MODULE 1: INTRODUCTION TO ENGINEERING ECONOMICS

Engineering economy involves formulating, estimating, and evaluating the expected

economic outcomes of alternatives designed to accomplish a defined purpose.
Mathematical techniques simplify the economic evaluation of alternatives.
- Blank, 2012

INTRODUCTION:
WHAT IS ENGINEERING ECONOMICS?

 The nature of engineering economics has evolved throughout time, much like
the place of engineers in society. Engineering economics was initially the body
of knowledge that enabled the engineer to choose the option that was
economically optimal—the least expensive or maybe the most profitable—out of
a variety of options. The engineer needed to comprehend the mathematics
controlling the link between time and money in order to make this judgment
correctly.

 Computer Engineers / Engineers are both designers and Innovators. Computer

Engineers employ science and technology to create digital systems and latest
products that benefit society. Designing a new machine, choosing a technology
for the design of a manufacturing process, creating a system to harvest useable
energy from a natural energy source, and creating an algorithm for a software
product are some examples of how this is done.

 Engineers typically work for industrial companies that want to sell their clients
these ideas, products, and technological solutions. The company serves as the
institutional link between the engineers' problem-solving efforts and the market-
based solutions that are used to meet societal requirements. In line with this,
engineering broadly was a person who uses science and technology to build
goods and procedures that meet societal demands is known as an engineer.
The phrase "to solve societal needs" in the final sentence of this description is
what connects engineering and economics.

 The study of how people employ finite resources to generate various

commodities and distribute them to individuals in society for consumption is a
common definition of economics. The engineer is a key player in determining the
best approach to "...use finite resources to make numerous commodities..." It is
the engineers' mission to use resources of lower economic value to develop
goods and systems of higher economic worth.

ORIGIN OF ENGINEERING ECONOMICS

 Engineering economy has just recently emerged as a distinct academic

discipline. It has no extensive prior history. It does not mean that, historically, costs
are overlooked in engineering decisions. The engineer's main focus is ultimate
economy.
  Second edition of The Economic Theory of Railway Location Civil engineer Arthur
M. Wellington's book, published by John Wiley & Sons in 1987, was the first to
show an engineering interest in economic evaluation. His passion was American
railroads.

 Eugene Grant wrote a textbook titled Principles of Engineering Economy in 1930

and it was available in New York through The Ronald Press Company. He is
considered as the father of engineering economy. Current trends are pushing for
innovative approaches to risk, sensitivity, resource conservation, efficient use of
public monies, etc.

ROLE IN DECISION
 Individuals in daily life, engineers at work, managers who oversee others'
activities, company presidents who run businesses and public servants who serve
the public interest all often make decisions to select one option over another.
The majority of decisions require capital, often known as capital funds, which is
typically a finite sum. A fundamental motivation for choosing where and how to
invest this restricted cash is to add value when future, anticipated benefits of the
chosen alternative are realized.

 Engineers play an important part in capital investment choices due to their skill
and expertise to design, analyze, and synthesize. A decision's components are
frequently a mix of economic and noneconomic considerations. Engineering
economy deals with the economic considerations. As stated by definition
“Engineering economy involves formulating, estimating, and evaluating the
expected economic outcomes of alternatives designed to accomplish a
defined purpose. Mathematical techniques simplify the economic evaluation of
alternatives”. (Blank, 2012)

DECISION MAKING PROCESS STEPS

(Engineering Economics Analysis 11th edition)

1. Recognize the Problem

 With the acknowledgment of a problem, the decision-making process began,
and the race was on to identify what should be done. In essence, identifying the
existence of an issue is the beginning point for decision making.

2. Define the goal or objective

 The goal or objective can be an overall goal of a person or a company. For
example, a personal goal could be to lead a pleasant and Purpose life, and a
firm’s goal is usually to operate profitably.

3. Assemble relevant data

 One must first gather reliable information before making a judgment. Further, an
essential source of information for engineering decision-making is a company's
own accounting system. These data need to be thoroughly analyzed.
 Engineering judgment must frequently be used to evaluate current and future
values because accounting data concentrates on previous data.

4. Identify feasible alternatives

 One must remember that the outcome will always be sub-optimal if the best
option is not taken into account. Sometimes, two different choices go
unconsidered. First, there are numerous circumstances where doing nothing is a
viable option. It's possible that this is the "Let's keep doing what we're doing" or
"Let's not spend any money on that problem" option. Second, there are
frequently practical (though unglamorous) solutions available, such "Patch it up
and keep using it for another year before replacing it."
5. Select the Criterion to determine the best alternatives
 A criterion, or collection of standards, must be used to determine which option is
preferable.

Relative subjective judgment spectrum

WORST BAD FAIR GOOD BETTER BEST

6. Construct a model
 The many components must come together at some point throughout the
decision-making process. It is necessary to combine the objective, relevant data,
feasible alternatives, and selection criterion.

7. Prediction each alternative’s outcomes or consequences

 The outcomes of each alternative must be expressed similarly in order to
determine which is the greatest. The effects of each option are typically listed in
terms of money, or in terms of costs and benefits.

8. Choose the best alternatives

 The alternative that best satisfies the choice criterion after taking into account
both the numerical implications and the effects not taken into account in the
monetary analysis is the one that is to be chosen. During the decision-making
process, some feasible alternatives are disregarded because other, superior
alternatives predominate.

9. Audit the result

 Lastly, an effective way to engage realistic economic analysis calculations for all
people was involved them to know that there will be an audit of the result,
basically an audit of the results is a comparison of what happened against the
predictions.
7 PRINCIPLES OF ENGINEERING ECONOMICS
: BY NANDA SHAKYA

PRINCIPLE 1 - DEVELOP THE ALTERNATIVES:

 The choice (decision) is among alternatives. The alternatives need to be
identified. A decision involves making a choice among alternatives. Developing
and defining alternatives depends upon engineer’s creativity and innovation.

PRINCIPLE 2 - FOUCUS ON THE DIFFERENCE:

 Only the differences in expected future outcomes among the alternatives are
relevant to their comparison and should be considered in the decision. If all
prospective outcomes of the feasible alternatives were exactly the same,
obviously, only the differences in the future outcomes of the alternatives are
important. Outcomes that are common to all alternatives can be disregarded in
the comparison and decision. For example, if two apartments were with same
purchase price or rental price, decision on selection of alternatives would
depend on other factors such as location and annual operating and
maintenance expenses.

PRINCIPLE 3 - USE A CONSISTENT VIEWPOINT:

 The prospective outcomes of the alternatives, economic and other, should be
consistently developed from a defined viewpoint (perspective). Often
perspective of decision maker is owner’s point of view. For the success of the
engineering projects viewpoint may be looked upon from the various
perspective e.g. donor, financer, beneficiary group & stakeholders. However,
viewpoint must be consistent throughout the analysis

PRINCIPLE 4 - USE A COMMON UNIT OF MEASURE:

 Using a common unit of measurement to enumerate as many of the prospective
outcomes as possible will make easier the analysis and comparison of the
alternatives. For economic consequences, a monetary unit such as dollars or
rupees is the common measure.

PRINCIPLE 5 - CONSIDER ALL RELEVANT CRITERIA:

 Selection of preferred alternative (decision making) 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 manner. Apart from the long term
financial interest of owner, needs of stakeholders should be considered.

PRINCIPLE 6 - MAKE UNCERTAINTY EXPLICIT:

 Uncertainty is inherent in projecting (or estimating) the future outcomes of the
alternatives ad should be recognized in their analysis and comparison. The
magnitude & impact of future impact of any course of action are uncertain or
probability of occurrence changes from the planned one. Thus dealing with
uncertainty is important aspect of engineering economic analysis.

PRINCIPLE 7 - REVISIT YOUR DECISIONS:

  Improved decision making results from an adaptive process; to the extent
practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved. If results significantly
different from the initial estimates, appropriate feedback to the decision making
process should occur.

ENGINEERING ECONOMICS ANALYSIS PROCEDURE

1. PROBLEM RECOGNITION, DEFINITION AND EVALUATION
 Before the project team moves on to the rest of the analysis, the problem must
be well recognized and communicated.
2. DEVELOPMENT OF FEASIBLE ALTERNATIVES
 Finding viable alternatives (using creativity and resourcefulness), then screening
them to choose a more manageable number of options for further examination.
3. DEVELOPMENT OF THE OUTCOMES AND CASH FLOWS FOR EACH ALTERNATIVE
 Cash flow method (revenue and payment, as well as non-financial elements like
satisfying customers and surpassing their expectations, staff safety, etc.)
4. SELECTION OF A CRITERION
 Long-term interest of the client and the organization, environmental concern,
etc.
5. ANALYSIS AND COMPARISON OF THE ALTERNATIVES
 Based on the flow, exchange rate, inflation, regulatory etc.
6. SELECTION OF THE PREFERRED ALTERNATIVES
 A result of the total effort of the above mentioned 5 step. It is the technical-
economic modeling.
7. PERFORMANCE MONITORING AND POST MONITORING RESULT
 Accomplished during and after the time result achieved. The aim of post
evaluation is to learn how to do better the job.

References:
[1] Shakya, N. (2019). Manual of Engineering Economy
[2] Newnan, D.,et al.(2012). Engineering Economic Analysis
[3] karimi, S. (2013) Introduction to engineering economy.