MODULE 1 – ENGINEERING ECONOMY

INTRODUCTION (FROM MS)

ENGINEERING ECONOMY
 Process of determining whether an engineering project is to be
undertaken or modified with the objective of obtaining the best
utilization of capital resources taken into account some pertinent
facts

 The analysis and evaluation of the factors that will affect the
economic success of engineering projects to the end that a
recommendation can be made which will insure the best use of
capital.

BASIC TERMS AND PRINCIPLES

 RATE OF RETURN (ROR)
o A measure of the effectiveness of an investment of a
capital
o Financial Efficiency
 indicator of success of engineering and business
project

 TYPES OF LIFE
o PHYSICAL
 the time it takes for the machine to function
normally
o ECONOMIC
 a function that has something to do with revenue

 TYPES OF GOODS
o LUXURIES
 necessities varies from person to person
o NECESSITIES
 products that are required to support human life
 BASIC TYPES OF FACTORS THAT AFFECT ECONOMIC
STUDIES
o TANGIBLE
 are those which can be expressed in terms of
monetary values
o INTANGIBLE
 are those which are difficult to express definitely in
terms of monetary values

 BASIC TERMS AND PRINCIPLES

o VALUE
 Designates the worth that a person attaches to an
object or service
o UTILITY
 The power to satisfy human wants
o MARKET
 The place where the vendors or the sellers and
buyers come together
o CLASSES OF GOODS
 CONSUMER GOODS
 are products and services that directly
satisfy human wants. Examples: Food,
cars. Clothing, TV, shoes, etc
 PRODUCER GOODS
 also satisfy human wants but do so
indirectly as a part of production process.
Examples: Bulldozers, ships, buildings,
buses, etc
 o DEMAND
 the quantity of a certain commodity that is bought
at a certain price at a given place and time
 Law of Demand states that the demand for a
commodity varies inversely as the price of
commodity.

o SUPPLY
 the quantity of a certain commodity that is offered
for sale at a certain price at a given place and time
 Law of Supply states that the supply of a
commodity varies directly as the price of
commodity.

o MARKET
 TYPES OF MARKET STRATEGIES
SELLER BUYER
PERFECT 1 1
COMPETITION
MONOPOLY 1 MANY
MONOPSONY MANY 1
DUOPOLY 2 MANY
DUOPSONY MANY 2
OLIGOPOLY 3 OR MORE MANY
OLIGOPSONY MANY 3 OR MORE

o TYPES OF COSTS
 FIXED
 VARIABLE
 INCREMENT
 MARGINAL
 SUNK
o MAJOR REASONS FOR REPLACEMENT
 PHYSICAL IMPAIRMENT
 INADEQUACY
 OBSOLESCENCE
 RENTAL OR LEASE POSSIBILITIES
MODULE 1 – ENGINEERING ECONOMY
INTRODUCTION TO ENGINEERING ECONOMICS (CANVAS)

ENGINEERING ECONOMICS
 previously known as engineering economy, is a subset of
economics for application to engineering projects.
 is equated with practicality and economic feasibility.

ENGINEERING ECONOMY
 is that branch of economics which involve the application of
definite laws of economics, theories of investment and business
practices to engineering problems involving cost.
 is the systematic evaluation of the economic merits of proposed
solutions to engineering problems.
 The purpose of engineering economy is to expose all
engineering students to the methods which are widely used for
evaluation of projects.

PRINCIPLES OF ENGINEERING ECONOMICS

 PRINCIPLE 1
o Develop the alternatives. The choice is among
alternatives
 PRINCIPLE 2
o Focus on the differences. Only the difference in expected
outcomes is considered.
 PRINCIPLE 3
o Use a consistent viewpoint. Prospective outcomes of the
alternatives, economic, etc. should be considered.
 PRINCIPLE 4
o Use a common unit of measure. Using a common unit of
measurement of the possible outcomes in comparing
alternatives.
  PRINCIPLE 5
o Consider all relevant criteria. Consider both monetary
and other unit of measure in measurement of outcomes.
 PRINCIPLE 6
o Make uncertainty explicit. Uncertainty is inherent in
projecting future outcomes and should considered in their
analysis and comparison.
 PRINCIPLE 7
o Revisit your decisions. Projected results and decisions
should be compared with actual results to improve the
decision process.

ENGINEERING ECONOMY (ANALYSIS)

1. 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. Recognition of the problem is normally
stimulated by internal or external organizational needs or
requirements.
2. DEVELOPMENT OF FEASIBLE ALTERNATIVES
a. Searching for the potential alternatives. Screening the to
select a smaller group of feasible alternatives.
3. DEVELOPMENT OF THE OUTCOMES AND CASH FLOWS
FOR EACH ALTERNATIVE
a. Uses basic cash flows approach employed in engineering
economy. Occurs when money is transferred from
organization or individual to another. Represents
economic effects of an alternative in terms of money
spent and received. Nonmonetary factors play a
significant role in final recommendation.
4. SELECTION OF CRITERION
a. Select alternative that will best serve long term interest of
organization. Should reflect a consistent and proper
viewpoint
5. ANALYSIS AND COMPARISON OF THE ALTERNATIVES
a. Largely based on cash flows estimates. Effort is required
to obtain reasonable accurate forecast of cash flows.
 6. SELECTION OF THE PREFERRED ALTERNATIVE
a. Alternative can be compared based on differences.
b. Best alternative is simply a result of the total effort.
c. Dictates the quality of the results obtain and
recommended course of action.
7. PERFORMANCE MONITORING AND POST-EVALUTION OF
RESULTS
a. Improves the achievement of related goals and
objectives. Aim is to learn how to do better analyses.
CAPITAL
The term capital refers to wealth in the form of money or property
that can be used to produce more wealth. Most engineering
economy studies involve commitment of capital for extended
periods of time, so effect of time must be considered. It is
recognized that a unit of principal today is worth more than a unit
of principal one or more years from now because of interest (or
profits) it can earn.

TYPES
1. EQUITY CAPITAL
a. is that owned by individuals who have invested their
money or property in a business project or venture in the
hope of receiving a profit
2. BORROWED CAPITAL
a. is obtained from lenders for investment, with a promise to
repay the principal and interest on a specific date,
whether the operations of the business have been
profitable or not.