Engineering Economic

Decisions

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What is Engineering Economy?
 Economic decision making for engineering systems is called engineering
economy. This definition may seem restricted to engineering projects and
systems only, engineering economy however is also the study of industrial
economics and the economic and financial factors which influence industry.

 Engineers are the people who are familiar with all the technicalities of
machinery and production therefore they are the best judges of the useful
lives of an asset and they also have the technical knowledge to calculate
the number of units a proposed plant would produce when operational.

 In today’s competitive world of business it has become essential that

engineers should practice financial project analysis for engineering projects
and make rational decisions.

 Engineering economy also includes the study of accounting practices for

manufacturing concerns. Unique features of accounting for manufacturing
concerns are process costing, batch costing, cost allocation.

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 Engineering economy deals with justification and selection of projects. Many
engineers work on projects which address a specified activity or a problem.
Any decision regarding the project must be justified.

 In business environments, many if not all, decisions are justified using

monetary criteria such as “profit”. Such decisions are made at the
managerial level and many engineers become managers in manufacturing
environment.

 Therefore, all engineers, regardless of their employment, should know

methods and tools used in evaluation of projects.

 The purpose of engineering economy is to expose all engineering students

to the methods which are widely used for evaluation of projects.

 Even though, engineering economy deals mostly with selection of projects

in business environment, the tools and methods can be and are used by
individuals and non-profit organizations such as government, hospitals, and
charitable entities, etc.

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SOME EXAMPLES
Let us present few examples in different environments where engineering
economy can facilitate the decision making process.

 Business Environment: A small manufacturing company needs to buy a

forklift truck for material handling. Two different brands, say A and B, are
being considered. Which truck should be bought? The decision will probably
be based on minimization of cost.

 Non-profit Organizations: A project for widening a two lane highway to

four lanes is being considered by the county board. A four lane highway
may reduce the traffic accident rate but is expected to lower property values
in the immediate neighborhood of the highway. Should the proposed
highway be built? The county board must weigh the relative benefit of lower
accident rates against the possible loss in value of homes as well as the
construction cost.

 Individuals: A new college graduate needs a new car. Should this new car
be bought or leased? Methods from engineering economy can be used for
determining the best choice.

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 Economic factors are as important as regard for the physical laws and
science that determine what can be accomplished with engineering. The
following figure shows how engineering is composed of physical and
economic components:

 Physical Environment: Engineers produce products and services

depending on physical laws. Physical efficiency takes the form:

System output(s)
Physical (efficiency) = -------------------------
System input(s)

 Economic Environment: Much less of a quantitative nature is known about

economic environments -- this is due to economics being involved with the
actions of people, and the structure of organizations.

 Satisfaction of the physical and economic environments is linked through

production and construction processes. Engineers need to manipulate
systems to achieve a balance in attributes in both the physical and
economic environments, and within the bounds of limited resources.

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 Following are some examples where engineering
economy plays a crucial role:
1. Choosing the best design for a high-efficiency gas furnace
2. Selecting the most suitable robot for a welding operation on an
automotive assembly line
3. Making a recommendation about whether jet airplanes for an overnight
delivery service should be purchased or leased
4. Considering the choice between reusable and disposable bottles for
high-demand beverages

 With items 1 and 2 in particular, note that coursework in

engineering should provide sufficient means to
determine a good design for a furnace, or a suitable
robot for an assembly line, but it is the economic
evaluation that allows the further definition of a best
design or the most suitable robot.
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Engineering Economic Decisions
 Rational Decision- making
Process
 The Engineer’s Role in
Business
 Types of Strategic
Engineering Economic
Decisions
 Fundamental Principles in
Engineering Economics
Bose Corporation

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 Engineering Economics
Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic
decisions

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Rational Decision-Making Process

1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion
to use
6. Select the best alternative

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Which Car to Lease?
Saturn vs. Honda
1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision
criterion to use
6. Select the best alternative
 Need a car
 Want mechanical
security
 Gather technical as well
as financial data
 Choose between
Saturn and Honda
 Want minimum total
cash outlay
 Select Honda
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Financial Data Required to Make an Economic
Decision

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Engineering Economic Decisions

Manufacturing Profit

Planning Investment

Marketing
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Predicting the Future

 Estimating a Required
investment
 Forecasting a product
demand
 Estimating a selling
price
 Estimating a
manufacturing cost
 Estimating a product
life

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Role of Engineers in Business

Create & 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

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Two Factors in Engineering
Economic Decisions

The factors of time and uncertainty

are the defining aspects of any
engineering economic decisions

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Summary

 The term engineering economic decision

refers to all investment decisions relating to
engineering projects.
 The five main types of engineering economic
decisions are (1) service improvement, (2)
equipment and process selection, (3)
equipment replacement, (4) new product and
product expansion, and (5) cost reduction.
 The factors of time and uncertainty are the
defining aspects of any investment project.
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