Chapter 1

Foundations Of
Engineering
Economy

Lecture slides to accompany

Engineering Economy
7th edition

Leland Blank
Anthony Tarquin

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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 LEARNING OUTCOMES

1. Role in decision
7. Economic equivalence
making
8. Simple and compound
2. Study approach
interest
3. Ethics and economics
9. Minimum attractive
4. Interest rate rate of return
5. Terms and symbols 10. Spreadsheet
functions
6. Cash flows

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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 What is Engineering Economy?

Engineering economy is the systematic evaluation of

the economic merits of proposed solutions to
engineering problems

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 Why Engineering Economy is Important to
Engineers? (Importance)

1. Seeking new objectives for the application of

engineering
An important use of engineering economy is to seek
new objectives for engineering application.
Engineers are constantly seeking new and wider
application of their technical knowledge for the
benefit of mankind and in line with this, engineering
economy provides basic principles and laws.

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2. Discovery of factors limiting the success of
a venture or enterprise 
upon knowing the objectives, next is to
determine ways and means to attain such
objectives. With Engineering Economy the so-
called limiting factors which may hinder the
success of a project are being discovered.

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3. Comparison of alternatives as a basis for
decision
The principles of engineering economy helps to
point out the analysis of choosing the best
alternatives on a quantitative basis.

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4. Analysis of possible investment of capital
Engineering economy enables engineers to
consider all aspects of investment from both the
technical and financial viewpoints. It provides
several patterns of analysis to determine rate of 
return, annual costs and pay out periods, which 
allserves as bases for decision.

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5. Determination of bases for decision
Engineers‟ main concern is on future actions,
that is on what to do and not on what has been
accomplished. Decisions on future actions are
more valid and accurate if the principles of
engineering economy are correctly applied.

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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What are the principles of engineering
economy?

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 The Engineering Economic Analysis
Procedure

Step 1 •Problem recognition, definition, and evaluation.

Step 2 •Development of the feasible alternatives

Step 3 •Development of the cash flows for each alternative

Step 4 •Selection of a criteria

Step 5 •Analysis and comparison of the alternative

•Performance monitoring and post

Step 6 evaluation result.

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General Steps for Decision Making Processes

1. Understand the problem – define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply sensitivity
analysis
6. Select the “best” alternative
7. Implement the alternative and monitor results

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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Types of strategic engineering economic
decisions
Service and quality improvement.
New product and product expansion.
Equipment and process selection.
Equipment replacement.
Cost reduction.

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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 Why Engineering Economy is Important to
Engineers?

 Engineers design and create

 Designing involves economic decisions
 Engineers must be able to incorporate economic analysis
into their creative efforts
 Often engineers must select and implement from multiple
alternatives
 Understanding and applying time value of money,
economic equivalence, and cost estimation are vital for
engineers
 A proper economic analysis for selection and execution is
a fundamental task of engineering
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 Time Value of Money (TVM)
Description: TVM explains the change in the amount of money
over time for funds owed by or owned by a corporation (or
individual)

 Corporate investments are expected to earn a return

 Investment involves money
 Money has a ‘time value’

The time value of money is the most important

concept in engineering economy

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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 Engineering Economy
 Engineering Economy involves
 Formulating
 Estimating, and
 Evaluating
expected economic outcomes of alternatives designed
to accomplish a defined purpose
 Easy-to-use math techniques simplify the
evaluation
 Estimates of economic outcomes can be
deterministic or stochastic in nature
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
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Steps in an Engineering Economy Study

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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 ‫‪ -1‬البحث عن أهداف جديدة لتطبيق الهندسة‬
‫من االستخدامات المهمة لالقتصاد الهندسي البحث عن أهداف جديدة للتطبيق الهندسي‪ .‬يسعى المهندسون باستمرار إلى‬
‫تطبيق جديد وأوسع لمعرفتهم التقنية لصالح البشرية ‪ ،‬ووفقًا لذلك ‪ ،‬يوفر االقتصاد الهندسي المبادئ والقوانين األساسية‪.‬‬
‫‪ -2‬اكتشاف العوامل التي تحد من نجاح المشروع أو المشروع‬
‫بعد معرفة األهداف ‪ ،‬بعد ذلك تحديد الطرق والوسائل لتحقيق هذه األهداف‪ .‬مع الهندسة االقتصادية ‪ ،‬يتم اكتشاف ما يسمى‬
‫بالعوامل المحددة التي قد تعيق نجاح المشروع‪.‬‬
‫‪ -3‬مقارنة البدائل كأساس التخاذ القرار تساعد مبادئ االقتصاد الهندسي في توضيح تحليل اختيار أفضل البدائل على أساس‬
‫كمي‪.‬‬
‫‪ -4‬تحليل إمكانية استثمار رأس المال‬
‫يم ّك ن االقتصاد الهندسي المهندسين من النظر في جميع جوانب االستثمار من وجهة نظر فنية ومالية‪ .‬يوفر العديد من أنماط‬
‫التحليل لتحديد معدل العائد والتكاليف السنوية وفترات الدفع ‪ ،‬والتي تعمل جميعها كأساس التخاذ القرار‬
‫‪ -5‬تحديد أسس القرار‬
‫ينصب الشاغل الرئيسي للمهندسين على اإلجراءات المستقبلية ‪ ،‬أي ما يجب فعله وليس ما تم إنجازه‪ .‬تكون القرارات‬
‫المتعلقة باإلجراءات المستقبلية أكثر صحة ودقة إذا تم تطبيق مبادئ االقتصاد الهندسي بشكل صحيح‪.‬‬

‫‪© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved‬‬

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