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INTRODUCTION TO
ENGINEERING ECONOMY
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WHAT IS ECONOMICS ?
The study of how limited
resources is used to
satisfy unlimited human
wants
WHAT IS ECONOMICS ?
The study of how individuals
and societies choose to use
scarce resources that nature
and previous generations
have provided.
Resources

• Land
• Labor
• Capital
Resources

• Land
• Labor
• Capital
 LAND
All gifts of nature, such as: water,
air, minerals, sunshine, plant and
tree growth, as well as the land
itself which is applied to the
production process.
 LABOR
The efforts, skills, and knowledge
of people which are applied to the
production process.
 CAPITAL
• Real Capital (Physical Capital )
–– Tools,
Tools, buildings,
buildings, machinery
machinery --
-- things
things
Dollar Bills which
which
have
have been
been produced
produced which
which are
are used
used in in further
further
production
production
• Financial Capital
–– Assets
Assets and
and money
money which
which are
are used
used in
in the
the
production
production process
process
• Human Capital
–– Education
Education and
and training
training applied
applied to
to labor
labor in
in
the
the production
production process
process
 ENGINEERING
• …is the profession in which knowledge of
the mathematical and natural sciences
gained by study, experience, and practice
with judgment to develop ways to utilize,
economically, the materials and forces of
nature for the benefit of mankind.
• Economic aspects of engineering
• Physical aspects of engineering
• Clearly, it is essential that the economic
part of engg. Practice be accomplished
well.
 Origins of Engineering
Economy
The perspective that ultimate economy
is a concern to the engineer and the
availability of sound techniques to
address this concern differentiate this
aspect of modern engineering practice
from that of the past.
 Origins of Engineering
Economy
• Pioneer: Arthur M. Wellington, civil engineer
latter part of nineteenth century;
addressed role of economic analysis in
engineering projects;
area of interest: railroad building
• Followed by other contributions which
emphasized techniques depending on
financial and actuarial mathematics.
PRINCIPLES OF ENGINEERING
ECONOMY
1. Develop the Alternatives;
2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
DEVELOP THE ALTERNATIVES
The final choice (decision) is
among alternatives. The
alternatives need to be identified
and then defined for subsequent
analysis.
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.
USE A CONSISTENT VIEWPOINT
The prospective outcomes of the
alternatives, economic and other,
should be consistently developed from
a defined viewpoint (perspective).
 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.
 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.
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.
 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 actual results achieved.
ENGINEERING ECONOMY AND
THE DESIGN PROCESS
•• DESIGN
DESIGN PROCESS?????
PROCESS?????

Is
Is an
an iterative,
iterative, decision
decision making
making activity
activity whereby
whereby
scientific
scientific and
and technological
technological information
information isis used
used
to
to produce
produce aa system,
system, device,
device, or
or process
process which
which is
is
different,
different, in
in some
some degree,
degree, from
from what
what the
the designer
designer
knows
knows to to have
have been
been done
done before
before and
and which
which isis
meant
meant toto meet
meet human
human needs.
needs. Also
Also we
we want
want to
to
meet
meet the
the human
human needs
needs economically
economically as as
emphasized
emphasized in in the
the definition
definition of
of engineering.
engineering.
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.
 ENGINEERING ECONOMIC ANALYSIS
PROCEDURE
Steps:
1. Problem recognition, formulation, and
evaluation.
2. Development of the feasible alternatives.
3. Development of the cash flows for each
alternative.
4. Selection of a criterion ( or criteria).
5. Analysis and comparison of the
alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post-
evaluation results.
Engineering Design Process
•• Activities:
Activities:
1-Problem
1-Problem // need
need definition.
definition.
2-Problem
2-Problem // need
need formulation
formulation and
and
evaluation.
evaluation.
3-Synthesis
3-Synthesis ofof possible
possible solutions
solutions
(alternatives).
(alternatives).
4-Analysis,
4-Analysis, optimization,
optimization, and
and evaluation.
evaluation.
5-Specification
5-Specification ofof preferred
preferred alternative.
alternative.
6-Communication.
6-Communication.
 Relationship b/w both.
•• A
A sound
sound EEEE analysis
analysis (EEA)
(EEA) procedure
procedure
incorporates
incorporates the
the basic
basic principles.
principles.
•• The
The 7-step
7-step EEA
EEA procedure
procedure isis used
used to
to
assist
assist decision
decision making
making within
within the
the
engineering
engineering design
design process.
process.
•• While
While performing
performing engg.
engg. design
design activities
activities
we’re
we’re to
to draw
draw info./help
info./help from
from EEA
EEA
procedure.
procedure.
 EEA Procedure Steps
•• Problem
Problem Definition
Definition
•• Search
Search for
for Alternatives
Alternatives /Option
/Option
Development.
Development.
•• Development
Development of of investment
investment alternatives
alternatives
•• Development
Development of of prospective
prospective outcomes
outcomes
•• Selection
Selection ofof Decision
Decision criteria
criteria and
and analysis
analysis
of
of alternatives.
alternatives.
•• Selection
Selection ofof the
the preferred
preferred alternative
alternative
•• Performance
Performance monitoring
monitoring andand post
post
evaluation
evaluation ofof results
results
 Problem Definition
•• It
It is
is not
not adequate
adequate simply
simply toto think
think about
about aa
perplexing
perplexing question
question oror situation.
situation.
•• Rather,
Rather, aa problem
problem must
must bebe well
well
understood
understood and and stated
stated in
in an
an explicit
explicit form
form
before
before thethe engineer
engineer proceeds
proceeds withwith the
the rest
rest
of
of analysis.
analysis.
•• The
The first
first step
step of
of the
the EEA
EEA Procedure
Procedure
(Problem
(Problem Def.)
Def.) is
is particularly
particularly important,
important,
since
since itit provides
provides the
the basis
basis for
for the
the rest
rest of
of
the
the analysis.
analysis.
 Problem Definition
•• The
The termterm problem
problem is is used
used here
here generically.
generically.
It
It includes
includes all all decision
decision situations
situations for
for
which
which EE EE analysis
analysis is is required.
required.
-- problem
problem recognition:
recognition: stimulated
stimulated by
by
internal
internal or
or external
external organizational
organizational

needs
needs or
or requirements.
requirements.
-- problem
problem formulation:
formulation: Boundary
Boundary or
or

extent
extent of
of situation
situation is
is defined.
defined.
-- problem
problem evaluation:
evaluation: Refinement
Refinement of
of
needs
needs and
and requirements.
requirements.
 Search for Alternatives /Option
Development
1-searching
1-searching forfor potential
potential alternatives
alternatives and
and
2-screening
2-screening them
them to
to select
select aa smaller
smaller group
group
of
of feasible
feasible alternatives
alternatives for
for detailed
detailed
analysis
analysis and
and comparison
comparison in in step
step 5.
5.
NOTE:
NOTE: In In searching
searching for
for alternatives
alternatives ,, several
several
limitations
limitations invariably
invariably exist,
exist, including
including
a-
a- lack
lack of
of time
time and
and money.
money.
b-
b- preconceptions
preconceptions of of what
what will
will and
and what
what
will
will not
not work
work and
and
c-
c- lack
lack of
of knowledge.
knowledge.
 Development of investment
alternatives
•• Saying:
Saying: “It
“It takes
takes money
money toto make
make money”.
money”.
•• Most
Most of
of the
the feasible
feasible alternatives
alternatives require
require
investment
investment of of money,
money, hence
hence it
it becomes
becomes aa
crucial
crucial step.
step.
•• The
The 22 most
most accepted
accepted Approaches
Approaches for for
developing
developing sound
sound investment
investment alternatives.
alternatives.
1-Classical
1-Classical Brainstorming
Brainstorming
2-Nominal
2-Nominal Group
Group Technique
Technique
 1. Classical Brainstorming
•• ItIt is
is based
based on
on the
the fundamental
fundamental principles
principles of
of
deferment
deferment of of judgment
judgment and
and that
that quantity
quantity breeds
breeds
quality.
quality.

•• Four
Four rules
rules of
of Brnstmg.
Brnstmg.

•• Criticism
Criticism is
is ruled
ruled out.
out.
•• Freewheeling
Freewheeling is is welcomed.
welcomed.
•• Quantity
Quantity is
is wanted.
wanted.
•• Combination
Combination and and improvement
improvement are
are sought.
sought.
 1-Classical Brainstorming
•• The
The most
most well-known
well-known and and often-used
often-used technique
technique
for
for idea
idea generation.
generation.
•• Steps:
Steps:
1.
1. Preparation:
Preparation: participants
participants selected,
selected, preliminary
preliminary
statement
statement of of problem
problem isis circulated.
circulated.
2.
2. Brainstorming:
Brainstorming: aa warm-up
warm-up session
session with
with simple
simple
problems
problems is is conducted,
conducted, thethe relevant
relevant problem
problem
and
and the
the 44 rules
rules of
of Brnstmg
Brnstmg are are presented
presented and
and
ideas
ideas are
are generated
generated andand recorded
recorded using
using
checklists
checklists andand other
other techniques,
techniques,
3.
3. Evaluation:
Evaluation: thethe ideas
ideas are
are evaluated
evaluated relative
relative to
to
the
the problem.
problem.
 2-Nominal Group Technique
(NGT)
• The NGT involves a structured group
meeting designed o incorporate
individual ideas and judgments into
group consensus.
• Sort of Group Discussion.
• Facilitator is required.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
•• EE
EE studies
studies provide
provide information
information on on which
which current
current
decisions
decisions pertaining
pertaining to to the
the future
future operation
operation of of an
an
organization
organization cancan bebe based.
based.
•• After
After aa decision
decision to to invest
invest capital
capital in
in aa project
project has
has
been
been made
made and
and the
the money
money has has been
been invested,
invested,
those
those who
who supply
supply and
and manage
manage thethe capital
capital want
want to
to
know
know the
the financial
financial results.
results. Therefore,
Therefore, accounting
accounting
procedures
procedures are are established
established so so that
that financial
financial
events
events relating
relating to
to the
the investment
investment can can bebe recorded
recorded
and
and summarized
summarized and and financial
financial performance
performance
determined.
determined.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
• General accounting and Cost
accounting are the procedures that
provide these necessary services in
a business organization.
• Accounting procedures are similar to
recording data in a scientific
experiment.
 ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
Modern cost accounting may satisfy any or
all of the following objectives:
1. To determine the cost of products or
services
2. To provide a rational basis for pricing
goods or services
3. To provide a means for controlling
expenditures
4. To provide information on which operating
decisions may be based and the results
evaluated
 Questions

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