Engineering

Economics
Engr. Joseph D. Retumban

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 Why is
Engineering
Economics
important?

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Why is Engineering Economics important?

Cost Analysis and Budgeting.

Investment Decisions. It aids in Optimization of Resources.
Engineering Economics helps
evaluating the financial Engineering Economics
engineers and project
feasibility of projects and provides tools to optimize the
managers estimate costs,
investments. By analyzing the allocation of resources such as
develop budgets, and manage
potential return on investment materials, labor, and capital,
resources efficiently. This is
(ROI), engineers can make ensuring that projects are
essential for ensuring projects
informed decisions about which completed efficiently and cost-
are financially viable and stay
projects to pursue. effectively.
within budget.

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Why is Engineering Economics important?

Economic Feasibility. Before Life Cycle Cost Analysis. This

Risk Assessment. It helps in
implementing any engineering involves analyzing the total cost
identifying and evaluating
project, it is essential to of ownership of a project or
financial risks associated with
evaluate its economic feasibility. product over its entire life cycle,
engineering projects. By
Engineering Economics including initial costs, operation,
understanding these risks,
provides methods to assess maintenance, and disposal
engineers can develop
whether a project is worth costs. This helps in making
strategies to mitigate them and
pursuing based on cost-benefit sustainable and cost-effective
make more resilient decisions.
analysis. choices.

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Why is Engineering Economics important?

Design Alternatives. Environmental and Social

Strategic Planning. It supports
Engineering Economics allows Considerations. It integrates
strategic planning by providing
engineers to compare different environmental and social
insights into market trends,
design alternatives by factors into economic analyses,
financial forecasts, and
evaluating their economic promoting sustainable
economic indicators that affect
impact. This helps in selecting development and socially
engineering projects and
the most cost-effective and responsible engineering
industries.
efficient design solution. practices.

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Why is Engineering Economics
important?
Engineering Economics is at the heart of making
decisions. These decisions involve the fundamental
elements of cash flow of money, time, and interest
rates.

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Case Study 1

An engineer is performing an analysis of warranty costs

for drive train repairs within the first year of ownership of
luxury cars. He found the average cost (to the nearest
hundred peso) to be ₱28,500 per repair from data taken
over a 5-year period (see table below).
What range of repair costs should the engineer use to
ensure that the analysis is sensitive to changing warranty
costs?

Year 2019 2020 2021 2022 2023

Average Cost (₱/repair) 26,250 21,500 30,950 32,500 31,250

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Performing an
Engineering Economy
Study
1. Identify and understand the problem;
identify the objective of the project.
2. Collect relevant, available data and define
viable solution alternatives.
3. Make realistic cash flow estimates.
4. Identify an economic measure of worth
criterion for decision making.
5. Evaluate each alternative; consider
noneconomic factors; use sensitivity
analysis as needed.
6. Select the best alternative.
7. Implement the solution and monitor the
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Case Study 2

A coal-fueled power plant is subjected to being shut down

by 2030 due to the production of excessive sulfur dioxide.
The goal of the analysis is to generate the forecasted
electricity needed for 2030 and beyond, plus to not exceed
all the projected emission allowances in these future years.

Propose a solution plan.

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1. Problem Description and
Objective Statement

Problem: The power plant produces

too much sulfur dioxide (SO2), which
exceeds environmental regulations.

Objective: The primary objective is to

generate the forecasted electricity
demand for 2030 and beyond while
adhering to projected emission
allowances.

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1. Problem Description and 2. Alternatives
Objective Statement

Problem: The power plant produces Data Collection: Gather data on current SO2
too much sulfur dioxide (SO2), which emissions, operational costs, electricity output,
energy demand projections for 2030, and
exceeds environmental regulations.
emission regulations.

Objective: The primary objective is to Alternatives:

generate the forecasted electricity
A1 - Retrofit the existing plant with advanced
demand for 2030 and beyond while
adhering to projected emission SO2 scrubbers.
allowances. A2 - Transition to renewable energy sources
(solar, wind).
A3 - Construct a new gas-fired power plant.
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2. Alternatives

A1 - Retrofit the existing A2 - Transition to A3 - Construct a new gas-

plant with advanced SO2 renewable energy sources fired power plant.
scrubbers. (solar, wind).

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3. Cash Flows Estimate
A1 - Retrofit: Initial cost for
scrubbers, operational costs,
reduced fines.

A2 - Renewable Transition: High

initial investment, low operational
costs, potential subsidies.

A3 - New Gas Plant: Significant

initial expense, moderate operational
costs, lower emissions.

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3. Cash Flows Estimate 4. Economic Measure of Worth
A1 - Retrofit: Initial cost for Net Present Value (NPV): Calculate NPV for each
scrubbers, operational costs, alternative to assess their profitability over time
reduced fines. considering a discount rate that reflects the cost of
capital.

A2 - Renewable Transition: High Analysis (and Assumptions)

initial investment, low operational
costs, potential subsidies. A1 - Retrofitting costs ₱100 million with an annual
saving of ₱15 million in fines and operating costs.
A2 - Building a renewable energy facility costs
A3 - New Gas Plant: Significant ₱500 million but saves ₱40 million annually in costs
initial expense, moderate operational and subsidies.
costs, lower emissions.
A3 - Constructing a new gas plant costs ₱300
million with annual operating savings of ₱25 million.
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5. Evaluate Alternatives

A1 – Retrofitting: May not meet future

stringent emission laws.

A2 - Renewable Energy: Best long-

term benefits in emissions reduction
but requires high initial investment.

A3 - Gas Plant: Reduces SO2 but still

contributes to greenhouse gas
emissions.

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5. Evaluate Alternatives 6. Selection of the Best Alternative

A1 – Retrofitting: May not meet future Given the environmental and regulatory
stringent emission laws. trends, transitioning to renewable energy
(A2) might be the best option if financials
A2 - Renewable Energy: Best long- and energy output requirements are met.
term benefits in emissions reduction It offers the most sustainable and long-
but requires high initial investment. term solution to meeting energy and
emission goals
A3 - Gas Plant: Reduces SO2 but still
contributes to greenhouse gas
emissions.

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7. Implement and Monitor

Implementation: Begin construction of

renewable facilities, phase out coal
operations, train staff for new
technology.

Monitoring: Regularly track emissions,

energy output, and operational
efficiency to ensure compliance and
adjust strategies as needed.

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 Ethical practices can be evaluated by using a code of morals or
code of ethics that forms the standards to guide decisions and
actions of individuals and organization s in a profession.

• Universal or common morals. These are fundamental moral

beliefs held by virtually all people. Most people agree that to
steal, murder, lie, or physically harm someone is wrong.
• Individual or personal morals. These are the moral beliefs
that a person has and maintains over time. These usually

Professional Ethics parallel the common morals in that stealing, lying, murdering,
etc. are immoral acts.
and Economic • Professional or engineering ethics. Professionals in a

Decisions
specific discipline are guided in their decision making and
performance of work activities by a formal standard or code.
The code states the commonly accepted standards of
honesty and integrity that each individual is expected to
demonstrate in his or her practice.
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Code of Mechanical Engineering Ethics Professional Ethics
Rule 10. Whenever he designs a mechanical equipment, machinery or
and Economic
process, or prepares the layout of a project, he must apply an
adequate factor of safety and provide for the necessary leeway for
Decisions
proper operating and maintenance conditions.

Rule 20. The mechanical engineer shall be completely above

suspicion or reproach in his relation with his clients or employers,
avoiding the remotest reference or relation to any secret or
questionable agreement on commissions or other financial
considerations promised by or received from any person or entity
other than his client or employer.

Rule 22. The mechanical engineer shall use only fair means to gain
professional advancement. In the pursuit thereof he shall not injure
the work or employment opportunities of others or use any improper or
questionable method of soliciting employment or clientele.
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Sample Situations That Have Ethical Dimensions

Design Stage:

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Sample Situations That Have Ethical Dimensions

Design Stage:
• Safety factors are compromised to ensure that a price
bid comes in as low as possible.
• Family or personal connections with individuals in a
company offer unfair or insider information that allows
costs to be cut in strategic areas of a project.
• A potential vendor offers specifications for company-
specific equipment, and the design engineer does not
have sufficient time to determine if this equipment will
meet the needs of the project being designed and
costed.

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Sample Situations That Have Ethical Dimensions

While the System is Operating:

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Sample Situations That Have Ethical Dimensions

While the System is Operating:

• Delayed or below-standard maintenance can be

performed to save money when cost overruns exist in
other segments of a project.
• Opportunities to purchase cheaper repair parts can save
money for a subcontractor working on a fixed-price
contract.
• Safety margins are compromised because of cost,
personal inconvenience to workers, tight time schedules,
etc.

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