Chapter 1: Introduction to Engineering Economy

Chapter 1
presents an
overview of
engineering
economy and
introduces
some important
concepts well
be using
throughout the
course.

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All engineering
projects cost
money, and
therefore all
must be
justified in
economic
terms. Its
important to
understand that
economics is
concerned with
choices that
rational people
make.
Engineering
economy is a
set of
techniques
which provide a
rational
framework to

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3

In Unit 2, well
consider
demand curves,
which allow us
to model the
behavior of
rational
decisionmakers. Then
well devote
several units
the time value
of money and
application so
that we can use
the concept of
equivalent
worth to
evaluate and
compare
projects using a
consistent

Chapter 1: Introduction to Engineering Economy

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During the late

19th and early
20th centuries,
engineers came
to realize that
in order to be
successful, they
needed to
include
economic
considerations
in their projects
from the outset.

Chapter 1: Introduction to Engineering Economy

5

The outside
reading
assignment
provides more
detail on the
origins of
engineering
economy.

Chapter 1: Introduction to Engineering Economy

6

These seven
principles will
guide most of
our work this
semester. Well
look at each in
detail.

Chapter 1: Introduction to Engineering Economy

7

In an
engineering
economy study,
we are always
choosing
among
alternatives.
Frequently, one
alternative is to
do nothing
that is, we must
decide whether
it is more
economical to
do nothing (and
at least not lose
money) or to
develop a
project.

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8

Alternatives can
be different
types of
projects we can
choose, or
different
approaches to
solving the
same
engineering
problem.

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9

Often,
engineering
economy
studies are
used to choose
among several
approaches to
solving the
same problem.
For example,
its often
necessary to
select a
manufacturing
technique for a
part or product
from a set of
candidate
techniques.

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10

If each
technique will
result in
equivalent
products which
can be sold for
the same price,
including selling
price (the sales
income stream)
in the study is
not necessary.

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11

In order to
make fair
comparison, we
must view each
alternative from
the same
viewpoint. The
most common
example of this
requirement is
comparison of
projects which
cover different
time periods.
We will devote
considerable
attention to
techniques for
adjusting cash
flows so that
they can be
compared from

Chapter 1: Introduction to Engineering Economy

12

In Unit 4, we
will develop a
variety of
approaches to
evaluate the
cash flows
associated with
projects.
When
comparing
projects, its
important to
use the same
technique to
evaluate all
projects
considered so
that the
comparisons
accurately
depict the
economic

Chapter 1: Introduction to Engineering Economy

13

In this course,
we will focus on
analysis from a
purely
economic
perspective. If
other
considerations
are important,
advanced
techniques such
as
multiobjective
optimization will
be required.

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Most of the
parameters in
an engineering
economy study
must be
estimated. For
example, if we
are considering
purchase of a
vehicle, the
cash flow must
account for
operating and
maintenance
expenses and
resale value.

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15

We cant know
any of these
parameters
with certainty
when were
making the
purchase
decision,
although we
can usually
make estimates
with reasonable
accuracy. Since
these
uncertainties
are not
avoidable, we
must
understand
their impacts.

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16

For most of the

units in this
course, we will
assume that we
know every
parameter of
the problem
with certainty.
This is
necessary for
you to develop
the analytical
skills.

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In Unit 10, we
will study
methods which
allow us to
understand the
consequences
to our decisions
of variations in
important
parameters of
the problem. In
Unit 11, we will
study
probabilistic
techniques to
more rigorously
deal with
uncertainty.

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As we just
discussed,
uncertainty is a
fundamental
problem in
engineering
economy.
Therefore, as
time passes and
we gain more
knowledge,
experience, and
numerical data,
it is important
to periodically
revise our
estimates to
determine
whether the
present course
of action is still
the most

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These seven
steps will allow
us to perform
analysis
consistent with
the seven
principles we
just discussed.

As engineers,
the first step is
frequently done
for us. Our
employer or
customer
request that we
study a problem
and determine
the best
solution.

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We develop
feasible
alternatives as
part of the
architectural
design phase of
the engineering
lifecycle, and
then develop
cash flows for
each
alternative.
Remember that
in developing
the cash flows,
we are
interested in
focusing on
differences.

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21

In units 4 and 5
you will learn a
variety of
criteria to
evaluate the
cash flows,
keeping in mind
the need to use
a consistent
viewpoint and
measures.

Once the
analysis is
complete,
selecting the
preferred
alternative is a
simple matter
of using the
criterion from
step 4.

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Finally,
performance
monitoring and
re-evaluation
will be done on
an ongoing
basis
throughout the
project life.

This concludes
Unit 1. In Unit 2,
we will study
cost concepts
and design
optimization.