Chapter 1.
Introduction To Engineering Economics
1.1 Definition and Basic Principles Engineering economics analysis can play
a role in many types of situations.
Engineering…
Choosing the best design for a high-
The Accreditation Board for Engineering efficiency gas furnace
and Technology states that engineering “is Selecting the most suitable robot for a
the profession in which a knowledge of the welding operation on an automotive
mathematical and natural sciences gained assembly line.
by study, experience, and practical is applied Making a recommendation about
with judgment to develop ways to utilize, whether jet airplanes for an overnight
economically, the materials and forces of delivery service should be purchased
nature for the benefit of mankind.” or leased.
Determining the optimal staffing plan
Emphasized the economic aspects of for a computer help desk.
engineering
Engineering Economy…
The physical aspect
It is essential that the economic part of Includes significant technical
engineering practice be accomplished considerations
well Involves technical analysis, with
Engineers use knowledge to find new emphasis on the
ways of doing things economically Economic aspects
Has the objective of assisting
Engineering Economy…
decisions
Involves the systematic evaluation of An engineer who is unprepared to
the economic merits of proposed excel at engineering economy is not
solutions to engineering problems. properly equipped for his or her job.
To be economically acceptable (i.e.,
Fundamental Principles of Engineering
affordable), solutions to engineering
Economy
problems must demonstrate a
positive balance of long-term 1. Develop the alternatives.
benefits over long term costs. Carefully define the problem!
An analysis and evaluation of the Then the choice (decision) is among
factors that will affect the economic alternatives
success of engineering projects to the The alternatives need to be identified
end that a recommendation can be and then defined for subsequent
made which will insure the best use of analysis.
capital.
2. Focus on the differences.
Solutions to Engineering Problem must:
Only the differences in expected
Promote the well-being and survival of future outcomes among the
an organization, alternatives are relevant to their
Embody creative and innovative comparison and should be
technology and ideas considered in the decision.
Permit identification and scrutiny of
their estimated outcomes , and 3. Use a consistent view point.
The prospective outcomes of the
Translate profitability to the “bottom
alternatives, economic and other,
line” through a valid and acceptable
should be consistently developed
measure of merit.
from a defined viewpoint
(perspective).
Chapter 1. Introduction To Engineering Economics
4. Use a common unit of measure. Engineering Economic Analysis Procedure
Using a common unit of
measurement to enumerate as many
of the prospective outcomes as
possible will simplify the analysis of
the alternatives.
5. Consider all relevant criteria.
Selection of preferred alternative
(decision making) requires the use of
a criterion (or several criteria).
The decision process should 1. Problem Definition
consider both the outcomes A problem must be well understood
enumerated in the monetary unit and stated in an explicit form before
and those expressed in some other the project team proceeds with the
unit of measurement or made rest of the analysis.
explicit in a descriptive manner. Recognition of the problem is
normally stimulated by internal or
6. Make risk and uncertainty explicit. external organizational needs or
Risk and uncertainty are inherent in requirements.
estimating the future outcomes of the Once the problems recognized, its
alternatives and should be formulation should be viewed from a
recognized in their analysis and systems perspective.
comparison. Evaluation of the problem includes
refinement of needs and
7. Revisit your decisions. requirements, and information from
Improve decision making results from the evaluation phase may change the
an adaptive process; to the extent original formulation of the problem.
practicable, the initial projected Redefining the problem until a
outcomes of the selected alternative consensus is reached may be the
should be subsequently compared most important part of the problem-
with actual results achieved. solving process!
Engineering Economy and the Design
2. Development of Alternatives
Process
Searching for Superior Alternatives
An engineering economy study is
accomplished using a structured The difference between good and
procedure and mathematical modeling great alternatives depends largely on
techniques. an individual's or group's problem-
The economic results are then used in a solving efficiency. Such efficiency can
decision situation that normally includes be increased in the following ways:
other engineering knowledge and input.
1. Concentrate on redefining one
problem at a time.
2. Develop many redefinitions for
the problem.
3. Avoid making judgments as
new problem definitions are
created.
4. Attempt to redefine a problem
in terms that are dramatically
Chapter 1. Introduction To Engineering Economics
different from the original 5. Meeting or exceeding all
problem definition. environmental requirements
5. Make sure that the true 6. Achieving good public relations or
problem is well researched and being an exemplary member of
understood. the community
Developing investment alternative
(1) Classical Brainstorming 4. Selection of a decision criterion
(2) Nominal Group Technique The decision maker will normally
select the alternative that will best
Example: Defining the Problem and serve the long-term interests of the
Developing Alternatives owners of the organization. It is also
true that the economic decision
criterion should reflect a consistent
and proper viewpoint to be
maintained throughout an
engineering economy study.
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.
6. Selection of the preferred alternative
The soundness of the technical-
economic modeling and analysis
3. Development of prospective outcomes techniques dictates the quality of the
A cash flow occurs when money is results obtained and the
transferred to organization or recommended course of action.
individual to another. Thus, a cash
flow represents the economic effects 7. Performance monitoring and post
of an alternative in terms of money evaluation of results.
spent and received. Monitoring project performance
In addition to the economic aspects of during its operational phase improves
decision making, nonmonetary the achievement of related goals and
factors (attributes) often play a objectives and reduces the variability
significant role in the final in desired results. The aim is to learn
recommendation. Examples of how to do better analysis, and the
objectives other than profit feedback from post implementation
maximization or cost minimization evaluation is important to continuing
that can be important to an improvement of operations in any
organization include the following: organization.
1. Meeting or exceeding customer
expectations
2. Safety to employees and to the
public 1.2 General Economic Environment
3. Improving employee satisfaction
4. Maintaining production flexibility
to meet changing demands
