Engineering

Economy

Engr. Lou Armielene Quevada - Teope

 Engineering

• “is the profession in which a knowledge of

the mathematical and natural sciences
gained by study, experience, and practice is
applied with judgment to develop ways to
utilize, economically, the materials and
forces of nature for the benefit of mankind

by Accreditation Board for Engineering and Technology

 Economy
• efficiency and conservation of effort in the
operation or achievement of something
• frudent managing of resources to avoid
extravagant expenditure or waste
 Engineering Economy

• is the discipline concerned with economic

aspects of engineering that involves the
systematic evaluation of the costs and
benefits of the proposed technical projects.
• money side of the decisions that engineers
make as they work to position a firm to be
profitable in a highly competitive marketplace
in a nut shell…….

• Engineering Economy is about making decisions

• It is based on the systematic evaluation of the costs and

benefits of proposed technical projects

• The principles and methodology of engineering economy are

utilized to analyze alternative uses of financial resources,
particularly in relation to the physical assets and the
operation of an organization.

5
 Rational Decision-Making Process
1. Recognize a decision problem
2. Define the goals or objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion to
use
6. Select the best alternative

6
Financial Data Required to Make an Economic
Decision

7
 Which Car to Lease?
Saturn vs. Honda
1. Recognize a decision • Need a car
problem
2. Define the goals or • Mechanical security
objectives
3. Collect all the relevant • Gather technical as well
information as financial data
4. Identify a set of feasible • Choose between Saturn
decision alternatives and Honda
a

5. Select the decision • Want minimum total cash

criterion to use outlay
6. Select the best alternative • Select Honda

8
 PRINCIPLES OF ENGINEERING ECONOMY

• set of principles, or fundamental concepts,

that provide a comprehensive doctrine for
developing the methodology.
1. Develop the alternatives
The choice (decision) is among
alternatives. The alternatives need to be
identified and then defined for subsequent
analysis.
2. 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.
3. Use a Consistent Viewpoint

The prospective outcome of the

alternatives, economic and other, should
be consistently developed from a defined
viewpoint (perspective).
4. Use a Common Unit of Measure

Using a common unit of

measurement to enumerate as many of
the prospective outcomes as possible will
make easier the analysis and comparison
of the alternatives.
5. Consider all Relevant Criteria

Selection of a preferred alternative

(decision making) requires the use of a
criterion (or several criteria). 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.
6. Make Uncertainty Explicit

Uncertainty is inherent in projecting

(or estimating) the future outcomes of
the alternatives and should be recognized
in their analysis.
7. 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.
IMPORTANT APPLICATIONS OF ENGINEERING
ECONOMY

1. SEEKING OF NEW OBJECTIVES

Engineers all over the world are constantly
seeking new and wider applications of
their technical knowledge for the benefit
of mankind. In this search, engineering
economy provides basic principles and
laws. Companies usually conduct market
surveys to learn what people need and
want.
2. DISCOVERY OF FACTORS LIMITING THE SUCCESS OF
A VENTURE OR ENTERPRISE

Engineering economy seeks to discover

so-called limiting factors, which may hinder
the success of a project. Among the limiting
factors, there are some outstanding ones,
called strategic factors, which if altered may
be made to ensure the success of a venture.
3. ANALYSIS OF POSSIBLE INVESTMENT OF CAPITAL

Engineering economy enables engineers

to consider all aspects of the investment
from both the technical and financial
viewpoints. It furnishes several patterns of
analysis to determine rate of return, annual
costs and payout periods, which all serve as
bases for decisions.
4. COMPARISON OF ALTERNATIVES AS A BASIS FOR
DECISIONS
Most anything that has to be done can be
accomplished in many ways with satisfactory end
results, but with varying expenditures. Usually, the
alternative that will accomplish the objective with the
least expense is the most desirable. The principles of
engineering economy point out the analysis of such
problems on a quantitative basis and enable decision
makers to choose the right decision. Likewise,
qualitative factors involving risk or uncertainty are
easier to evaluate when principles of engineering
economy are known and applied.
5. DETERMINATION OF BASES FOR DECISION

The work of engineers is fundamentally

concerned with future actions – on what to do, not
on what has been accomplished. Decisions on future
actions are more valid and their chances for accuracy
are improved when principles of engineering
economy are correctly applied. A working
knowledge of engineering economy should improve
the ability of an engineer to make correct decisions
on all technical matters involving cost.
 The General Relationship Between the Economic
Analysis Procedure & the Engineering Design Process

An engineering economy study is

accomplished using a structured procedure
and mathematical modeling techniques. The
economic results are then used in a decision
situation that involves two or more
alternatives and normally includes other
engineering knowledge and input
 ENGINEERING DESIGN PROCESS

1 • Problem/need definition.
2 • Problem/need formulation and evaluation
3 • Synthesis of possible solutions (alternatives)
4 • Analysis, optimization, and evaluation
5 • Specification of preferred alternative
6 • Communication
 Engineering Economic Analysis Procedure

• Problem recognition, formulation, and evaluation

1
• Development of the feasible alternatives
2
3 • Development of the cash flows for each alternative.
4 • Selection of a criterion (or criteria).
5 • Analysis and comparison of the alternatives.
6 • Selection of the preferred alternative
7 • Performance monitoring and post-evaluation of results.
ENGINEERING ENGINEERING
DESIGN PROCESS ECONOMIC ANALYSIS

• Development of
the cash flows for
3 each alternative.
Analysis,
optimization,
4 and
evaluation
4
• Selection of a
criterion (or
criteria).

5 • Analysis and
comparison of the
alternatives.
 STEP 1: PROBLEM DEFINITION

Recognition of the problem is normally stimulated by internal or

external organizational needs or requirements. An operating
problem within a company (internal need) or a customer
expectation about a product or service (external requirement)
are examples.
Once the problem is recognized, its formulation should be
viewed from systems perspective. That is, the boundary or
extent of the situation needs to be carefully defined, thus
establishing the elements of the problem and what constitutes
its environment.
Evaluation of the problem includes refinement of needs and
requirements, and information form the evaluation phase may
change the original formulation of the problem.
 STEP 2: DEVELOPMENT OF ALTERNATIVES

The two primary actions in this step are

(1) searching for potential alternatives and
(2) screening them to select a smaller group of
feasible alternatives for detailed analysis.
The term feasible here means that each
alternative selected for further analysis is judged,
based on preliminary evaluation, to meet or
exceed the requirements established for the
situation.
 STEP 3: DEVELOPMENT OF PROSPECTIVE OUTCOMES

This step incorporates Principles 2, 3, and 4 of the

Engineering Economy Principles and uses the
basic cash-flow approach. A cash flow occurs
when money is transferred from one organization
(or individual) to another. Thus, a cash flow
represents the economic effects of an alternative
in terms of money spent and received.
 STEP 3: DEVELOPMENT OF PROSPECTIVE OUTCOMES

In addition to the economic aspects of decision making, non-

monetary factors (attributes) often play a significant role in the
final recommendation. Examples of objectives other than profit
maximization or cost minimization that can be important to an
organization include the following:
• Meeting or exceeding customer expectations
• Safety to employees and to the public
• Improving employee satisfaction
• Maintaining production flexibility to meet changing demands
• Meeting or exceeding all environmental requirements
• Achieving good public relations or being an exemplary member
of the community.
 STEP 4: SELECTION OF DECISION CRITERION

The decision maker will normally select the

alternative that will best serve the long-term
interests of the owners of the organization. This
step usually incorporates Principles 3 and 4 of the
Engineering Economy Principles.
STEP 5: ANALYSIS AND COMPARISON OF ALTERNATIVES

Analysis of the economic aspects of an engineering problem is

largely based on cash-flow estimates for the feasible
alternatives selected for detailed study. A substantial effort is
normally required to obtain reasonably accurate forecasts of
cash flows and other factors in view, for example, inflationary
(deflationary) pressures, exchange rate movements, and
regulatory (legal) mandates that often occur. Clearly, the
consideration of future uncertainties (Principle 6) is an essential
part of and engineering economy study. When cash flows and
other required estimates are eventually determined,
alternatives can be compared based on their differences as
called by Principle 2. Usually, these differences will be
quantified in terms of a monetary unit.
 STEP 6: SELECTION OF PREFERRED ALTERNATIVES

When the first five steps of the engineering

economic analysis procedure have been done
properly, the preferred alternative is simply a
result of the total effort. Thus, the soundness of
the technical-economic modeling and analysis
techniques dictates the quality of the results
obtained and the recommended course of action.
STEP 7: PERFROMANCE MONITORING AND POST-EVALUATION
OF RESULTS
This final step implements Principle 7 and is accomplished during
and after the time that the results achieved from the selected
alternative are collected. Monitoring project performance during
its operational phase improves the achievement of related goals
and objectives and reduces the variability in desired results. This
step is also the follow-up step to a previous analysis, comparing
actual results achieved with the previously estimated outcomes.
The aim is to learn how to do better analyses, and the feedback
from post-implementation evaluation is important to the
continuing improvement of operations in any organization.
Unfortunately, this final step is often not done consistently or well
in engineering practice; therefore, it needs particular attention to
ensure feedback for ongoing and subsequent studies.
 “Do its benefits exceed its costs?”

An engineer who is unprepared to excel at

engineering economy is not properly
equipped for his or her job.