ENGINEERING ECONOMY (1ST EXAM COVERAGE)
 Engineering Economy
– involves the systematic evaluation of the economic
merits of proposed solutions to engineering problems.
–To be economically acceptable, solutions to
engineering problems must
demonstrate a positive balance of long-term benefits
over long-term costs,
and they must also:
o promote the well-being and survival of an
organization,
o embody creative and innovative technology
and ideas,
o permit identification and scrutiny of their
estimated outcomes, and
o translate profitability to the “bottom line”
through a valid and acceptable measure of
merit.
Rational Decision-Making Process:
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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
Implement the solution and monitor the results.
Engineering Economy in Decision Making:
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is the dollars-and-cents side of the decisions that
engineers make or recommend as they work to
position a firm to be profitable in a highly competitive
marketplace.
Inherent to these decisions are trade-offs among
different types of costs and the performance (response
time, safety, weight, reliability, etc.) provided by the
proposed design or problem solution.
The Principles of Engineering Economy
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Develop the Alternatives – Carefully define the
problem! Then the choice (decision) is among
alternatives. The alternatives need to be identified and
then defined for subsequent analysis.
Focus on the Differences – Only the differences in
expected future outcomes among the alternatives are
relevant to their comparison and should be considered
in the decision.
Use a Consistent Viewpoint – The prospective
outcomes of the alternatives, economic and other,
should be consistently developed from a defined
viewpoint (perspective).
Use a Common Unit of Measure – Using a common
unit of measurement to enumerate as many of the
prospective outcomes as possible will simplify the
analysis of the alternatives.
Consider All Relevant Criteria – Selection of a
preferred alternative (decision making) requires the
use of a criterion (or several criteria).
Make Risk and Uncertainty Explicit – Risk and
uncertainty are inherent in estimating the future
outcomes of the alternatives and should be recognized
in their analysis and comparison.
Revisit Your Decisions – Improved decision-making
results from an adaptive process; to the extent
practicable, the initial projected outcomes of the
selected alternative should be subsequently compared
with actual results achieved.
Description and Role in Decision Making
The estimates and the decision usually involve four
essential elements:
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Cash flows
Times of occurrence of cash flows
Interest rates for time value of money
Measure of economic worth for selecting alternative
INTEREST AND MONEY-TIME RELATIONSHIPS
Interest – is the amount of money paid for the use of borrowed
capital (borrower’s viewpoint) or the income produced by
money which has been loaned (lender’s viewpoint).
Example 2: Determine the exact simple interest on P 500 for
the period from January 10 to October 28, 1996 at 16% interest.
Where:
Example 3: If P 4000 is borrowed for 75 days at 16% per
annum. How much will be due at the end of 75 days?
I = interest
P = principal or present worth
F = accumulated amount or future worth
CASH-FLOW DIAGRAMS
Cash-Flow Diagram – is a graphical representation of cash
flows drawnon a time scale.
Example 4: How long will it take for a deposit of P 1,500 to
earn P 186 if invested at the simple interest rate of 7 1/3 %?
Example 5: If your borrow money from your friend with a
simple interest of 12%, find the present worth of P 20 000 at the
end of 9 months.
 SIMPLE INTEREST – The interest earned bythe
principal is computed atthe end of the investment
period.
P = principal / present worth
r = simple interest rate (per year)
F = P (1 + rt)
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Example 6: A deposit of P 110 000 was made for 31 days. The
net interest after deducting 20% withholding tax is P 890.36.
Find the rate of return annually.
t = time in years / fraction of a year
Ordinary Simple Interest – the interest is computed
on the basis of one banker’s year (360 days)
Seatwork:
Example 1: Determine the ordinary simple interest on P 20
000 for 9 months and 10 days if the rate of interest is 12%.
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Exact simple interest – the interest is based on the
exact number of days in a year (ordinary year = 365
days, leap year = 366 days)
&
1. Determine the exact simple interests on P 100 000 for the
period Jan. 15 to June 20, 2012, if interest is 15%.
2. A man buys an electric fan from a merchant that charges
P 1500 at the end of 90 days. The man wishes to pay cash. What
is the cash price if money is worth 10% simple interest?