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TRIMESTER#1 (2016/2017)
CHAPTER#1
F O U N D AT I O N S O F E N G I N E E R I N G E C O N O M Y
OFFICIAL SYLLABUS
Introduction to engineering economy.
Non-linear breakeven analysis.
The material in these notes are adapted from Engineering Economy, Fifteenth Edition by William
G. Sullivan, Elin M. Wicks, and C. Patrick Koelling (Pearson Education).
1.1.1 INTRODUCTION
Engineering economy (EE) involves the systematic evaluation of the
economic merits of proposed solutions to engineering problems.
In order to be economically acceptable, the solutions provided must
demonstrate a positive balance of long-term benefits over long-term
costs.
In addition, the solutions to the engineering problems must also:
Promote the well-being and survival of the organization
Integrate and include creativity and innovative ideas
Allow identification and scrutiny of their estimated outcomes
Translate profitability to the bottom line through a valid and
acceptable measure of merit
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i.
ii.
v.
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associate with an operation that vary in total with the quantity of output
or other measure of activity level
(c) Incremental Cost
the additional cost that results from increasing the output of a system by
one (or more) units.
Associated with go-no go decisions that involve a limited change in
output or activity level
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acquisition phase
The greatest potential for achieving life-cycle cost savings is early in the
acquisition phase. Effective engineering design and economic analysis
are critical in maximizing potential savings.
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However, these two terms are relative because what one person
considers a necessity may be considered a luxury by another.
For all goods and service, there is a general relationship between
the prices that must be paid and the quantity that will be demanded
or purchased.
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, and
> 0, > 0
( 0)
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(d) Competition
Most general economic principles are stated for situations in which
perfect competition exists.
However, perfect competition occurs in situations where any given
product is supplied by a large number of producers/vendors and
there is no restriction on additional suppliers entering the market.
Under such conditions, there is assurance of complete freedom on
the part of both the buyer and seller.
However, in real practice perfect competition may never occur
because of the multitude of factors that impose some degree of
limitation on the buyers and sellers.
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= 2 = 0
Therefore,
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Select the best alternative, each with its own unique value for the
design variable.
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This may occur when the direct, indirect and overhead costs are incurred
regardless of whether the item is purchased from an outside supplier.
However, in the long run capital investments in additional manufacturing
plans and capacity are often feasible alternatives to outsourcing
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1.3.1 INTRODUCTION
This sections addresses Step#3 Development of the outcomes and
cash flows for each alternative from the 7 steps used in the EE analysis
procedure.
Since EE deals with outcomes that extend into the future, estimating the
future cash flows for feasible alternatives is an important step.
This estimation step can be the most difficult, expensive and timeconsuming part of EE.
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The life-cycle concept and the WBS are important aids in developing the
cost and revenue structure for a project.
The life-cycle defines a maximum time period and establishes a range of
cost and revenue elements that need to be considered in developing cash
flows.
The WBS focuses the analysts effort on the specific functional and
physical work elements of a project and on its related costs and revenues.
The estimates should adequately suit the need at a reasonable cost and
is often presented as a range of numbers.
Cost and revenue estimates can be classified according to detail,
accuracy, and their intended use.
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Problem definition
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= R TC
= R (FC +VC)
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A relation for the breakeven point may be derived when revenue and
total cost are linear functions of quantity Q by setting the relations for R
and TC equal to each other, indicating a profit of zero
R = TC
rQ = FC + vQ
If nonlinear R or TC
models are used, there
may be more than one
breakeven point.
The maximum profit
occurs at QP between the
two breakeven points
where the distance
between the R and TC
relations is greatest.
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ii.