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ENGG ECON-INTRODUCTION
1. 1 DEFINITION OF ENGINEERING
ECONOMY
-involves formulating, estimating and
evaluating the economic outcomes
when alternatives to accomplish a
defined purpose are available.
is a collection of mathematical
techniques that simplify economic
comparison
purpose is to aid in decision making
ENGG ECON-INTRODUCTION
DECISION-result of choosing
alternative over another.
-alternatives refer to selection on
investment or use of funds ( capital)
amount of funds or capital is usually
limited or restricted in quantity
- decisions on how to invest capital
will affect the future
ENGG ECON-INTRODUCTION
RATIONAL DECISION MAKING PROCESS
Personal Decision
Step 1. Recognize a decision problem
ENGG ECON-INTRODUCTION
RATIONAL DECISION MAKING PROCESS
Personal Decision
Step 4. Identify a set of feasible decision
alternatives
Option1. Buy
Brand A
Brand B
Option 2. Lease
Brand A
Brand B
ENGG ECON-INTRODUCTION
RATIONAL DECISION MAKING PROCESS
Personal Decision
Step 5. Select a decision Criterion to use
Minimize R & M
Fuel economy
Reliability
Step 6. Select the best alternative
ENGG ECON-INTRODUCTION
Engineering Design Problem
ENGG ECON-INTRODUCTION
Engineering Design Problem
2. Setting Design Goals and Objectives
Time
Simplicity of design
Environmentally safe
Etc.
ENGG ECON-INTRODUCTION
Engineering Design Problem
3. Evaluate design alternatives
ENGG ECON-INTRODUCTION
As the design and manufacturing process
become more complex, the engineer is making
decisions that will involve more money than ever
before with greater risk but also greater possible
benefits.
Thus the competent and successful engineer
must have an improved understanding of the
principles of science, engineering and economics
coupled with relevant design experience
Economics and design issues are inextricably
linked in the product/service life cycle
ENGG ECON-INTRODUCTION
ROLE OF ENGINEERING ECONOMY IN
DECISION MAKING
Engineers play a major role in capital
investment decisions based on the
analysis , synthesis and design
efforts
The factors considered in making the
decision are a combination of
economic , non-economic factors and
intangibles
ENGG ECON-INTRODUCTION
ROLE OF ENGINEERING ECONOMY IN DECISION
MAKING
People make decision- computers , mathematics
and other tools do not
Engineering Economy Techniques assists people
in making decisions.
Time frame of Engineering Economy is the future
The numbers used in Engineering Economy are
best estimates or forecast of what is expected to
occur.
ENGG ECON-INTRODUCTION
ROLE OF ENGINEERING ECONOMY IN
DECISION MAKING
The Estimates will involve:
Cash Flow
Time of occurrence
Interest rate
The estimates made will be different
from what will occur, due to changing
circumstances and unplanned for events
ENGG ECON-INTRODUCTION
ROLE OF ENGINEERING ECONOMY IN
DECISION MAKING
Sensitivity Analysis- analysis performed to
determine how the decision might change
based on varying estimates especially
those that may vary widely.
Engineering Economy can also be used to
analyze the past. Actual data are
evaluated if the result has met a specified
criterion like rate of return.
ENGG ECON-INTRODUCTION
ROLE OF ENGINEERING ECONOMY IN DECISION MAKING
Procedure for selection of alternative. Problem Solving
approach and decision making process
1. Understand the problem and define the objective.
2. Define the feasible alternative solution and make
realistic estimates
3. Collect relevant information
4. Identify the criteria for decision making using one or
more attributes
5. Evaluate each alternative, using sensitivity to
enhance the evaluation
6. Select the best alternative
7. Implement the solution
8. Monitor the result
ENGG ECON-INTRODUCTION
1. Types of Business Organization
Proprietorship
Partnership
Corporation
ENGG ECON-INTRODUCTION
1.INTRODUCTION
1. Types of Business Organization
Partnership-same as
proprietorship , except it has more
that one owner, Established by
written contract. Low cost and ease
of formation, Each partner is liable
for a businesss debt, limited life,
dissolved if one of the partners quits.
ENGG ECON-INTRODUCTION
1. Types of Business Organization
ENGG ECON-INTRODUCTION
IMPACT OF ENGINEERING PROJECTS ON
FINANCIAL STATEMENTS.
Engineers must understand the business
environment in which the companys major
business decisions are made.
1. It is important for a project to generate
profit but it should also strengthen the firms
overall financial position ( cash position,
debt levels, rate of return on capital, market
position, competiveness , asset value etc.)
ENGG ECON-INTRODUCTION
TYPES OF ENGINEERING ECONOMIC DECISIONS
(a) Service or Quality Improvementsimprovement of productivity, quality and
customer satisfaction
(b) New Products and Product Expansion- to
increase revenue due to increase in output:
ENGG ECON-INTRODUCTION
TYPES OF ENGINEERING ECONOMIC DECISIONS
(c) Equipment and Process Selection- involves
selecting the best course of action to meet a
projects requirements
- equipment selection
- material selection
- process selection
in general the basis of choice of item is the
largest savings generated assuming all items
meet the project requirement
ENGG ECON-INTRODUCTION
TYPES OF ENGINEERING ECONOMIC
DECISIONS
(d) Cost Reduction- project is
expected to lower the firms current
operating cost.
(e) Equipment Replacement- replace
worn out or obsolete equipment
ENGG ECON-INTRODUCTION
FUNDAMENTAL PRINCIPLES OF ENGINEERING
ECONOMICS
1. Money has time value associated with it. Because
we can earn interest on money received today, it is
better to receive money earlier than later.
2. All that counts is the difference between
alternatives-An economic decision should be based
on the differences among alternatives. An economic
decision should be based on the objective of making
the best use of limited resources. Whenever a choice
is made , something is given up. The opportunity
cost is the valu of the best alterrnative given up.
ENGG ECON-INTRODUCTION
FUNDAMENTAL PRINCIPLES OF
ENGINEERING ECONOMICS
3. Marginal revenue must exceed
marginal cost.
ENGG ECON-INTRODUCTION
FUNDAMENTAL PRINCIPLES OF
ENGINEERING ECONOMICS
4. Additional risk is not taken without
the expected additional return.
= PHP 700.00
Interest Rate = PHP 700.00/ PHP 10,000.00 X
100%
= 7% per year
= PHP 20,000.00 x
0.09
= PHP
= P x 0.05
Total Amount = P + P x 0.05
$ 1,000.00 = P ( 1+0.05)
P = $ 952.38
Interest earned = Total amount - original amount
= $ 1000.00 - $ 952.38
= $ 47.62
= $ 106
If inflation is 4%
Total cost
$ 104
= $ 106
If inflation is 8%
Total cost
$
108
I = (iP)N
Total Amount (F) available at end of N
periods
F=P+I
F = P + (iP)N = P(1+iN)
F = P( 1+i)N
i = interest
N = 5 yrs
F= P(1+i)N = PHP1000(1+0.12)5 =
PHP 1,762.34
P = F / ( 1+i)N
P2 = A2/( 1+i)N2
F2 = A2( 1+i)N2
A = F [i/(1+i)N-1]
A = P(1+i)N [i/(1+i)N-1]
A = P[(1+i)N i/(1+i)N-1]
P = A [(1+i)N-1/i(1+i)N]
P = A/i
N = 1, 2, 3.. N