ENGINEERING
ECONOMY
INTRODUCTION TO
ENGINEERING ECONOMY
MODULE 01
To familiarize with concepts and definition of Engineering Economy
To learn history of Engineering Economy
To distinguish importance of Engineering Economy
To learn and solve problems applying Principles of Engineering
Economy and Engineering Economy Analysis
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INTRODUCTION TO ENGINEERING ECONOMY
ECONOMY/ECONOMICS
The study of how limited resources is used to satisfy unlimited
human wants.
ENGINEERING ECONOMY/ECONOMICS
As defined by Arreola
Engineering economy is that branch of economics which involve the
application of definite laws of economics, theories of investment and business
practices to engineering problems involving cost.
It is also defined to be the study of economic theories and their
application to engineering problems with concept of obtaining the maximum
benefit at the least cost as a basis for decision.
It also involves the study of cost features and other financial data and their
application in the field of engineering as a basis for decision. (M. Arreola)
As defined by Kasner
Engineering economics is equated with practicality and economic
feasibility. It is also the search for the recognition of alternatives which are
then compared and evaluated to come up with the most practical design and
creation.
As defined by Sullivan,et al.
Engineering economy is the systematic evaluation of the economic
merits of proposed solutions to engineering problems.
ORIGIN 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.
ARTHUR WELLINGTON
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A civil engineer named Arthur Wellington in the later part of the 19 th
century made use of engineering economic analysis in building railroads in the
U. S. In 1930, Eugene Grant published his book, Principles of Engineering
Economy, which emphasized on techniques that depended on financial and
actuarial mathematics.
INTRODUCTION TO ENGINEERING ECONOMY
IMPORTANCE OF ENGINEERING ECONOMY
1. Engineers are called upon to analyze and select the most economical
alternative among several design alternatives.
2. Engineers often play a major role in investment decisions based on the
analysis and design of new products or processes.
3. Decisions made by the engineer during the engineering phase of a
product’s development determine most of the costs of manufacturing
the product.
4. 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.
5. 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.
6. Comparison of alternatives as a basis for decision – The principles of
engineering economy help to point out the analysis of choosing the best
alternatives on a quantitative basis.
PRINCIPLE OF ENGINEERING ECONOMY
The purpose of engineering economy is to assess the suitability of a
given engineering project and to evaluate related alternatives from an
economic standpoint. For every engineering project, there are usually several
potential alternatives. The difficulty of selecting one alternative over others or
choosing the do-nothing alternative is often encountered. When making a
decision, evaluation of factors such as costs, revenues, and period of analysis
will often lead to a choice, however, attributes like environmental effect,
community development, and public image must at times be considered. In
each analysis it will be useful to consider and be guided by the fundamental
principles of engineering economy:
The final choice (decision) or selection is among alternatives. The
alternatives need to be identified and then defined for subsequent
analysis.
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1. Identify Alternatives
INTRODUCTION TO ENGINEERING ECONOMY
2. Focus On Differences
Only the differences in expected future outcomes among the
alternatives are relevant to their comparison and should be considered
in the decision.
3. Establish Perspective
The potential worth of the alternatives, economic and otherwise,
must be evaluated from defined viewpoint of the decisionmaker, which
may be that of the owners of the business, the employees, or the
customers.
4. Use Common Unit of Measure
To simplify assessment and comparison of the alternatives a common
and practical unit of measurement must be applied. This is usually
achieved by expressing the prospective outcomes in monetary terms or
in percentage of the rate of return.
5. 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.
6. Make Uncertainty Explicit
Because estimates are only predictions, uncertainty is inherent in
projecting (or estimating) the future outcomes of the alternatives and
should be recognized in their analysis and comparison.
7. Re-examine your Decision.
When a decision is made, and the proposal is implemented it is
critically important to follow upon the project. Actual result should be
consistently monitored and subsequently compared with the projected
outcomes of the selected alternatives.
ENGINEERING ECONOMY AND DESIGN PROCESS
STEP 1. Problem recognition, formulation, and evaluation
This will lead to the objective statement of the situation.
STEP 2. Development of the feasible alternatives.
It should be two or more approaches to meet the objective.
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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.
INTRODUCTION TO ENGINEERING ECONOMY
STEP 3. Development of the cash flows for each alternative.
This includes the following:
Expected life
Revenues
Costs
Taxes
Project Financing
STEP 4. Selection of a criterion (or criteria).
This includes the following:
Present Worth
Rate of Return
Benefit-Cost Ratio
STEP 5. Analysis and comparison of the alternatives.
Consider the following:
Non-economic factors
Sensitivity analysis
Risk analysis
STEP 6. Selection of the preferred alternative.
STEP 7. Performance monitoring and post-evaluation results.
Note: Once the time passes on implementing the selected alternative and new
problem occurs, that is the time when new engineering economic study
begins.
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INTRODUCTION TO ENGINEERING ECONOMY
SAMPLE PROBLEM (Principle Of Economy)
While studying for the Engineering Economy final exam, you and two friends
find yourselves craving for a fresh pizza. You can’t spare the time to pick up
the pizza and must have it delivered. “Aling Bebang Pizza” offers a 1” thick
(including toppings), 20” square pizza with your choice of two toppings for
Php 750.00 plus 5% sales tax and a Php 100.00 delivery charge (no sales tax
on delivery charge). “Mang Kepweng Pizza” offers the round, deep-dish
Sasquatch which is 20 inches in diameter. It is 1-3/4” thick, which includes
two toppings, and costs Php 850.00 plus 5% sales tax and free delivery
A. What is the problem in this situation?
B. Systematically apply the seven principles of engineering economy to
the problem you have defined in part (A).
C. Assuming that your common unit of measure is Php (i.e., cost), what
is the better value for getting a pizza based on the criterion of
minimizing cost per unit of volume?
D. What other criteria might be used to select which pizza to purchase?
SOLUTION:
A. What is the problem in this situation?
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You are hungry and craving for pizza.
You no time to buy and pick up pizza so you want it to deliver.
B. Systematically apply the seven principles of engineering economy to
the problem you have defined in part (A).
1. Develop Alternatives
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𝐵𝑢𝑦 𝑃𝑖𝑧𝑧𝑎 𝑓𝑟𝑜𝑚 𝐴𝑙𝑖𝑛𝑔 𝐵𝑒𝑏𝑎𝑛𝑔 𝑃𝑖𝑧𝑧𝑎
𝐵𝑢𝑦 𝑃𝑖𝑧𝑧𝑎 𝑓𝑟𝑜𝑚 𝑀𝑎𝑛𝑔 𝐾𝑒𝑝𝑤𝑒𝑛𝑔 𝑃𝑖𝑧𝑧𝑎
2. Focus on Differences.
Aling Bebang Pizza
1” 𝑇ℎ𝑖𝑐𝑘 𝑃𝑖𝑧𝑧𝑎
20” 𝑆𝑞𝑢𝑎𝑟𝑒 𝑃𝑖𝑧𝑧𝑎
𝑃ℎ𝑝. 750.00 𝑃𝑖𝑧𝑧𝑎 𝑃𝑟𝑖𝑐𝑒
5% 𝑇𝑎𝑥 𝑜𝑛 𝑃𝑖𝑧𝑧𝑎
𝑃ℎ𝑝 100.00 𝐷𝑒𝑙𝑖𝑣𝑒𝑟𝑦 𝐶ℎ𝑎𝑟𝑔𝑒
2 𝑠𝑒𝑙𝑒𝑐𝑡𝑒𝑑 𝑡𝑜𝑝𝑝𝑖𝑛𝑔𝑠
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INTRODUCTION TO ENGINEERING ECONOMY
Mang Kepweng Pizza
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1 ¾” 𝑇ℎ𝑖𝑐𝑘 𝑃𝑖𝑧𝑧𝑎
20” 𝐷𝑖𝑎𝑚𝑒𝑡𝑒𝑟 𝑃𝑖𝑧𝑧𝑎
𝑃ℎ𝑝 850.00 𝑃𝑖𝑧𝑧𝑎 𝑃𝑟𝑖𝑐𝑒
5% 𝑇𝑎𝑥 𝑜𝑛 𝑃𝑖𝑧𝑧𝑎
𝐹𝑟𝑒𝑒 𝐷𝑒𝑙𝑖𝑣𝑒𝑟𝑦 𝐶ℎ𝑎𝑟𝑔𝑒
2 𝐷𝑒𝑓𝑎𝑢𝑙𝑡 𝑇𝑜𝑝𝑝𝑖𝑛𝑔𝑠
3. Establish Perspective
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𝐶𝑜𝑠𝑡
𝑉𝑜𝑙𝑢𝑚𝑒
4. Use Common Unit of measure
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𝐶𝑜𝑠𝑡
𝑉𝑜𝑙𝑢𝑚𝑒
5. Consider all relevant criteria.
• 𝑄𝑢𝑎𝑙𝑖𝑡𝑦
• 𝑆𝑖𝑧𝑒
• 𝐷𝑒𝑙𝑖𝑣𝑒𝑟𝑦 𝑇𝑖𝑚𝑒
• 𝐵𝑟𝑎𝑛𝑑
• 𝐶𝑜𝑚𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑛𝑔
• 𝑃𝑟𝑖𝑐𝑒
6. Make uncertainty explicit.
• 𝑃𝑟𝑜𝑚𝑜
• 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
7. Revisit your decision.
𝑆𝑒𝑒 𝑎𝑛𝑠𝑤𝑒𝑟 𝑜𝑛 𝑙𝑒𝑡𝑡𝑒𝑟 𝐶.
C. What other criteria might be used to select which pizza to
purchase?
For Cost
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 750.00 (1.05) + 100.00
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑃ℎ𝑝 887.50
For Volume
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 = 𝑠 2 ∗ ℎ
𝐹𝑜𝑟 𝑆𝑞𝑢𝑎𝑟𝑒 𝑃𝑖𝑧𝑎
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Aling Bebang Pizza
INTRODUCTION TO ENGINEERING ECONOMY
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 = 202 ∗ 1
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 = 400 𝑖𝑛3
887.50
𝐶𝑜𝑠𝑡/𝑉𝑜𝑙𝑢𝑚𝑒 =
400
𝑪𝒐𝒔𝒕/𝑽𝒐𝒍𝒖𝒎𝒆 = 𝟐. 𝟐𝟐
Mang Kepweng Pizza
For Cost
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 850.00 (1.05)
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝑃ℎ𝑝 892.50
For Volume
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 =
𝜋 2
𝑑 ∗ℎ
4
𝐹𝑜𝑟 𝐶𝑖𝑟𝑐𝑢𝑙𝑎𝑟 𝑃𝑖𝑧𝑧𝑎
𝜋 2
20 ∗ 1.75
4
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 = 549.78 𝑖𝑛3
892.50
𝐶𝑜𝑠𝑡/𝑉𝑜𝑙𝑢𝑚𝑒 =
549.78
𝑪𝒐𝒔𝒕
= 𝟏. 𝟔𝟐
𝑽𝒐𝒍𝒖𝒎𝒆
𝑇𝑜𝑡𝑎𝑙 𝑉𝑜𝑙𝑢𝑚𝑒 =
Aling Bebang Pizza vs. Mang Kepweng Pizza
2.22 >
1.62
Choose Mang Kepweng Pizza since 1.62 it is less cost and more
volume.
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INTRODUCTION TO ENGINEERING ECONOMY
SAMPLE PROBLEM (Engineering Economics and Design Process)
Mina Myoui is a newly hired chemical engineer. She has been asked to
select a pump to move 15,000 liters of slurry a day to the pollution
treatment center. What process should she use to select the pump?
Solution:
STEP 1. Problem recognition, formulation, and evaluation
Key problem characteristics include but are not limited to:
1. slurry characteristics, such as particle size and corrosiveness.
2. pipe sizes and flow velocities for input and output.
3. any size, power, and location restrictions
4. time horizon for using the pump and how soon is it needed
5. cost limits
6. vendor selection process— purchase order, competitive bid, or
request for proposal (RFP)
7. how many pumps (identical, similar, or by the same vendor) are
needed?
Cost over the pump’s life and technical performance will usually
dominate, but Mina must also consider other factors, such as vendor and
pump reliability, similarity to current practice, maintainability, and
flexibility for changed conditions.
STEP 2. Development of the feasible alternatives.
If the pump will be purchased from a catalog or other vendor
material, then Mina must assemble and examine those materials from all
appropriate vendors.
STEP 3. Development of the cash flows for each alternative.
Once pump vendors are shortlisted, Mina shall analyze each pump
by checking the expected life, revenues, cost, taxes and other project
financing to establish each cashflow.
STEP 4. Selection of a criterion (or criteria).
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Mina must enumerate each alternative’s advantages and
disadvantages with respect to the objectives.
INTRODUCTION TO ENGINEERING ECONOMY
STEP 5. Analysis and comparison of the alternatives.
Mina must select a pump based on costs and benefits adjusted for
the time value of money. Technical performance objectives must be
completely satisfied, so that any pump with deficiencies is eliminated
from consideration.
STEP 6. Selection of the preferred alternative.
The pump must be ordered and installed.
STEP 7. Performance monitoring and post-evaluation results.
This step evaluates the pump and the decision-making process
after the pump is in use. The intent is to provide “lessons learned” to
assist in future decisions.
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