Lecture 1

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Introduction to Engineering Economy

Eng.Mohammed Ismeel Shekfa

Chapter 1

Eng. Mohammed Ismaeel Shekfa

January 10, 2021
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Objectives
• Define Engineering Economy

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• Discuss the critical role of engineering economy in engineering
practice (design and analysis) and entrepreneurial activities.

Eng.Mohammed Ismeel Shekfa

• Discuss the basic principles of the engineering economy.

• Introduce the relationship between procedure of engineering

economic analysis and the process of engineering design.

• Discuss the procedure of engineering economic analysis.

• Appreciate the role of accounting as a tool in engineering 2

economy studies.
Engineering Definition
• ABET defines engineering as

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The profession in which a knowledge of the
mathematical and natural sciences, gained by:

Eng.Mohammed Ismeel Shekfa

• Study
• Experience
• Practice

The knowledge is applied with judgment to:

• Develop ways to utilize, economically , the
materials and 3
• Forces in nature for the benefit of mankind
Engineering Definition
• The engineering practice consists of two
parts :

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• A technological part

Eng.Mohammed Ismeel Shekfa

• Economic part .

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 Engineering Economy

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Engineering economy has the objective of
1 assisting decision makers through technical
analysis with emphasis on economic aspects.

Eng.Mohammed Ismeel Shekfa

Engineering
Economy

It involves the systematic evaluation of the

2 economic merits of proposed solutions to
engineering problems
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Engineering Economy

For solutions to engineering problems

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to be economically acceptable

Eng.Mohammed Ismeel Shekfa

Demonstrate a Represent
positive Promote the
creative &
balance of well‐being &
innovative
long‐term survival of an
technology &
benefits over organization
ideas
long‐term costs
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Engineering economy

• It defines how we Land

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can use limited
recourse to solve

Eng.Mohammed Ismeel Shekfa

any engineering Labor Recourses
problem

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Capital
Land Recourse
• Land Recourse
• Water,

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• Air

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• Minerals
• Sunshine
• plant & tree growth
• land itself

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Recourses
• Labor Recourse
• The efforts, skills, and knowledge of people which are applied to the
production process

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Eng.Mohammed Ismeel Shekfa
• Capital Recourse
• Real Capital Tools, buildings, machinery ‐‐ things which have
been produced which are used in further production

• Finical Capital Assets & money which are used in the 9

production process
Engineering Economy
• Examples where Engineering Economy is
used:

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• Preparing a feasibility study for a project

Eng.Mohammed Ismeel Shekfa

• Choosing the best design for a high-
efficiency chiller unit
• Making a recommendation about
whether a piece of equipment needed for
a construction project should be 10
purchased or leased
The basic principles of the
engineering economy
• Principle 1- Develop the • Principle 2- Focus on

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alternatives differences

1. Develop and define different 1. Focus only on the

Eng.Mohammed Ismeel Shekfa

(feasible) alternatives for
detailed evaluation.
differences in expected
future outcomes among
2. The effort spent in this the alternatives when
process will be reflected on comparing between
the quality of the decision alternatives to take a
taken. decision.

2. Discard common
outcomes.
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• Example: in renting a car with the rent
being the same for two cars.
The basic principles of the
engineering economy
• Principle 3- Use a consistent • Principle 4 - Use a common unit
viewpoint of measure

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1. Develop the description, 1. Use a common unit of
analysis and comparison of measurement (such as

Eng.Mohammed Ismeel Shekfa

the alternatives, from a Dollars) to enumerate as
defined view point ( many of the prospective
perspective). You try to outcomes as possible. This
answer the question the will simplify the analysis
viewpoint of whom is of and make the comparison of
interest? Who will pay the alternatives more easy.
cost, for example, or get Outcomes that can't be
the benefit. enumerated should be tried
to be quantified using an
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appropriate unit or
described in a useful way.
 The basic principles of the engineering economy
• Principle 5 – Consider all relevant criteria
• The primary criterion is the long- term financial interests of the owners.
However, there are other nonmonetary attributes(Slide 11) and multiple
objectives(capital) that might be considered as additional criteria in the

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decision making process.(what is the owner interests? Make profit or like
coca cola in vietnam)
• Initial (first) cost

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• Annual maintenance cost
• Operational cost
• Selling price
• Aesthetic value
• Safety
• Efficiency
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The basic principles of the
engineering economy
• Principle 6 – Make • Principle 7 – Revisit your

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uncertainty explicit decision

1. Risk analysis of 1. Improved future decision

Eng.Mohammed Ismeel Shekfa

expected outcomes making process can result
should be used to from comparing the actual
outcomes of the selected
affect the decision
alternative with the initial
making process. What projected ones (feedback or
we expect may post-evaluation). This is
eventually not be the called the adaptive process
case? War may be which means learning from
and adapting based on
experience. 14
 The relationship between procedures of engineering economic analysis and the
process of engineering design.
The seven-step procedure of engineering economic analysis

Procedure of the Engineering Economic Activities of the engineering design

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analysis process
1- Problem recognition, definition and evaluation 1- Problem definition
2- problem formulation and evaluation
2- Development of feasible alternatives 3- Synthesis of possible solutions
(alternatives)
3- Development of the outcomes and cash flows
for each alternative.
4- Selection of a criterion or criteria 4- Analysis, optimization and evaluation

5- Analysis and comparison of alternatives

6- Selection of the preferred alternative 5- Specification of preferred alternative

7- Performance monitoring and post-evaluation 6- Communication 15

of results
Procedure of the Engineering
Economic analysis
Problem
Development of
recognition, Development of
feasible
definition and the outcomes
alternatives

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evaluation

Eng.Mohammed Ismeel Shekfa

Selection of the Analysis and
Selection of a
preferred comparison of
criterion or criteria
alternative alternatives

Performance
monitoring 16
The seven-step procedure of engineering economic analysis

1- Problem recognition, definition and evaluation

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Recognition of the problem is normally stimulated by internal or external organizational
needs. The problem must be well understood and defined since this provides the basis for
the rest of the analysis. Evaluation of the problem includes refinement of the needs and

Eng.Mohammed Ismeel Shekfa

requirements. Information from the evaluation phase may change the original
formulation of the problem.

2- Development of feasible alternatives

This involves developing potential alternatives and screening them to select a smaller
group of feasible alternatives for detailed analysis. Creativity of the team is essential for
the development of good alternatives. Two approaches have found wide acceptance in
industry for developing good alternatives, these are :
(a) Classical brainstorming and 17
(b) The Nominal Group Technique (NGT).
The seven-step procedure of engineering economic analysis
(continued)

(a) Classical brainstorming

• Is based on the principles of deferment of judgment and quantity breeds

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quality. Four rules are needed for successful brainstorming:
1- No criticism 2- Freewheeling is welcome 3-Quantity is wanted
4- Combination and improvement are required.

Eng.Mohammed Ismeel Shekfa

• A classical brainstorming has the following basic steps:
1- Preparation.. A preliminary statement of the problem is circulated
among the selected participants (4-7 people).
2- Brainstorming.. A warm-up session with simple unrelated
problems is conducted. This is followed up with presenting the four
rules of brainstorming and generating and recording ideas relevant
to the main problem.
3- Evaluation of ideas.
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The seven-step procedure of engineering economic analysis
(continued)

(b) Nominal Group Technique (NGT)

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• Involves structured group technique aiming at incorporating individual
ideas into a group consensus. This technique reduces two undesirable
effects of most meetings. These are the dominance of one or more

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participants and the suppression of conflicting ideas.

• The basic format for a NGT is as follows:

1- Individual silent generation of ideas
2- Individual round-robin recording of ideas
3- Group clarification of each idea
4- Individual voting and ranking of ideas
5- Discussion of group agreement results
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The seven-step procedure of engineering economic analysis
(continued)
3- Development of the outcomes and cash flows for each alternative
This step incorporates principles 2,3,and 4 of the engineering economy.
• The cash flow represents the economic effects of an alternative in terms of
money spent & received. The net cash flow for an alternative is the

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difference between all cash inflows (receipts or savings) & cash outflows
(cost or expenses)
In addition, examples of nonmonetary factors to be also considered are:

Eng.Mohammed Ismeel Shekfa

1-Meeting or exceeding customer expectations
2-Safety
3-Improving employee satisfaction
4-Maintaing production flexibility to meet changing demands
5-Meeting or exceeding all environmental requirements
6-Achieving good public relation

Example: design new product? Will you sell it and modify it according to the
customers feedback or will you get feedback from selected consumers before 20
any sales?
The seven-step procedure of engineering economic analysis
(continued)
4- Selection of a criterion or criteria
This incorporate principles 3,viewpoint, and 5,long term interests, of the
engineering economy.

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5-Analysis and comparison of alternatives
This is largely based on cash-flow estimates for the feasible alternatives

Eng.Mohammed Ismeel Shekfa

6- Selection of the preferred alternative

7- Performance monitoring and post-evaluation of results

This final step is often not done consistently in engineering practice, therefore, it
needs particular attention to ensure feedback for use in ongoing and subsequent
studies.

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Engineering Economy
Step 2. Develop Your
Feasible Alternatives • Principle 1

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Step 3 Estimate the Cash
Flows for Each Alternative • Principles 2, 3, & 4

Eng.Mohammed Ismeel Shekfa

Step 4. Select a Decision
Criterion • Principles 3, 4, & 5
Step 5. Analyze & Compare
the Alternatives • Principles 5 & 6
Step 6. Select the Best
Alternative • Principle 6
Step 7. Monitor the 22
Performance of Your Choice • Principle 7
Accounting as a tool in engineering economy studies

• Accounting is a tool through which the outcome of a project is

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measured and compared to the initial forecast analysis.

Eng.Mohammed Ismeel Shekfa

• General accounting is a source of the past financial data needed
for estimating future financial conditions.

• Cost accounting, or management accounting is concerned with

decision making and control of the firm.

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Accounting as a tool in engineering economy studies

• Modern cost accounting may satisfy any or all of the following

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objectives:
1- To determine the cost of a product or a service

Eng.Mohammed Ismeel Shekfa

2- To provide a rational basis for pricing goods or services
3- To provide a means for controlling the expenses
4- To provide information on which operating decisions may be
based and the results evaluated

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 Eng.Mohammed Ismeel Shekfa 1/11/2021
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