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FUNDAMENTALS OF
ENGINEERING ECONOMY
CHE40: Engineering Economy

of Engineering Economy

Principles

of Engineering Economy

Economic

Analysis Procedure

Fundamentals of Engineering Economy

Definition

Outline

 Define
State

engineering economy.

the principles of engineering

economy.
the economic analysis procedure.

Fundamentals of Engineering Economy

Outline

Learning Objectives

 Engineering

Engineering

Economy

systematic evaluation of the economic

merits of proposed solutions to engineering
problems

Fundamentals of Engineering Economy

the profession in which a knowledge of the

mathematical and natural sciences 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 (ABET)

Definition of Engineering Economy

 Must

Fundamentals of Engineering Economy

demonstrate a positive balance of

long-term benefits over long-term costs
Promote well-being and survival of an
organization
Embody creative and innovative
technology and ideas
Translate profitability to the bottom line
through a valid and acceptable measure
of merit

Solutions to Engineering Problems

 Balance

the trade-offs in the most

economical manner
Trade-off between performance and cost
Response time, safety, weight, reliability,
etc.

considerations are an integral

part of engineering economy studies

Fundamentals of Engineering Economy

Technical

Mission of Engineering Economy

Focus on the Differences

Only the differences in expected future
outcomes among the alternatives are
relevant to their comparison and should be
considered in the decision.

Principles of Engineering Economy

Fundamentals of Engineering Economy

Develop the alternatives

Carefully define the problem. The choice is
among the alternatives. The alternatives
need to be identified and defined for
subsequent analysis.

Use a Common Unit of Measure

Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the
analysis and comparison of the alternatives.

Principles of Engineering Economy

Fundamentals of Engineering Economy

Use a Consistent Viewpoint

The prospective outcomes of the
alternatives, economic and other, should be
consistently developed from a defined
viewpoint or perspective.

Fundamentals of Engineering Economy

Consider All Relevant Criteria

Selection of a preferred alternative requires
the use of a criterion or several criteria. The
decision process should consider both the
outcomes enumerated in the monetary
unit and those expressed in some other unit
of measurement or made explicit in a
descriptive nature.

Principles of Engineering Economy

Make Risk and Uncertainty Explicit

Risk and uncertainty are inherent in
projecting the future outcomes of the
alternatives and should be recognized in
their analysis and comparison.

Revisit Your Decisions

Improved decision making results from an
adaptive process; to the extent practicable,
the initial projected outcomes of the
selected alternatives should be
subsequently compared with actual results
achieved.

Principles of Engineering Economy

Fundamentals of Engineering Economy

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 An

Fundamentals of Engineering Economy

engineering economy study is

accomplished using a structured procedure
and mathematical modeling techniques
Economic results are used in a decision
situation that normally includes other
engineering knowledge and input
Always with reference to the basic
engineering economy principles

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Engineering Economy and the Design Process

Fundamentals of Engineering Economy

While studying for the Engineering Economy final exam, you and
two friends find yourselves craving for a fresh pizza. You cant
spare the time to pick up the pizza and must have it delivered.
Pick-Up-Sticks offers a 1 thick (including toppings), 20 square
pizza with your choice of two toppings for $15 plus 5% sales tax
and a $1.50 delivery charge (no sales tax on delivery charge).
Freds offers the round, deep-dish Sasquatch which is 20 inches
in diameter. It is 1-3/4 thick, which includes two toppings, and
costs $17.25 plus 5% sales tax and free delivery.
a)
What is the problem in this situation? Please state it in a
lucid manner.
b)
Systematically apply the seven principles of engineering
economy to the problem you have defined in part (a).
c)
Assuming that your common unit of measure is $ (i.e., cost),
what is the better value for getting a pizza based on the
criterion of minimizing cost per unit of volume?
d)
What other criteria might be used to select which pizza to
purchase?

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AN EXAMPLE PROBLEM TAKEN FROM AN OLD

EXAM

One problem involves how to satisfy the hunger of three students-assume a piping hot, delicious pizza will satisfy this need. (Another
problem is to learn enough about Engineering Economy to pass-or better yet earn an A or a B--on the final examination and
ace the course. Maybe a pizza will help solve this problem too?)
Lets use hunger satisfaction with a pizza as the problem/need
definition.

b)

Principle 1 - Develop the Alternatives

i) Alternative A is to order a pizza from Pick-Up-Sticks.

ii) Alternative B is to order a pizza from Freds.

Other options probably exist but well stick to these two

alternatives.
Principle 2 - Focus on the Differences

Difference in delivery time could be an issue. A perceived

difference in the quality of the ingredients used to make the pizza
could be another factor to consider. Well concentrate our
attention on cost differences in part (c) to follow.

Solution

Fundamentals of Engineering Economy

a)

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Principle 3 - Use a Consistent Viewpoint

Consider your problem from the perspective of three customers
wanting to get a good deal. Does it make sense to buy a pizza
having a crust that your dog enjoys, or ordering a pizza from a
shop that employs only college students? Use the customers point
of view in this situation rather than that of the owner of the pizza
shop or the driver of the delivery vehicle.

Most people use dollars as one of the most important measures

for examining differences between alternatives. In deciding which
pizza to order, well use a cost-based metric in part (c).

Fundamentals of Engineering Economy

Principle 4 - Use a Common Unit of Measure

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Solution

Principle 5 - Consider All Relevant Criteria

Factors other than cost may affect the decision about which pizza
to order. For example, variety and quality of toppings and
delivery time may be extremely important to your choice.
Dynamics of group decision making may also introduce various
political considerations into the final selection (can you name a
couple?).

Principle 7 - Revisit Your Decision

After youve consumed your pizza and returned to studying for
the final exam, were you pleased with the taste of the toppings?
On the downside, was the crust like cardboard? Youll keep these
sorts of things in mind (good and bad) when you order your next
pizza!

Fundamentals of Engineering Economy

Principle 6 - Make Uncertainty Explicit

The variability in quality of the pizza, its delivery time and even its
price should be carefully examined in making your selection.
(Advertised prices are often valid under special conditions--call
first to check on this!)

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Solution

c)

Finally some numbers to crunch--dont forget to list any key assumptions

that underpin your analysis to minimize the cost per unit of volume
(Principles 1, 3, 3, 4 and 6 are integral to this comparison).

Analysis:
Alternative A Pick-up Sticks:

Alternative B Freds

Volume = 20 x 20 x 1 = 400 in3

Volume = (3.1416)(10)2(1.75) = 550

in3

Total Cost = $ 15 (1.05) + $ 1.50 = $

17.25

Total Cost = $ 17.25 (1.05) = $ 18.11

Cost per in3 = $ 0.043

Cost per in3 = $ 0.033

Therefore, order the pizza from Freds to minimize total cost per in3

Solution

Fundamentals of Engineering Economy

Assumptions: (i) weight is directly proportional to volume (to avoid a

meringue pizza with lots of fluff but meager substance), (ii) you and your
study companions will eat the entire pizza (avoids variable amounts of
discarded left-overs and hence difficult-to predict cost of cubic inch
consumed) and (iii) data provided in the Example Problem are accurate
(the numbers have been confirmed by phone calls).

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Fundamentals of Engineering Economy

17

Development of
feasible alternative

Development of
the outcomes and
cash flows for each
alternative

Fundamentals of Engineering Economy

Problem
recognition,
definition and
evaluation

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Economic Analysis Procedure

Analysis and
comparison of
the alternatives

Selection of the
preferred
alternative

Fundamentals of Engineering Economy

Selection of a
criterion (or
criteria)

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Economic Analysis Procedure

Fundamentals of Engineering Economy

Performance monitoring and

post-evaluation of results

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Economic Analysis Procedure

of Engineering Economy

Principles

of Engineering Economy

Economic

Analysis Procedure

Fundamentals of Engineering Economy

Definition

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Outline

 Sullivan,

W., Wicks, E. and Luxhoj, J.,

Engineering Economy, 12th ed, USA:
Pearson Education, Inc., 2003

T., Engineering Economy

Applying Theory to Practice, USA: 1995

Eschenbach,

Cost Concepts and Design Economics

L. and Tarquin, A., Engineering

Economy, 4th ed, Singapore: McGraw-Hill
Book Co, 1998

Blank,

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References

FUNDAMENTALS OF
ENGINEERING ECONOMY
CHE40: Engineering Economy