Engineering Economic
Analysis
CHAPTER 1
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What is Engineering Economy?
Engineering economy
 involves the financial and economic evaluation of
projects.
 is the study of industrial economics and economic and
financial factors that influence industry.
 includes
the study of accounting practices for
manufacturing concerns.
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 Engineers are familiar with all the technicalities of
machinery and production, therefore they
 are the best judges of the useful lives of an asset
 have the technical knowledge to calculate the number
of units a plant would produce
 In today’s competitive world, it is essential that engineers
should practice financial project analysis for engineering
projects and make rational decisions.
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Engineering economy deals
with justification and
selection of projects.
 In business environments, decisions are justified
using monetary criteria such as “profit”.
 Therefore, all engineers should know methods and
tools used in evaluating projects.
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 The purpose of engineering economy is to expose all
engineering students to the methods which are widely
used for evaluating projects.
 Even though, engineering economy deals mostly with
selection of projects in business environment, the tools
and methods can be used by individuals and by nonprofit organizations such as government, hospitals, and
charitable organizations.
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EXAMPLES
Business Environment:
 A small manufacturing company needs to buy a forklift
truck for material handling.
 Two different brands, say A and B, are being considered.
 Which truck should be bought?
 The decision will probably be based on
minimization of cost.
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Non-profit Organizations:
 A project for widening a two lane highway to four lanes is
being considered by the city board.
 A four lane highway may reduce the traffic accident rate
but is expected to lower property values in the immediate
neighborhood of the highway.
 Should the proposed highway be built?
 The city board must weigh the comparative benefit of
lower accident rates against the possible loss in value of
homes as well as the construction cost.
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Engineering Economics Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic decisions
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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
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Which Car to Lease? Saturn vs. Honda
Predicting the Future
 Estimating a Required investment
 Forecasting a product demand
 Estimating a selling price
 Estimating manufacturing cost
 Estimating a product life
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Role of Engineers in Business
Two Factors in Engineering Economic Decisions
The factors of time and uncertainty are the defining
aspects of any engineering economic decisions
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Summary
 The term engineering economic decision refers to all
investment decisions relating to engineering projects.
 Many companies have a specialized project analysis
division that actively searches for
 new
ideas,
 new
projects,
 ventures.
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 Once project ideas are identified, they are typically
classified as (types of Strategic Engineering Economic
Decesions)
(1) service or quality improvement,
(2) equipment and process selection,
(3) equipment replacement,
(4) new product and product expansion
(5) cost reduction.
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 This classification system allows management to address key
questions.
 Can the existing plan be used to achieve new production
levels?
 Does the firm have the capital to undertake this new
investment?
 Does new proposal justify the recruitment of new technical
personnel?
Answers to these questions help firms screen out proposals
that are not feasible
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Fundamental Principles in
Engineering Economics
 A nearby dollar is worth more than a distant dollar
 All that counts is the differences among alternatives
 Marginal revenue must exceed marginal cost
 Additional risk is not taken without the expected
additional return
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Your Goal –Save $2M at the age of
65
 Your current age: 20 years old
 Amount of savings desired: $2 million
 Interest earned on your savings: 5%
 Required monthly savings: $987
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Monthly Savings Required
(to save $2M at age 65)
Starting
Age
Required Monthly Savings at Varying Interest
Rates
5%
7%
$987
$527
$190
$93
$31
30
$1,760 $1,110
$527
$311
$136
40
$3,358 $2,469 $1,507 $1,064
$617
50
$7,483 $6,310 $4,825 $4,003 $2,998
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10%
12%
15%
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What’s an Engineering Degree Worth
in 2008?
Source: National Association of Colleges and Employers, Summer 2008
Majors
Average Starting Salary
Chemical Engineering
$63,165
Computer Engineering
$60,416
Electrical Engineering
$56,910
Industrial Engineering
$57,456
Mechanical Engineering
$57,009
Civil Engineering
$51,632
For any engineering graduate, it is not difficult to set aside
$200 each month from his or her salary.
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