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Ie 2518 Module 1 Introduction To Engineering Economy

This document provides an introduction to engineering economy. It defines economics as the study of how limited resources are used to satisfy unlimited human wants. Engineering economy applies economic techniques to evaluate design alternatives and make decisions that balance current and future revenues and costs with the ultimate goal of profit. The principles of engineering economy include developing alternatives, focusing on differences, using consistent measurements, considering all criteria, accounting for uncertainty, and revisiting decisions. The process involves defining problems, developing alternatives, analyzing cash flows, selecting criteria, comparing alternatives, and monitoring results.

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IAN PAOLO BAUTISTA
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© © All Rights Reserved
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79 views

Ie 2518 Module 1 Introduction To Engineering Economy

This document provides an introduction to engineering economy. It defines economics as the study of how limited resources are used to satisfy unlimited human wants. Engineering economy applies economic techniques to evaluate design alternatives and make decisions that balance current and future revenues and costs with the ultimate goal of profit. The principles of engineering economy include developing alternatives, focusing on differences, using consistent measurements, considering all criteria, accounting for uncertainty, and revisiting decisions. The process involves defining problems, developing alternatives, analyzing cash flows, selecting criteria, comparing alternatives, and monitoring results.

Uploaded by

IAN PAOLO BAUTISTA
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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MODULE I

INTRODUCTION TO
ENGINEERING ECONOMY
WHAT IS ECONOMICS ?
The study of how limited
resources is used to
satisfy unlimited human
wants
WHAT IS ECONOMICS ?
The study of how individuals
and societies choose to use
scarce resources that nature
and previous generations
have provided.
Resources

• Land
• Labor
• Capital
LAND
All gifts of nature, such as: water,
air, minerals, sunshine, plant and
tree growth, as well as the land
itself which is applied to the
production process.
LABOR
The efforts, skills, and knowledge
of people which are applied to the
production process.
CAPITAL
• Real Capital (Physical Capital )
– Tools, buildings, machinery -- things
Dollar Billswhich have
been produced which are used in further production
• Financial Capital
– Assets and money which are used in the production
process
• Human Capital
– Education and training applied to labor in the
production process
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WHAT IS ENGINEERING?

Profession in which a knowledge of


the mathematical and natural
science gained by study, experience
and practice is applied with
judgement to develop ways to utilize
economically the materials and
forces of nature for the benefit of
mankind.
ENGINEERING ECONOMY

 about decision making

 assesses the appropriateness of a given


project , estimates its value and justifies it
from an engineering standpoint

 application of economic techniques to the


evaluation of design and engineering
alternatives
Bottom line is PROFIT
Engineering economy balances current and future
revenues and costs:
Origins of Engineering
Economy
The perspective that ultimate economy
is a concern to the engineer and the
availability of sound techniques to
address this concern differentiate this
aspect of modern engineering practice
from that of the past.
Origins of Engineering
Economy
• Pioneer: Arthur M. Wellington, civil engineer
latter part of nineteenth century;
addressed role of economic analysis in
engineering projects;
area of interest: railroad building
• Followed by other contributions which
emphasized techniques depending on
financial and actuarial mathematics.
PRINCIPLES OF ENGINEERING
ECONOMY
1. Develop the Alternatives;
2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
DEVELOP THE ALTERNATIVES
The final choice (decision) is
among alternatives. The
alternatives need to be identified
and then defined for subsequent
analysis.
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.
USE A CONSISTENT VIEWPOINT
The prospective outcomes of the
alternatives, economic and other,
should be consistently developed from
a defined viewpoint (perspective).
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 alternatives.
CONSIDER ALL RELEVANT
CRITERIA
Selection of a preferred alternative
(decision making) requires the use of
a criterion (or several criteria). The
decision process should consider the
outcomes enumerated in the monetary
unit and those expressed in some
other unit of measurement or made
explicit in a descriptive manner.
MAKE UNCERTAINTY EXPLICIT
Uncertainty is inherent in projecting
(or estimating) 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 alternative
should be subsequently compared
with actual results achieved.
PRINCIPLES OF ENGINEERING
ECONOMY
• A sound engineering
economic analysis procedure
incorporates the basic
principles of engineering
economy
ENGINEERING ECONOMY AND
THE DESIGN PROCESS
An engineering economy study is
accomplished using a structured
procedure and mathematical modeling
techniques. The economic results are
then used in a decision situation that
involves two or more alternatives and
normally includes other engineering
knowledge and input.
ENGINEERING ECONOMIC ANALYSIS
PROCEDURE
1. Problem recognition, formulation, and evaluation.
2. Development of the feasible alternatives.
3. Development of the cash flows for each
alternative.
4. Selection of a criterion ( or criteria).
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post-evaluation
results.
ENGINEERING ECONOMIC
ANALYSIS PROCEDURE
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
Modern cost accounting may satisfy any or all of
the following objectives:
1. To determine the cost of products or services
2. To provide a rational basis for pricing goods or
services
3. To provide a means for controlling expenditures
4. To provide information on which operating
decisions may be based and the results
evaluated

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