Engineering Economics

Introduction
• Engineering activities are not an end in themselves. They are a means
for satisfying human wants.

• Engineers have two concerns:1) Materials and Forces of Nature

2) Needs of People

• Engineering projects need to be not just physically feasible but

economically also.

Engineering Economy
 Why Engineering Economy is Important to Engineers

• Engineers design and create which involves economic decisions

• Engineers must be able to incorporate economic analysis into their creative

efforts

• Often engineers must select and implement from multiple alternatives

• Understanding and applying time value of money, economic equivalence, and

cost estimation are vital for engineers

• A proper economic analysis for selection and execution is a fundamental task

of engineering. Engineering Economy

 Engineering and Science
• Engineering is an application of science. It is an art of adopting skill and

knowledge of science.

• Accreditation Board for Engineering and Technology defines Engineering as

follows:

• “Engineering is a profession in which knowledge of the mathematical and

natural sciences are 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”.

Engineering Economy
 ECONOMICS

 Economics is an science primarily concerned with the process

of mobilizing, allocating and utilizing resources for the purpose
of promoting human development and welfare.
 Economics as a branch of knowledge is concerned with the
study of the allocation of scarce resources among competitive
ends.
 Problems of resource allocation are constantly faced by
individuals, enterprise and nations.
 The limited productive resources such as land, raw-materials,
skilled manpower, capital equipment's and technology etc.
 The resources not only scarce and limited but also using for alternative
purpose to satisfying people in the country.
 Therefore, resources need to be used and managed most efficiently and
economically.
 Efficient and economic use of resources is not an easy task. It is
achieved over time and is a function of many physical, financial,
engineering, human and institutional factors.
 Economics

Economic Problems

Means (Human Wants) Ends (Resources)

Unlimited Graded Limited Alternative

Wants Wants Resource Uses

Scarcity of Resources
  Engineers are technologists, designers, planners and
builders. They are also problem solvers, managers
and decision-makers – Engineering economists
touches each of activities.

Engineering  Students of engineering in all disciplines often

Economics engage themselves in technology and technological
related aspects of business. While, monitory aspects
are neglected by them.

 Therefore engineering economics focuses on both

practicability and economic feasibility.
 Good Engineering
Projects

Technological Economic
Feasibility Feasibility

Engineering
Economics
 Engineering &Economics
Economics is directed at the satisfaction of needs and wants through
the allocation of scarce resources.
Father of economics : Adam Smith
Types: 1. Micro Economics
2.Macro Economics
Application of economic techniques and principle is to
evaluate engineering design and engineering alternatives
Engineers can increase the productivity by eliminating waste and
improving the effective utilisation of resources
Maximum production, minimum cost and maximum profit

Profit = sales + other incomes – expenses - taxes

 Production Function

Production
Process
Land
Physical Inputs Labour
Physical Outputs
Machinery
Equipment
Money

Engineering is primarily a producer activity -

to satisfy human wants.
 Engineering economics is the application of economic
techniques and principles to the evaluation of design and
engineering alternatives.
 Engineers are mainly concern with design and manufacturing
machines, plants, automobiles, computers, products,
environment etc of his her area of specialization.
 If economic criteria are not considered properly when profit is
the ultimate objective, the result is bad engineering
 Many technologically brilliant projects have been destroyed as
a result of unsound economic analysis.
 Engineers can improving and increasing production,
reducing human efforts and increasing wealth.
 The role of engineering economics is to assess the
feasibility of a project, estimate its value and justify –
engineering point of views.
 Therefore engineering economics denotes technological
aspect as well as monetary aspects.
Efficiency is one of the most important concept of
engineering economics
 The concept of efficiency playing an important role in
output maximization and minimization of wastages of
resources.
 Here, there is a shortages of resources - Men, Materials,
Machines, Money and Management etc.
 At this stage efficiency one of the most important
concept of engineering economics.
 Proper allocation of resources and best way of
utilisation of resources, while minimizing wastages and
inefficiency.
 Concept of Efficiency
Higher Efficiency Lower Efficiency

Highest National income, employment and Modest or lowest National

output income, employment and output

Highest Per capita income and standard of Lowest or modest Per capita income
living and standard of living

Highest quality of life and HDI Lowest quality of life and HDI
(Human Development Index)
Maximisation of wastages of resources
Minimisation of wastages of resources
Therefore engineering activities must be an vital factors for
maximisation of output and minimisation of wastages
 For an economy to be efficient, the three essential
requirements are –
1. The maximum number of workers to be employed
2. The maximum number of products and services to be
produced.
3. The flow of currency to be maximized.
 Recession is a significant decline in economic activity in
any economy.
 Moreover, if employment rate would drop, there would be
cut backs in consumer spending.
 If the availability of products drops, it can result in
excessive inflation.
 The companies exist for one reason – to make money or profit
Profit = sales + other income – expenses – taxes
 Engineers affect profits in a number of ways –
1. They create the opportunity for new sales by developing new
product or improved.
2. They create the opportunity for reducing expenses. Cost of
production of product.
3. They design and build or modify plants or processes –
produce new product, increase production capacity,
increased sales and reduce expenses.
 Engineering economics provides knowledge of engineering and
economic problem related to limited resources and select the
preferred course of action.
 It evaluations mainly on mathematical models and cost data.
 Before 1940 engineers were mainly concerned with the design,
construction and operation of machines, structures and
process.
 They gave less attention or importance to revenue and cost
aspect.
 Today, close and tangled relations among industry, the public
and government, cost and value analysis are expected more in
detailed and inclusive.
 Worker safety
 Environmental effects
 Consumer protection
 Resource conservation
 Without these analysis, an entire project can easily become more
burden than a benefit.
 For this purpose concept like cash-flows, interest rates as well
as more evaluation criteria like simple payback period, rate of
return, net present value, Break-Even-Analysis are considered
and instructed.
 Engineering is an important part of an economy, the
knowledge of engineering economics has become mandatory
for all engineers.
 Engineering economics concerned with time value of money,
cash-flow concepts, alternatives, depreciation etc.
 Importance of Engineering Economics
1. Increasing production and Improving productivity
2. Reducing human efforts
3. Increasing wealth by maximising profit
4. Controlling cost and Reducing cost
5. Decision-making – selection of location, selection of equipment
and replacement analysis
6. It provides a number of tools and techniques to solve
engineering problems – advertising, investment, pricing and
level of output etc
7. It deals with identification of economic choices
 The Role of Engineers in Business

Create & Design

• Engineering Projects

Identify Evaluate Analyze

• Production Methods • Expected • Impact on Financial

• Engineering Safety Profitability Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
 Economics play an important role in all
engineering decision-making.
 Economic criteria such as Time value of
money, interest calculation, depreciation
and taxes, replacement analysis and
others have to be considered in the
engineering projects.
 Therefore, engineering economy is
concerned with the economic aspects of
engineering is known as engineering
economics.
 Individuals

Limited financial
and personal Enterprises
resources

Nations

Mobilisation of Allocation of Effective

resources Resources Utilisation of resources
 how much it is costing to produce a particular
technology or design or structures and how much
revenue generated by the same?
 Therefore, engineering economy is concerned with the
economic aspects of engineering is known as
engineering economics.
 Engineering Decision Making Processes
1. Understand the problem – define objectives
2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives
6. Select the “best” alternative
7. Implement the alternative and monitor results
Steps in an Engineering Economy Study

Engineering Economy 29
Rational Decision-Making Process
 Recognize the decision problem
 Collect all needed (relevant) information
 Identify the set of feasible decision
alternatives
 Define the key objectives
and constraints
 Select the best possible and implementable
decision alternative

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 A Simple Illustrative Example: Car to
Lease – Saturn or Honda?
 Recognize the decision problem • Need a car on lease
 Collect all needed (relevant) information • Gather technical and financial data
 Identify the set of feasible decision • Select cars to consider
alternatives • Wanted: small cash outlay, safety, good
 Define the key objectives performance, aesthetics,…
and constraints • Choice between Hyundai and Tata
 Select the best possible and motors (or others)
implementable decision alternative • Select a car (i.e., Hyundai or Tata
motors or another brand)

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What Makes Engineering Economic Decisions Difficult?
Predicting the Future
• Estimating the required investments
• Estimating product manufacturing costs
• Forecasting the demand for a brand new
product
• Estimating a “good” selling price
• Estimating product life and the profitability
of continuing production

32
Bi-Environmental Nature of Engineering

• Engineers are confronted with two environments:

• 1) Physical Environment.

• 2) Economic Environment.

• The success of engineering is to create products and services with the

knowledge of physical laws.

• However, the worth of these products and services lies in their utility
measured in economic terms.
Engineering Economy 33
Contd..
• Physical environment is governed by physical laws which are more
exact/accurate and much is known with certainty.

• Economic environment is governed by economic laws which are influenced

by human behavior. These laws are less exact/accurate compared to
physical laws.

• Quantification is possible to a large extent in economic environment due to

similar reaction of human beings over space and across time to similar
events. Engineering Economy 34
Contd..
• Engineers may have a tendency to disregard economic environment.

• But role of an engineer goes much beyond physical environment to

economic and managerial as well.

• There is also an argument that engineers must confine to physical factors

and economic and humanistic factors should be handled by others.

• However, keeping activities in such watertight compartments is not

possible.

Engineering Economy 35
Contd..

• Engineers can readily extend their inherent ability of analysis to become

proficient in the analysis of the economic aspects of engineering
application.

• Engineers who will be eventually engaged in managerial activities will

find such proficiency is necessary.

• It is the objective of engineering economy to prepare engineers to cope

with bi- environmental nature of engineering.

Engineering Economy 36
Physical and Economic Efficiency
• There is limited resources and as a result it is necessary to produce
greatest output with limited input.

• Opportunity cost: Cost of foregone alternative.

• Engineering is concerned with physical efficiency: i.e. output/input

Engineering Economy 37
Contd..
• At second level there is economic efficiency i.e. worth/cost.

• In final evaluation of ventures, even though engineering plays a major

role, economic efficiency must take precedence over physical efficiency.

• Economic efficiency concept brings to the fore all complexities of

economic environment.

Engineering Economy 38
Engineering for Economic Competitiveness

• Producers strive for sustainable competitive advantage in the market

place.

• Through the life cycle approach to engineering, economic

competitiveness can be enhanced.

• Identification of need, conceptual/preliminary design, detailed design

and development, production/construction, utilization and finally phase
out and disposal.
Engineering Economy 39
Contd..

• Generally, engineers have focused mainly on the acquisition phase i.e. up

to production/construction.

• However, recent experience shows that product competitiveness cannot

be achieved through efforts applied largely after product comes in to
market place. For e.g. Tata Nano

• As a result, it is essential that engineers need to be sensitive in the early

stages of life cycle.

Engineering Economy 40