ES 123: ENGINEERING

ECONOMY
Engr. Owen Francis A. Maongat
Instructor
1st Sem, SY 2023-2024
Lecture No. 1
Introduction of Engineering Economics

 1 Background
 2 Key Concepts in Engineering Economics
 3 Why Does an Engineer Need To Understand Economi
cs?
 4 Principles of an Engineering Economy
 5 What is the role of Engineers in an Economic decision
?
 6 Design Process in an Engineering Economy
1 BACKGROUND
 Engineering economy, often known as economic analysis in engineering or
engineering finance
 Engineering economy, the study of how to allocate to achieve a certain goal
in the most effective way possible.
 Engineering economy has expanded to embrace a wide range of
applications, such as infrastructure project design and construction, the
creation of new technologies, and the optimization of manufacturing
processes.
 One of the key concepts in the engineering economy is the time value of
money, which states that the value of a given amount of money changes over
time due to inflation and the opportunity cost of not investing the money
elsewhere.
1 BACKGROUND
 Engineering economics also entails the use of financial methods, such as net
present value and internal rate of return, to assess the profitability of various
solutions.
1 BACKGROUND

SUMMARY
 Engineering economy is a critical discipline that enables
engineers to make informed judgments about how to
allocate resources in the most cost-effective manner.
2 KEYCONCEPTS IN ENGINEERING
ECONOMICS
 Time value of money: This concept states that the value of a given amount of
money changes over time due to inflation and the opportunity cost of not
investing the money elsewhere.
 Net present value (NPV): This is a measure of the profitability of an
investment, calculated by taking the present value of the expected cash flows
and subtracting the initial investment.
 Internal rate of return (IRR): This is the discount rate that makes the NPV
of an investment equal to zero. It is used to compare the profitability of
different investments.
2 KEYCONCEPTS IN ENGINEERING
ECONOMICS
 Benefit-cost ratio (BCR): This is the ratio of the benefits of an investment to
its costs. A BCR greater than 1 indicates that the investment is financially
viable.
 Demand and Supply: Demand and supply are free market economic
principles or forces that govern what producers want to produce and what
buyers want to buy and pay for.
3 WHY DOES AN ENGINEER NEED TO
UNDERSTAND ECONOMICS?
 Cost-benefit Analysis: Engineers are often required to make resource
allocation decisions in order to achieve a specific goal.
Economics assists them in weighing the costs and benefits of several
choices and selecting the most cost-effective solution.
 Financial Feasibility: Engineers need to consider the financial feasibility of
their projects in order to ensure that they are viable and will provide a good
return on investment.
Economics provides the tools and concepts needed to evaluate the
profitability of different alternatives.
 Resource Allocation: Engineers frequently must make decisions on how to best
allocate limited resources.
Economics assists them in understanding the trade-offs involved and making
informed decisions.
 Long-term Planning: Many engineering projects have long-term implications and
require long-term planning.
Economics helps engineers to consider the long-term financial implications of
their decisions and to choose the most cost-effective options.
 Essential in Everyday Life: The knowledge gained from studying economics is
useful in both personal and social scenarios. The ability to evaluate operating and
maintenance costs is critical in determining which materials should be utilized.
Economics exposes students to the many vocabularies and problem-solving
skills needed by engineers, making them less frightened.
 SUMMARY
Overall, understanding economics is essential for engineers as it
allows them to make informed decisions about the allocation of
resources and to ensure the financial viability of their projects.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Develop the Alternatives:
The principle of developing alternatives refers to the
process of identifying and evaluating different options or courses
of action in order to choose the most suitable one.
This principle is often applied in engineering economics,
where it involves identifying and evaluating the costs and
benefits of different alternatives in order to choose the most cost-
effective option.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Develop the Alternatives:
It is an important step in decision-making as it allows
engineers to consider a range of options and choose the one that
best meets their needs and goals.
To develop alternatives, engineers may use a variety of
tools and techniques, such as brainstorming, SWOT analysis,
and cost-benefit analysis.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Focus on Differences:
It relates to the concept that while comparing
options, it is vital to consider their differences rather than
their similarities
This theory is frequently used in engineering
economics to compare the costs and advantages of many
alternatives in order to select the most cost-effective
solution.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Focus on Differences:
It allows engineers to find the important elements
that distinguish the options and make informed
conclusions about which one is best.
It is a key decision-making phase because it allows
engineers to evaluate solutions based on the exact criteria
that are most relevant to their needs and goals.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Use a Consistent Viewpoint:
It refers to the idea that when evaluating different
alternatives, it is important to use the same perspective or
frame of reference in order to make fair and accurate
comparisons.
This principle is often applied in engineering
economics, where it involves comparing the costs and
benefits of different alternatives in order to choose the
most cost-effective option.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Use a Consistent Viewpoint:
It allows engineers to compare alternatives on a
level playing field and avoid bias toward one choice over
another.
It is a critical phase in the decision-making process
because it enables engineers to make informed and
unbiased conclusions about which alternative is best.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Use a Common Unit of Measurement:
It refers to the idea that when evaluating different
alternatives, it is important to use a consistent unit of
measurement in order to make fair and accurate
comparisons.
This principle is often applied in engineering
economics, where it involves comparing the costs and
benefits of different alternatives in order to choose the
most cost-effective option.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Consider all Relevant Criteria:
It refers to the idea that when evaluating different
alternatives, it is important to consider all factors that are
relevant to the decision in order to make an informed and
well-rounded choice.
This principle is often applied in engineering
economics, where it involves comparing the costs and
benefits of different alternatives in order to choose the
most cost-effective option.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Make Uncertainty Explicit:
The principle of making uncertainty explicit relates to the
idea that it is critical to acknowledge and account for any
uncertainty or uncertainty in the data or assumptions used in the
analysis while evaluating different alternatives.

This theory is frequently used in engineering economics to

compare the costs and advantages of many alternatives in order
to select the most cost-effective solution.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Revisit Your Decision:

The principle of revisiting your decision refers to the

idea that it is important to periodically review and assess your
decisions in order to ensure that they are still relevant and
appropriate given any changes in the circumstances.
This principle is often applied in engineering
economics, where it involves reviewing and assessing the costs
and benefits of different alternatives in order to ensure that the
chosen option is still the most cost-effective.
4 PRINCIPLES OF AN ENGINEERING
ECONOMY
 Revisit Your Decision:

It helps engineers to adapt to changing

circumstances and to ensure that their decisions are still
aligned with their goals and objectives.
It is an important step in the decision-making
process as it allows engineers to make any necessary
adjustments and to ensure that they are on track to achieve
their desired outcomes.
5 ROLE OF ENGINEERS IN AN ECONOMIC
DECISION

Engineers play a crucial role in economic decision-

making, as they are often responsible for evaluating and
comparing the costs and benefits of different alternatives
in order to choose the most cost-effective option.
SOME SPECIFIC TASKS THAT ENGINEERS MAY PERFORM
IN THE ECONOMIC DECISION-MAKING PROCESS ARE:

 Identifying and evaluating different alternatives:

Engineers may use tools such as cost-benefit analysis, net
present value, and internal rate of return to compare the costs
and benefits of different alternatives and choose the most
cost-effective option.
 Assessing financial feasibility: Engineers may use financial
metrics such as return on investment (ROI) and payback
period to evaluate the profitability of different alternatives and
ensure that they are financially viable.
SOME SPECIFIC TASKS THAT ENGINEERS MAY PERFORM
IN THE ECONOMIC DECISION-MAKING PROCESS ARE:

 Analyzing risk: Engineers may use tools such as sensitivity

analysis and risk assessment to identify and evaluate the
potential risks and uncertainties associated with different
alternatives and to make more informed decisions.
 Collaborating with other stakeholders: Engineers may
work with clients, users, and subject matter experts to ensure
that all relevant perspectives are considered in the decision-
making process.
 SUMMARY

Overall, the role of engineers in economic decision-making is to

use their technical expertise and financial analysis skills to
evaluate the costs and benefits of different
6 DESIGN PROCESS IN AN ENGINEERING
ECONOMY

The design process in the engineering economy

involves a series of steps that engineers follow to identify,
evaluate, and choose the most cost-effective solution to a
given problem.
DESIGN PROCESS

1. Define the problem: The first step in the design process is to

clearly define the problem that needs to be solved. This involves
identifying the needs and goals of the project, as well as any
constraints or limitations that may impact the design.
2. Generate ideas: The next step is to generate ideas for potential
solutions to the problem. This may involve brainstorming sessions
with a team of engineers or other stakeholders or using tools such
as SWOT analysis to identify strengths, weaknesses, opportunities,
and threats.
DESIGN PROCESS
3. Evaluate alternatives: Once a range of potential solutions has been
identified, the next step is to evaluate the alternatives based on their
costs and benefits. This may involve using tools such as cost-benefit
analysis, net present value, and internal rate of return to compare the
financial feasibility of different options.
4. Select the best solution: Based on the evaluation of the
alternatives, the next step is to choose the most cost-effective solution.
This may involve considering additional factors such as technical
feasibility, risk, and stakeholder preferences in order to make a well-
rounded decision.
DESIGN PROCESS
5. Implement the solution: Once the best solution has been chosen,
the final step is to implement it. This may involve designing and
building the solution, as well as testing and verifying that it meets the
desired specifications and requirements.
 SUMMARY

Overall, the design process in the engineering economy is a systematic

and iterative process that helps engineers to identify and choose the most
cost-effective solution to a given problem.