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Introduction To Engineering Economics

Engineering economics is an important concept for engineers to understand as it helps analyze decisions by comparing the cash flows of alternatives over time using mathematical models. It allows engineers to evaluate project and design options by accounting for the time value of money, which recognizes that money available at present is worth more than the same amount in the future due to factors like investment opportunities and uncertainty. Engineering economics uses tools like present value calculations and sensitivity analysis to help decision makers understand how changes in key parameters may impact outcomes and ultimately select the best alternative.

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Miguel Toriente
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51 views19 pages

Introduction To Engineering Economics

Engineering economics is an important concept for engineers to understand as it helps analyze decisions by comparing the cash flows of alternatives over time using mathematical models. It allows engineers to evaluate project and design options by accounting for the time value of money, which recognizes that money available at present is worth more than the same amount in the future due to factors like investment opportunities and uncertainty. Engineering economics uses tools like present value calculations and sensitivity analysis to help decision makers understand how changes in key parameters may impact outcomes and ultimately select the best alternative.

Uploaded by

Miguel Toriente
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 1

Introduction to Engineering Economics

Why Is Engineering Economics Important?


Engineers DESIGN things and perform PROJECTS Therefore, engineers must be concerned with the economic aspects of designs that they recommend, and projects that they perform

What can go wrong when we dont have the concepts of engineering economics?

What Kinds of Questions Can Engineering Economics Answer?

Engineering economics is needed for many kinds of decision making Example: Buying a car
Alternatives:
P 18,000 now, or P 600 per month for 3 years

Which is better?

Engineering Economics Helps Make Cash Flow Comparisons!

Example: Buying a car


Alternatives:
P 18,000 now, or P 600 per month for 3 years (= P 21,600 total)

Which is better?
It depends! Issue: how much is money now worth compared to money in the future? Leads to idea of time value of money!

Key Concept: Time Value of Money


Would you rather have: P 100 today, or P 100 a year from now?

Time Value of Money


Would you rather have: P100 today, or P100 a year from now? Basic assumption: Given a fixed amount of money, and A choice of having it now or in the future, Most people would prefer to have it sooner rather than later
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Time Value of Money


Basic assumption: Given a fixed amount of money, and A choice of having it now or in the future, Most people would prefer to have it sooner Reasons: ? ? ? ?
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Time Value of Money


Basic assumption: Given a fixed amount of money, and A choice of having it now or in the future, Most people would prefer to have it sooner rather than later This assumption is not universally satisfied: E.g., saving money for graduate school But it is nearly universal, especially in business
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Time Value of Money


One consequence of the time value of money: Suppose you are willing to exchange a certain amount now for some other amount later Then the later amount has to be ________________?

Time Value of Money


The time value of money centers around the idea of an interest rate (if projecting into the future): Or, equivalently, a discount rate (if rolling back to the present)

Time value of money deals with changes in the value of money over some period of time (due to investment opportunities, uncertainty, etc.) This is the single most important concept in engineering economics!
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What Does This Mean for Us?


In this course, we will learn methods to:

Compare different cash flows over time Using the interest rate or discount rate:

How much more a dollar today is worth, Compared to a dollar in one year For example, if the interest rate is 5%: P 1 today is worth as much as P 1.05 next year

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Illustration of Discounting

100 80 60 40 20 0
0 2 4 6 8 10 12 14 16 18

0 0.01 0.05 0.1 0.2 0.3


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Present Value

Time

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What Kinds of Questions Can Engineering Economics Answer? It will help you make good decisions:

In your professional life


(Regardless of whether you go into the private or public sector) And in your personal life! Knowledge of engineering economics will have a significant impact on you personally!

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What Kinds of Questions Can Engineering Economics Answer?

ENGINEERING ECONOMICS INVOLVES: FORMULATING, ESTIMATING, AND EVALUATING ECONOMIC OUTCOMES WHEN CHOICES OR ALTERNATIVES ARE AVAILABLE

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How Does It Do This?

BY USING SPECIFIC MATHEMATICAL RELATIONSHIPS TO COMPARE THE CASH FLOWS OF THE DIFFERENT ALTERNATIVES (typically using spreadsheets)

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Where Does Engineering Economics Fit? Here is an approach to problem-solving: Understand the problem Collect all relevant data/information

Define the feasible alternatives


Evaluate each alternative

Select the best alternative


Implement and monitor the decision
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Where Does Engineering Economics Fit?


1. Understand the Problem

2. Collect all relevant data/information (difficult!)


3. Define the feasible alternatives 4. Evaluate each alternative

5. Select the best alternative


6. Implement and monitor

This is the major role of engineering economics

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Where Do I Get the Data?


Engineering economics is based mainly on
estimates of future costs and benefits: So it has to deal with risk and uncertainty

The costs, benefits, and other parameters are


typically unknown, and can vary over time: The values of these parameters will dictate a particular numerical outcome And therefore a particular decision! Sensitivity analysis can be used to explore how the decision changes as our estimates change

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What If I Dont Like the Answers?


Remember: Tools dont make decisions People make decisions, based on values

Engineering economics is just a set of tools:


It can help in decision making But it wont make the decision for you Which alternative is best is up to you!
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