ENGINEERING

ECONOMIC

Bhesh R Kanel, Coordinator

College of Biomedical engineering And Applied sciences
Jan, 2022
 COURSE CONTENT
1. Introduction: (3 hours)
1. Essential business and accounting
terminology.
2. Definition of cash flow.
3. Economic systems
2. Cost Classification and Analysis: (5 hours)
1. The elements of cost.
2. Classification of cost: overhead, prime cost.
3. Cost variance analysis.
4. Job and process costing.
3. Interest and the Time Value of Money:
(6 hours)
1. Simple interest, compound interest, interest
tables, interest charts.
2. Present worth.
3. Nominal and effective interest rates.
4. Continuous compounding and compounding
formula.
5. Interest calculations for uniform gradient.
4. Basic Methodologies of Engineering
Economic Studies: (7 hours)
1. Present worth and annual worth methods.
2. Future worth method.
3. Internal rate of return method.
4. Drawbacks of the internal rate of return
method.
5. External rate of return method.
6. Minimum attractive rate of return method.
7. The playback (payout) period method
5. Cost/Benefit Analysis: (4 hours)
1. Conventional cost/benefit ratio.
2. Modified cost/benefit ratio.
3. Break-even analysis.
6. Investment Decisions: (8 hours)

1. Comparison of alternatives having some useful life.

2. Comparison of alternatives having different useful
life.
3. Comparison of alternatives including of excluding
the time value of money.
4. Comparison of alternatives using the capitalized
worth method.
5. Definition of mutually exclusive investment
alternatives in terms of combinations of projects.
6. Comparison of mutually exclusive alternatives.
7. Risk Analysis: (4 hours)
1. Projects operating under conditions of certainty.
2. Projects operating under conditions of
uncertainty.
3. Decision tree.
4. Sensitivity analysis.
8. Taxation System in Nepal: (3 hours)
1. Taxation law in Nepal.
2. Depreciation rates for buildings, equipment,
furniture etc.
3. Recaptured depreciation.
4. Taxes on normal gains.
5. Taxes on capital gains.
9.Demand Analysis and Sales
Forecasting: (5 hours)
1. Demand analysis.
2. Correlation of price and consumption rate.
3. Market research.
4. Sales forecasting.
5. Criteria for desirable sales forecasting
procedures.
6. Factors affecting accuracy of forecasting.
Before completing the course
◼ Assignments -3
◼ case studies -3
◼ Project Evaluation
Practice - 1
Text Book References
◼ TextBook: Engineering Economy, W.G
Sullivan, Pearson 2001
◼ Engineering Economics, Er.Kiran Thapa
◼ References:
 www.prenhall.com/sullivan_engineering
 www.ocw.mit.edu/courses/engineering-systems-division/esd-
70i......
 MS Excel functions
 Referece Books
◼ E.P. DeCramo, W.G. Sullivan and J.A. Bontadelli, 8th
Edition, Macmillan Publishing Company, 1988.
◼ N.N. Borish and S. Kaplan, “Economic analysis: For
Engineering and Managerial Decision Making”, McGraw-
Hill.
◼ “Contemporary Engineering Economics” by
Chan S. Park
◼ “ Engineering Economic Analysis” by Tony and
Blank.
 INTRODUCTION
Economics Definition
Economics:
Study allocation of its scarce resources – Examining
Which Goods and Services wind up in the hands of
which people
Scarce Resource: Resource which are not abundant.
And are not easily available
Where resources are abundant, no issue on allocation
Economics
Allocation of the resources to fulfill the
unlimited desires of the human beings.

Branch of social science that deals with the

production and consumption of goods and
services as well as the distribution for the
human welfare and their management.
Positive and Normative Analysis

◼ Positive Analyis: Study of Econonic relationships

without value judgenent like electrodynamics
◼ Normative: Analysis with Value judgement e.g.
effect of taxation on poor family and whether it is
desirable or not.
◼ Monetization: Measure of value in terms of
money
Economic Reasoning & Analysis
◼ Ceteris Paribus: Other Things remaining Equal
economics is a complex System, so cosider effect of one
variable at one time
◼ Homo economicus: self-interested behabiour or
selfishness
People or organization make choices based on “their
own welfare only”
◼ Marginal … : the Derivative of …
◼ Model: A relationship between variables, a functional
equation
 Engineering Economics
➢ Deals with the methods that enable one to take
economic decision towards minimizing the cost or
maximizing benefits to business organization.

➢ Chooses between alternatives

➢ The field of engineering economy is concerned with the

systematic evaluation of the benefits and costs of the
projects involving engineering design and analysis.
➢ In manufacturing or construction, engineering is
involved in every detail of a product’s production
from conceptual design to distribution, for the best
alternatives

➢ Engineers must decide if the benefits of a project

exceed its costs and must make this comparison in a
unified framework.

➢ The frame work within which to make this

comparison is the field of engineering economics.
Definition1:
◼ “Engineering economics is the application of
economic techniques to the evaluation of design
and engineering alternatives. The role of
engineering economics is to assess the
appropriateness of a given project, estimate its
value, and justify it from an engineering
standpoint”. (Dr. John M.Watts)
Definition 2:
“Engineering economics deals with the methods that
enable one to take economics decision towards
minimizing the cost or maximizing benefits to
business organization”.
Definition 3:
“Engineering economy involves formulating,
estimating, and evaluating the economic outcomes
when alternatives to accomplish a defined purpose
are available. Another way to define engineering
economy is as a collection of mathematical
techniques that simplify economic comparison”.
 STRATEGIC ECONOMIC DECISIONS

◼ Once project ideas are identified, they are

typically classified as:

1. Equipment and process selection

2. Equipment Replacement
3. New product and product expansion
4. Cost reduction, and
5. Service improvement
Principles of Engineering Economics

◼ Develop alternatives
◼ Focus of the differences
◼ Use a consistent view point
◼ Use common unit of measure
◼ Consider all relevant criteria
◼ Make uncertainty explicit
◼ Revisit your decision