Lesson 1 – Introduction to

Engineering Economy
 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, 13TH ED.
Pearson-Prentice Hall. p2
 Definition of Engineering Economy
• 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
• 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.
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p3
 Definition of Engineering Economy

• 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.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p3
 Definition of Engineering Economy

• 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 decision
situation 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
 Principles of Engineering Economy

#2: FOCUS ON THE DIFFERENCES

• Only the differences in the expected 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 action
based on the differences among feasible alternatives.

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

#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 the
particular 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
 Principles of Engineering Economy

#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.

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

#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 alternative
that will best serve the long-term interests of the owners
of the organization.

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

#6: MAKE RISK AND UNCERTAINTY EXPLICIT

• Risks and uncertainty are inherent in
projecting/estimating the future outcomes of the
alternatives and should be recognized in their analysis
and comparison.

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

#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.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,
TH
 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 normally
includes other engineering knowledge and input.
• A sound engineering economic analysis procedure
incorporates the basic principles (7 principles)
and involves several steps.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,
TH
 Engineering Economy and Design
Process
ENGINEERING ECONOMIC ANALYSIS
PROCEDURE ENGINEERING DESIGN
1. Problem recognition, definition, and PROCESS
evaluation
2. Development of the feasible
1. Problem/Need definition
alternatives
3. Development of the outcomes and 2. Problem/need formulation and
cash flows for each alternative evaluation
4. Selection of a criterion 3. Synthesis of possible solutions
5. Analysis and comparison of the 4. Analysis, optimization, and
alternatives evaluation
6. Selection of the preferred 5. Specification of preferred
alternative alternative
7. Performance monitoring and post-
6. Communication
evaluation of results
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,
TH
 Application of Engineering
Economic Procedure
• PROBLEM: To find the least expensive
method for setting up capacity to produce
drill bits
 Application of Engineering
Economic Procedure
• ASSUMPTIONS: The revenue per unit will be
the same for either machine; startup costs are
negligible; breakdowns are not frequent;
previous employee’s data are correct; drill bits
are manufactured the same way regardless of
the alternative chosen; in-house technicians
can modify the old machine so its life span will
match that of the new machine; neither
machine has any resale value; there is no
union to lobby for in-house work; etc.
 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 mortgage
payment 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 that can each 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?
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY,
TH