Engineering Economic Decisions

Lecture No. 1
Chapter 1
Contemporary Engineering Economics, 6th ed.
Copyright © 2016

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
What Is an Engineering Economic
Decision?
 Role of engineers in business
 Understanding the term “engineering
economic decision”
 An overview of a variety of engineering
economic decision problems
 Understanding the fundamental principles of
engineering economics

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Role of Engineers in Business
Create and 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, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Types of Business Organization

Sole
Partnerships
Proprietorships

Corporations Others
• Private Ltd • Company Ltd by
• Public Ltd Guarantee
• Foreign Co.

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Engineering
Economic
Decisions
Investment Marketing

Planning Manufacturing Profit

Plan for the acquisition of equipment (capital

expenditure) that will enable the firm to design and
produce products economically

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
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, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Accounting Vs. Engineering Economy

Evaluation Evaluation and

of past prediction of
performance future events

Accounting Engineering Economy

Past Future
Present

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Common Types of Strategic
Engineering Economic Decisions

• Equipment or process selection

• Equipment replacement decisions
• New products and product expansion
• Cost reduction
• Improvement in service or quality
• Design decisions

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Fundamental Principles of
Engineering Economics

• Principle 1: A dollar earned today is worth more

than a dollar earned in the future.
• Principle 2: The only thing that matters is the
difference between alternatives.
• Principle 3: Marginal revenue must exceed
marginal cost.
• Principle 4: Additional risk is not taken without
the expected additional return.

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 1: A dollar earned today is worth
more than a dollar earned in the future.

Interest rate = 10%

$121
$110 two
one years
$100 year later
today later
Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 2: The only thing that matters is the
difference between alternatives.
Option Monthly Monthly Cash Monthly Salvage
fuel cost maintenance outlay at payment value at
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, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 3: Marginal revenue must exceed
marginal cost.

Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Principle 4: Additional risk is not taken
without the expected additional return.
Investment Class Potential Expected
Risk Return
o Savings Low/None 1.5%
account (cash)

o Bond (debt) Moderate 4.8%

o Stock (equity) High 11.5%

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved
Two Factors in Engineering Economic
Decisions

• Time
• Uncertainty

Contemporary Engineering Economics, 6th edition Copyright © 2016 by Pearson Education, Inc.
Park All Rights Reserved