module 1 introduction to engineering economy

8/9/2019 Module 1 Introduction to Engineering Economy

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Module 1 –

Introduction to

Engineering Economy

Prepared by:

Ezrha C. Godilano

BSIE, [email protected]



ORIGIN OF ENGINEERING ECONOMY

• Arthur Mellen Wellington or known as A.M Wellington

was a railway civil engineer of his time. He became

famous because of his book entitled “The Economic

Theory of the Location of Railways” which was

published by John Wiley and Sons in 1887. The book was

subtitled as “an analysis of the conditions controlling the

laying out of railways to effect the most judicious use of capital. Wellington was later known as the “Father of

Engineering Economy”.

Source: http://mysite.du.edu/~jcalvert/railway/wellingt.htm



Definition of Engineering Economy

• Engineering, as defined by the Accreditation Board for

Engineering Technology is “the profession in which a

knowledge of the mathematical and natural sciences

gained by study, experience, and practice is applied with

judgement to develop ways to utilize, economically the

materials and forces of nature for the benefit of

mankind”.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13 TH ED.Pearson-Prentice Hall. p2




• 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 overlong-term costs, and they must also

• Promote the well-being and survival of the organization

• Embody creative and innovative technology and ideas

• Permit identification and scrutiny of their estimated outcomes

• Translate profitability to the bottom line through a valid and

acceptable measure of merit.





• Engineering Economy 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.





• Engineering Economy involves formulating, estimating,

and evaluating the expected economic outcomes of

alternatives designed to accomplish a defined purpose.

Mathematical techniques simplify the economic

evaluation of alternative.

Source: Blank, L. and Tarquin, A. (2012). ENGINEERING ECONOMY, 7TH ED. McGraw Hill. P3



Principles of Engineering Economy

#1: DEVELOP ALTERNATIVES

• A decision situation involves making a choice among two

or more alternatives. Developing and defining the

alternatives for detailed evaluation is important because

of the resulting impact on the quality of the decision.

• Creativity and innovation are essential to the process.

• One alternative that may be feasible in a decisionsituation is making no change to the current operation or

set of conditions.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,TH - -




#2: FOCUS ON THE DIFFERENCES

• Only the differences in the future outcomes of the

alternatives are important. Outcomes that are common

to all alternatives can be disregarded in the comparison

and decision.

• The principle focuses on the engineering economic

analysis of recommending a future course of actionbased on the differences among feasible alternatives.





#3: USE A CONSTANT VIEWPOINT

• The prospective outcomes of the alternatives, economic

and other, should be consistently developed from a

defined viewpoint or perspective.

• The perspective of the decision maker, which is often

that of the owners of the firm, would normally be used.

However, it is important that the viewpoint for theparticular decision be first defined and then used

consistently in the description, analysis, and comparison

of the alternatives.Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,

TH - -




#4: 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.

• It is desirable to make as many prospective outcomes as

possible commensurable.





#5: CONSIDER ALL RELEVANT CRITERIA

• Selection of a preferred alternative requires the use of a

criterion. The decision process should consider both the

outcomes enumerated in the monetary unit and those

expressed in some other unit of measurement or made

explicit in a descriptive manner.

• The decision maker will normally select the alternativethat will best serve the long-term interests of the owners

of the organization.





#6: MAKE RISK AND UNCERTAINTY EXPLICIT

• Risks and uncertainty are inherent in estimating the

future outcomes of the alternatives and should be

recognized in their analysis and comparison.





#7: REVISIT YOUR DECISIONS

• A good decision-making process can result in a decision

that has an undesirable outcome. Other decisions, even

though relatively successful, will have results significantly

different from the initial estimates of the consequences.




Engineering Economy and Design

Process

• An engineering economy study is accomplished

using a structured procedure and mathematical

modelling techniques. The economic results are

the used in a decision situation that normallyincludes other engineering knowledge and input.

• A sound engineering economic analysis procedure

incorporates the basic principles (7 principles)and involves several steps.




Engineering Economy and Design

Process


ENGINEERING ECONOMIC ANALYSIS

PROCEDURE (Steps)

1. Problem recognition, definition, and

evaluation

2. Development of the feasible

alternatives3. Development of the outcomes and

cash flows for each alternative

4. Selection of a criterion

5. Analysis and comparison of the

alternatives6. Selection of the preferred

alternative

7. Performance monitoring and post-

evaluation of results

ENGINEERING DESIGN

PROCESS (Activity)

1. Problem/Need definition2. Problem/need formulation and

evaluation

3. Synthesis of possible solutions

4. Analysis, optimization, and

evaluation5. Specification of preferred

alternative

6. Communication



Engineering Design Process

Recognition of aproblem to be

solved

Completely

specified

solution

Possible formulation

Possible solutions

Analysis

Specifications(preferred

alternative)

Needs identification

Communication



Application of Engineering

Economic Procedure

• Sheila bought a small apartment building for $100,000 in

a college town. She spent $10,000 of her own money for

the building and obtained a mortgage from a local bank

for the remaining $90,000. The annual mortgagepayment to the bank is $10,500. Sheila also expects that

annual maintenance on the building and grounds will be

$15,000. There are four apartments each with two

bedrooms in the building, each unit can be rented for$360 per month.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,TH -



Application of Engineering

Economic Procedure

a. Does Sheila has a problem?

b. What are her alternatives? Identify at least three.

c. Estimate the economic consequences and other required

data for the alternative in part b.d. Select criterion for discriminating among alternatives and

use it to advise Sheila on which course of action to pursue.

e. Attempt to analyze and compare the alternatives in view of

at least one criterion in addition to cost.

f. What should Sheila do based on the information you have

generated?




Homework 1

While studying for an upcoming exam, you and two friends find

yourselves craving for pizza. You don’t have time to buy the

pizza so your choice is to have it delivered to your home.

“Johnny’s Pizza” offers 1 and ¼ inch thick including toppings, 20-

inch square pizza with your choice of two toppings for $15 plus

5% sales tax and a $1.50 delivery charge. (No sales tax on

delivery charge). “Pizza Corner” offers the round, deep dish

Sasquatch which is 20 inches in diameter. It is 1 and ¾ inches

thick, includes two toppings, and costs $17.25 plus 5% sales tax

and free delivery.




Homework 1

a. What is the problem in this situation? State explicitly and in

a precise manner.

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 in dollars,

what is the better value for getting a pizza based on the

criterion of minimizing cost per unit volume?

d. What other criteria might be used to select which pizza topurchase?

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,

module 1 introduction to engineering economy

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