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Introduction to

Engineering Economy
CE 22 lecture
Marie Claire Pascua

Engineering is the art of doing that well


with one dollar which any bungler can do
with two. Arthur M. Wellington, 1887

Wellington, a civil engineer, is the pioneer of engineering


economy. Area of interest is railroad building.

Engineers use knowledge to find new


ways of doing things economically

ENGINEERING
safety

economy

serviceability

What is engineering economy?


Systematic evaluation of the economic merits of
proposed solutions to engineering problems
To be economically acceptable (or affordable), solutions
to engineering problems must:
Demonstrate more long-term benefits over long-term costs
Promote the well-being and survival of an organization
Embody creative and innovative technology and ideas
Permit identification and scrutiny of their estimated
outcomes
Transfer profitability to the bottom line through a valid and
acceptable measure of merit

Asphalt concrete

Cement concrete

What is engineering economy?


The money side of decisions that engineers make or
recommend as they make a firm to be profitable in a
highly competitive marketplace
The decisions contain trade-offs
Cost
Performance

Engineering economy must balance these trade-offs in


the most economical manner
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Principles of engineering economy


The basic foundation for engineering economy

1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

After defining the


problem, two or more
alternatives must be
identified and defined
Creativity and
innovation
Doing nothing is also
an alternative
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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

What would happen if


all alternatives had the
same attributes or
characteristics?

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

Use only one


viewpoint or
perspective in each
decision-making
process

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

Outcomes should be
directly comparable
Monetary units can be
used
Some outcomes can be
translated to monetary
units
Others can be
explicitly described

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

Typical primary
criterion is financial
interest
Scrap criteria that are
not relevant to the
decision-making
process.

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

Most outcomes are


simply estimated.
Risk and uncertainties
are inherent.

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Principles of engineering economy


1.
2.
3.
4.
5.
6.
7.

Develop the alternatives


Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make risk and uncertainty explicit
Revisit your decisions

Decision-making is an
adaptive process.
Evaluations should be
carried out even after
implementation.
Risk will show itself
after implementation.
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