INTRODUCTION TO Parvaiz Shafi Khan

ENGINEERING School of Mechanical and

ECONOMICS Manufacturing Engineering, SMME

CONTENTS
PART-I
1. What is Engineering?
2. Introduction
3. Need for Engineering Economy in the field of Engineering.
4. Understand the basic Engineering Economy
5. Decision-making Process.
6. Engineering Economy Principles
CONTD.
7. Concept of Engineering Economics
8. Engineering Economic Analysis-Seven Steps
9. The Goal
10. Summary
PART-II
Class Discipline
11. Learning Outcomes
12. Instructional Objectives
13. Detailed Topics
 CONTD.
15. Assessment Criteria 22. Analysis Techniques
16. Text & Reference Books 23. Depreciation
17. Engineering Economics & Decision making 24. Question of the day
18. Engineering Costs
19. Cost Estimating
20. Cash Flow Diagram
21. Interests
WHAT IS ENGINEERING?
‘Scientists investigate that which already is; Engineers create that which
has never been’ - Albert Einstein
 Engineers are shaping the future by applying their skills to almost
everything one can think of from medicines to renewable energy, food
technologies to sustainable mining. There really is no limit to what
Engineers can do.
 A discipline that opens opportunities and creates technology and
products that help make our lives easier.
INTRODUCTION
 Development in science and technology causes changes for improvement.
 Knowledge in the field of engineering is very important, for example in
designing a product or service.
 Decision-making requires systematic financial management.
 Engineering and economics are closely related.
 Economic Engineering involves systematic evaluation in financial
management in solving engineering problems
NEED FOR ENGINEERING
ECONOMY
 The decision to choose between alternatives depends on the monetary
factors.
 The decision made is a balance between a combination of technical and
economic aspects.
CONTD.
May be categorized into 3 programs:
1. Program to increase profit; for example, development of a new product,
increasing new production capacity, and improving customer service
center.
2. Cost control programs such as defect reduction programs because each
defect is costly, efficiency improvement, waste reduction, and liabilities
reduction programs.
3. Facilities/ infrastructure programs such as construction of roads,
bridges, playgrounds, etc. These programs are not profit-oriented but
rather focus on increasing convenience and comfort at minimum cost.
CONTD.
Decision is classified into 3 :
Expansion:
Production capacity, exploring new markets for products or services.
Replacement:
Replacing existing methods with the optimum and least costly method,
equipment process, or location.
Closure:
Usually the last resort; more towards investment decisions such as closing
down factory, termination of projects, and others.
DECISION MAKING PROCESS
 Cash Flow
 Time
 Growth Rate Time value of money concept.
ENGINEERING ECONOMY
PRINCIPLES
Principle 1
Generate alternatives.
Principle 2
Consider differences only.
Principle 3
Use the same perspectives for each alternative.
Principle 4
Use the same unit of measurement.
CONTD.
Principle 5
Consider all relevant factors.
Principle 6
Conduct sensitivity analyses.
Principle 7
Continuous monitoring and improvement of decisions.
CONCEPT OF ENGINEERING
ECONOMY
1. Cash Flow
2. Time Value of Money
3. Depreciation
4. Cost Benefit analysis
5. Systematic Comparison of Alternatives
SEVEN STEPS OF ENGINEERING
ECONOMIC ANALYSIS
1. Recognize and formulate the problem
2. Develop feasible alternatives
3. Develop cash flow for each alternative
4. Select criterion (or criteria) for determining the preferred alternative
5. Analyze and compare alternatives
6. Select the preferred alternative
7. Perform monitoring
THE GOAL
1. For profit organizations have the goal of making money.

2. Not for profit must remain financially sound.

3. Both types must worry about money or they will probably cease to
exist
SUMMARY
 What is Engineering Economy?
 Importance of Engineering Economy to an engineer.
 The basic principles of engineering economy for decision-making
in engineering problems.
CLASS DISCIPLINE
1. Come in time
2. No disturbance during lectures
3. Interactive Presentation Sessions
4. Bring your Notebook, Pen & Calculator
5. Don’t miss your quizzes & Exams
6. No Cell Phone Calls, no SMS
7. Copying of Assignments is strictly prohibited
8. Meet the deadline of the assignments
9. Maintain your Attendance
LEARNING OUTCOMES
To provide Engineering students with the knowledge of basic concepts of
Engineering Economics as a decision-making tool to select suitable
alternative/s for engineering projects

Instructional Objectives:

On successful completion of this course the student should attain:

• Understand the role of Economic Analysis as a decision-making and

management/planning tool
CONTD.
Gain knowledge and understanding of theoretical concepts/principles that
form the basis of Engineering Economics such as the time value of money,
interest, and depreciation

• Identify and apply various alternative evaluation methods that are

commonly used in the Economic Decision-making process faced by
engineers.
DETAILED TOPICS

The following topics will be addressed during lectures:

1. Introduction to Engineering Economics 7. Uniform Cash Flow Analysis
2. The Decision-making process 8. Benefit-Cost analysis
3. Cost Estimation 9. Rate of Return Analysis
4. Interests & Equivalence 10. Depreciation
5. Different interest formulae
6. Present Worth Analysis
ASSESSMENT CRITERIA
The students must demonstrate the ability to:
1. Prepare various decision-making plans on their Engineering Economic
Analysis
2. Estimate the Economic aspects of Engineering projects/products
3. Calculate the interests and Economic Equivalence on various cash flow
situations
4. Perform an Economic Analysis for various Engineering alternatives
and
5. Calculate the depreciation of Engineering products and decision-
making based on the analysis
 TEXT AND REFERENCE BOOKS
1. William G. Sullivan and Elin M. Wicks, Estimation of future events

2. N. M. Fraser and E. M. Jewkes, Engineering Economics: Financial Decision

Making for Engineers

3. D. G. Newnan, J. Whittaker, T. G. Eschenbach and J. P. Lavelle, Engineering

Economic Analysis

4. A. J. Tarquin, L. T. Blank, Engineering Economy, McGraw-Hill

Reference Books
Any other standard book on Engineering Economics and you may get help from
Google search engine
ENGINEERING ECONOMICS
AND DECISION MAKING
1. Engineering Economy involves formulating, estimating & and
evaluating the expected outcomes of alternatives designed to
accomplish a defined purpose

2. Mathematical Techniques are used to simplify the economic evaluation

of alternatives and these techniques are equally good for individual
businesses or government projects

3. Thus this course also offers you an economic analysis tool for making
decisions such as car purchases, house purchases major purchases on
credit cards, etc.
ENGINEERING COSTS
1. Fixed Costs: These costs are unchanging regardless of the level of Output or
activity

2. Variable Costs: These are not constant and depend on the level of activity

3. Marginal Costs: Variable cost for one more unit

4. Average Cost:Total Cost divided by number of units

Profit Loss Breakeven Charts

On Whiteboard
CONTD.
5. Sunk Cost: Sunk Cost is the money already spent as a result of past decision

6. Opportunity Cost: An opportunity cost is associated with using a resource in

one activity instead of another

7. Recurring & Non-Recurring Costs: Recurring Cost refers to any expense that
is known and anticipated and that occurs at regular interval

8. Non-Recurring Costs: Anyone of a kind of expenses that occur at irregular

intervals, and these are sometimes difficult to plan for or anticipate from
budgetary perspective
COST ESTIMATION
Types of Estimates: 3. Cost Index

1. Rough Estimate 4. Power Sizing Model

2. Semi-Detailed Estimate 5. Triangulation

Estimating Models 6. Improvement & Learning

Curve
1. Per Unit Model

2. Segmenting Model
CASH FLOW DIAGRAMS
 Cash Flow diagrams usually represent income and expenses over some
time interval

 It is a graphical representation of cash flow drawn on the y-axis and time

scale along the x-axis

Explanation on White Board

 CONTD.
Categories of Cash Flows: The expenses and receipts due to Engineering Projects
fall into one of the following categories:

1. First Cost: Expenses to build, to buy and to install

2. Operation & Maintenance (O & M): Annual expenses such as electricity,

labor, and minor repairs

3. Salvage Value: Receipts at project termination for sale and transfer of

equipment (can be salvage cost)

4. Revenues: Annual receipts due to sale of products or services

5. Overhaul: Major capital expenditure that occurs during the asset life.
INTEREST
Simple Interest:

Simple interest is computed only on the initial sum (Principal) and on

interest earned and left in this account

A Bank Account for example may have its simple interest every year. In this
case, an amount with $ 1000/- as initial principal and 20% interest per
year would have a balance of $ 1200/- at the end of the first year, $ 1400/-
at the end of the second year, and so on.
CONTD.
Compound Interest:

Compound interest arises when interest is added to the principal of a

deposit or loan so that from that moment on the interest that has been
added also earns interest. This addition of interest in Principal is called
compounding.

A Bank Account for example may have its interest compounded every year.
In this case, an account with $ 1000/- initial Principal and 20 % interest
per year would have a balance of $ 1200/- at the end of the first year and $
1440/- at the end of 2nd year, and so on.
ANALYSIS TECHNIQUES
1. Present worth analysis

2. Annual Cash Flow Analysis

3. Rate of Return Analysis

4. Incremental Analysis
OTHER TECHNIQUES
• Future Worth Analysis

• Benefit Cost Ratio Analysis

• Payback Period Analysis

DEPRECIATION
Depreciation is a decrease in the value of an asset each year.

• A decrease in market value

• A decrease in the value to the owner

Important reasons for depreciation include:

- Deterioration

- Obsolescence
QUESTION OF THE DAY!
Write your views on the need of an Engineering Economics Course for
your Studies

(Only Few Lines are enough)

Thank You!