards.
– Risk and uncertainty are inherent in estimating
the future outcomes of the alternatives and
should be recognized in their analysis and
comparison.
 Seven Principles of Engineering
Economy

7. Revisit your Decisions

– Check the results of action plan and revise plan
if/when necessary
– 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 actual results achieve
Engineering Economy and
the Design Process
 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 normally
includes other engineering knowledge and
input.”
 Engineering Economic Analysis Procedure

1. Problem recognition, definition, and evaluation.

2. Development of the feasible alternatives.
3. Development of the outcomes and cash flows
for each alternative.
4. Selection of a criterion (criteria).
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post evaluation of
results.
 Problem Definition
• A problem must be well understood and
stated in an explicit form before the project
team proceeds with the rest of the analysis.
• It includes all decision situations for which an
engineering economy analysis is required.
• The boundary or extent of the situation needs
to be carefully defined, thus establishing the
elements of the problem and what constitutes
its environment.
 Development of Alternatives
Involves two steps:
1. Searching for potential alternatives
2. Screening them to select a smaller group of
feasible alternatives for detailed analysis

“It takes money to make money.”

 Development of Alternatives

“ Engineers are the very heart of creating value

for a firm by turning innovative and creative
ideas into new or reengineered commercial
products and services.”
 Development of Alternatives
Brainstorming
– Based on the fundamental principles of :
• Deferment of judgment
• Quantity breeds quality
– Basic steps :
• Preparation
• Brainstorming
• Evaluation
 Development of Prospective
Outcomes

• Uses the basic cash flow approach

• Cash flow represents the economic effects of
an alternative in terms of money spent and
received.
 Selection of a Decision Criterion

• The decision maker will normally select the

alternative that will best serve the long term
interests of the owners of the organization.
 Analysis and Comparison of
Alternatives

• Analysis of economic aspects of an

engineering problem is largely based on cash
flow estimates for the feasible alternatives
selected for detailed study.
 Selection of Preferred Alternative
• The preferred alternative is simply a result of
the total effort of the steps abovementioned.
• The soundness of the technical-economic
modeling and analysis techniques dictates the
quality of the results obtained and the
recommended course of action.
 Performance monitoring and Post
evaluation of results

• Monitoring project performance during its

operational phase improves the achievement
of related goals and objectives and reduces
the variability in desired results.