Engineering Economics: Module 1: Introduction To Engineering Economy

Engineering Economics
Module 1: Introduction to
Engineering Economy
Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
All rights reserved.
The purpose of module 1 is to
develop and illustrate the principles
and methodology required to answer
the basic economic question of any
design:
Do its benefits exceed its costs?

Economics… is the study
• of how limited resources is used to
satisfy unlimited human wants
• of how individuals and societies
choose to use scarce resources that
nature and previous generations have
provided.

Engineering…is
the profession in which a knowledge of
mathematical and natural sciences
gained by study, experience and practice
is applied with judgment to develop
ways to utilize economically the
materials and forces for the benefit of
mankind.
Engineering economy…
involves the systematic

evaluation of the economic
merits of proposed solutions
to engineering problems.

The Role of Engineers in Business
Create & Design
• Engineering Projects
Analyze Evaluate Evaluate
• Production Methods • Expected • Impact on Financial

• Engineering Safety Profitability Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk

Upper Saddle River, New Jersey 6 07458
Engineering Economic Decisions
Needed e.g. in the following (connected) areas:
Profit! Then continue
at the next stage…
Manufacturing
Design
Financial Investment
planning and loan Marketing
Engineering economy…
• the study of economic problems with the
concept of obtaining the maximum
benefit at the least cost
• process of determining whether an
engineering project is to be undertaken or
modified with the objective of obtaining
the best utilization of capital resources
taken into account some pertinent facts.
11
Rational Decision-Making Process

 Recognize the decision problem
 Collect all needed (relevant) information
 Identify the set of feasible decision
alternatives
 Define the key objectives
and constraints
 Select the best possible and implementable
decision alternative
A Simple Illustrative Example: Car to
Lease – Saturn or Honda?
 Recognize the decision • Need to lease a car
problem
 Collect all needed (relevant) • Gather technical and
information financial data
 Identify the set of feasible • Select cars to consider
decision alternatives
• Wanted: small cash outlay,
 Define the key objectives safety, good performance,
and constraints aesthetics,…
 Select the best possible and • Choice between Saturn and
implementable decision Honda (or others)
alternative • Select Honda

What Makes Engineering Economic
Decisions Difficult? Predicting the Future
• Estimating the required investments

• Estimating product manufacturing costs
• Forecasting the demand for a brand new product
• Estimating a “good” selling price
• Estimating product life and the profitability of
continuing production

Accounting vs. Engineering Economy
Evaluating past performance Evaluating and predicting future events
Accounting Engineering Economy

Past Future
Present

Why do we need to study
Engineering Economy?
• It will readily benefit mankind in
general due to the more efficient use of
wealth.
• It will realize that engineering does not
merely concern itself with technical
aspects, but will ultimately lead to
economic considerations.
In summary,
• Companies are money factories that convert raw materials and/or
brain power into dollars.
• The success of any company that you work for depends on it being
able to provide a product or service that can be sold at a profit that
yields an acceptable rate of return. This is its mission.
• Regardless of your job description, completion of your tasks in
a timely and cost-effective manner contributes to the achievement of
your company's mission.
• Choosing between engineering alternatives, such as three heat
exchangers or two office building designs, is based on technical
and economic evaluations of the alternatives.

By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Source: Engineering Economics for the 21st Century All rights reserved.
• The decision to fund a technical project, such as the construction of
a chemical plant, is based on a technical evaluation of the project
and its anticipated rate of return.
• You can also use the principles of engineering economics to
Decide whether it's cheaper to rent or buy a house.
Determine the monthly cost of leasing a car.
Evaluate a personal investment.
• And as an aside, the mathematics of engineering economics is
trivial. There are no derivatives, integrals, or differential equations.
A few simple algebraic equations and sums are used, but the range
of engineering and personal finance problems that they can solve
is limitless.

By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling Source: Engineering Economics for the 21st Century All rights reserved.

Engineering Economics: Module 1: Introduction To Engineering Economy

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Engineering Economics

Copyright ©2012 by Pearson Education, Inc.

Do its benefits exceed its costs?

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

involves the systematic

Copyright ©2012 by Pearson Education, Inc.

Create & Design

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on Financial

Copyright ©2012 by Pearson Education, Inc.

Rational Decision-Making Process

Copyright ©2012 by Pearson Education, Inc.

• Estimating the required investments

Copyright ©2012 by Pearson Education, Inc.

Accounting Engineering Economy

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

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