Lecture
1
Engineering Economics
ENGR 3300
Department of Mechanical Engineering
Inter American University of Puerto Rico
Bayamon Campus
Dr. Omar E. Meza Castillo
omeza@bayamon.inter.edu
http://www.facultad/bayamon.inter.edu/omeza
Inter - Bayamón
ENGR 3300 Engineering Economics
The total course grade is calculated as follows:






Homework
Quiz
Partial Exam 1
Partial Exam 2
Final Exam
Final Project
10%
10%
20%
20%
25%
15%
100%
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
 Most Course Material (Power Point Lectures and
homework) will posted every week or two on
Web Page of the course ENGR 3300:
http://facultad.bayamon.inter.edu/omeza/
 Office Hours: G235
 Monday and Wednesday: 5:00-6:00 p.m.
 Contact Email: mezacoe@gmail.com
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Lecture 1
Lecture
1
Engineering Economic
Decisions
Introduction the Decisions-Making
Process
Inter - Bayamón
ENGR 3300 Engineering Economics
What is Engineering?
Profession, art or study of applying
scientific and mathematical knowledge
to practical ends, such the design and
building of structures, engines, electrical
equipment, and the like.
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
What is Economics?
Economics – Systematic study of the
production and distribution of goods
and services.
Economy – Careful management of
wealth, resources, and means of
production.
Economics focuses on how people
make decisions over scarce resources
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
What is Engineering Economics?
One definition …
Engineering Economics is the systematic
study of managing wealth, resources,
and means of production in the
application
of
scientific
and
mathematical knowledge to practical
ends.
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
What is Engineering Economics?
A second definition …
Engineering Economics seeks to answer
the question:
Given a set of business or engineering
alternatives. What course of action
makes the best economic sense?
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Examples of Decision Problems
Individuals
 Should I pay off my credit card
balance with borrowed money?
 What are graduate studies worth
financially over my professional
career?
 Are tax deductions for my home
mortgage a good deal or should I
accelerate my mortgage payments?
 Should I buy or lease my next car?
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Examples of Decision Problems
Corporations and Businesses
 Do we build or lease space for the
new branch in Asia?
 Will we make the required return if we
install
this
new
manufacturing
technology in the plant?
 Is it economically better to make inhouse or outsource an electronic
component on a new product line?
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Examples of Decision Problems
Government
 How much new tax revenue does the
city need to generate to pay for the
school bond issue up for vote?
 Is it cost effective for the city to
construct a covered dome for major
sports events?
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
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
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Chapter Opening Story - Bose
Corporation
 Dr. Amar Bose, a graduate of electrical
engineering, an MIT professor, and
Chairman of Bose Corporation.
 He invented a directional home speaker
system that reproduces the concert
experience.
 He formed Bose Corporation in 1964 and
became the world’s No.1 speaker maker.
 He became the 288th wealthiest American
in 2002 by Forbes magazine.
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Engineering Economics Overview
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Rational Decision-Making Process
Economic Decisions
Predicting Future
Role of Engineers in Business
Large-scale engineering projects
Types of strategic engineering
economic decisions
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
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
Lecture 1
Inter - Bayamón
Which Car to Lease? Saturn vs. Honda
1.
ENGR 3300 Engineering Economics
2.
3.
4.
5.
6.
Recognize a decision
problem
Define the goals or
objectives
Collect all the relevant
information
Identify a set of feasible
decision alternatives
Select the decision
criterion to use
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




Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Financial Data Required to Make an
Economic Decision
Lecture 1
Inter - Bayamón
Engineering Economic Decisions
Manufacturing
Profit
ENGR 3300 Engineering Economics
Design
Investment
Marketing
The term engineering economic decision refers to all
investment decisions relating to engineering projects.
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Predicting the Future
1. Estimating a Required
investment
2. Forecasting a product
demand
3. Estimating a selling
price
4. Estimating a
manufacturing cost
5. Estimating a product life
Lecture 1
Inter - Bayamón
Role of Engineers in Business
Create & Design
ENGR 3300 Engineering Economics
• Engineering Projects
Analyze
Evaluate
Monitor
• Production Methods
• Engineering Safety
• Environmental Impacts
• Market Assessment
• Expected
Profitability
• Timing of
Cash Flows
• Degree of
Financial Risk
• Impact on
Financial Statements
• Firm’s Market Value
• Stock Price
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Accounting Vs. Engineering Economy
Evaluating past performance
Accounting
Past
Evaluating and predicting future events
Engineering Economy
Present
Future
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
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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Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
A Large-Scale Engineering Project
1. Requires a large sum of
investment
2. Takes a long time to
see the financial
outcomes
3. Difficult to predict the
revenue and cost
streams
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Types of strategic engineering
economic decisions
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Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
Cost Reduction
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Fundamental Principles of Engineering
Economics
 Principle 1: A nearby dollar is worth
more than a distant dollar
 Principle 2: All it counts is the
differences among alternatives
 Principle 3: Marginal revenue must
exceed marginal cost
 Principle 4: Additional risk is not
taken
without
the
expected
additional return
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Principle 1: A nearby dollar is worth
more than a distant dollar
Today
6-months later
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Principle 2: All it counts is the
differences among alternatives
Option
Monthly
Monthly
Fuel Cost Maintenance
Cash
outlay at
signing
Monthly Salvage
payment Value at
end of
year 3
Buy
$960
$550
$6,500
$350
$9,000
Lease
$960
$550
$2,400
$550
0
Irrelevant items in decision making
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Principle 3: Marginal revenue must
exceed marginal cost
Manufacturing cost
Sales revenue
1 unit
1 unit
Marginal
cost
Marginal
revenue
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Principle 4: Additional risk is not taken
without the expected additional return
Investment
Class
Potential
Risk
Expected
Return
Savings
Low/None
account (cash)
1.5%
Bond (debt)
Moderate
4.8%
Stock (equity)
High
11.5%
Lecture 1
Inter - Bayamón
ENGR 3300 Engineering Economics
Homework1  www.bc.inter.edu/facultad/omeza
Lecture 1