Yldz Technical University

Civil Engineering Department

Construction Management
Division
ENGINEERING ECONOMY
A S S I S T. P R O F. D R. C E N K B U D AYA N

Information about the

lecture
Lecture hours and classroom
Monday: 14:00-16:50 Classroom (F1-118)
E-mail: budayan@yildiz.edu.tr and
Web page
http://www.yarbis.yildiz.edu.tr/budayan
Office Hours:
Friday 15:00 17:00
Office: 1-064

Subjects
Introduction: Definition of engineering economy, reasons of
engineering economy, decision making in engineering
economy
Time value of money: cost of money and time value of
money, calculation of interest ratio
Calculation of interest ratio: Nominal and effective interest
ratio, calculation of interest formulas, usage of interest ratio
table
Techniques for comparing different investment alternatives:
Minimum attractive rate of return (MARR), Net present value
analysis, Internal rate of return analysis, pay back period
analysis

Subjects
Replacement investments: economic life, techniques for
replacement and refurbishment decisions (Receipts and
disbursements, outsider viewpoint).
Depreciation: Depreciation concept, techniques for
depreciation calculation (Straight Line, declining balance,
double declining balance, sum of the years digit method).
Evaluation of public investments: Benefit/Cost analysis

References
L. Blank ve A. Tarquin, Engineering Economy, Macmillan
Publishing Company, seventh edition (658.15/BLA)
O. Okka, Mhendislik Ekonomisi. Beinci Bask, Nobel
Yayn. Mhendislik Serisi C3 (338.39/OKK)

Engineering
Engineering is one of the scientific principles to design or
develop structures, machines, apparatus, or manufacturing
processes, or works utilizing them singly or in combination;
or to construct or operate the same with full cognizance of
their design; or to forecast their behaviour under specific
operating conditions; all as respects an intended function,
economics of operation and safety to life and property.
(Engineers Council for Professional Development)
Arthur Mellen Wellington defined engineer as An engineer
can do for a dollar what any fool can do for two
According to these definitions, an engineer should always
consider economy throughout a project.

Engineering economy
Engineering economy is placed at the heart of decision making.
Engineering economy is the principle which deals with the economic
perspective of engineering. Engineering economics is the application
of economic techniques to the evaluation of design and engineering
alternatives. The role of engineering economics is to assess the
appropriateness of a given project, estimate its value, and justify it
from an engineering standpoint.
The principles and methodologies used in engineering economy has a
wide range of application areas in engineering from engineering
design, technical and general management disciplines.
Where incomes and expenses exist, then the principles of engineering
economy can be applied.

Engineering Economy
The important point that should be kept in mind is that the decisions about
the future is made by the engineers, not the methods used in engineering
economy.
Engineering economy is the sum of the methods which help you to make
decisions easily and accurately. In other words, these methods cannot make
decisions instead of you.
Engineering economy depends on the assumptions about future, therefore
all of the decisions made in the engineering economy consists of risk.
In addition, most of the parameters which affect the decision can vary
within the time.

Why engineering
economy?
Decisions made by engineers, managers, corporation presidents, and individuals are
commonly the result of choosing one alternative over another.
The amount of capital is usually restricted, just as the cash available to an individual
is usually limited. The decision of how to invest capital will invariably change the
future, hopefully for the better; that is, it will be value adding.
The factors considered in making the decision are a combination of economic and
noneconomic factors.
Additional factors may be intangible, such as convenience, goodwill, friendship, and
others.
Some of the typical questions in an engineering company are stated below.
Should a new bonding technique be incorporated into the manufacture of automobile brake pads?
If a computer-vision system replaces the human inspector in performing quality tests on an
automobile welding line, will operating costs decrease over a time horizon of 5 years?
Is it an economically wise decision to upgrade the composite material production center of an
airplane factory in order to reduce costs by 20%?
Should a highway bypass be constructed around a city of 25,000 people, or should the current
roadway through the city be expanded?
Will we make the required rate of return if we install the newly offered technology onto our medical
laser manufacturing line?

Engineering economy can provide mathematical tools and systematical approaches

in providing responses to these questions.

Why engineering
economy?
Large scale engineering projects
o require a large sum of investment
o can be very risky
o take a long time to see the financial outcomes
o lead to revenue and cost streams that are difficult to predict
For individuals
o Should I buy or lease my next car, or keep the one I have now
and payoff the loan?
o Should I payoff my credit card balance with borrowed money?
o Exactly what rate of return did we make on our stock
investments?
o What are graduate studies worth financially over my professional
career?

Steps in decision making

process
Understand the
problem and
define the
objective

Collect relevant
information

Define the
feasible
alternative
solutions and
make realistic
estimates

Identify the
criteria for
decision
making using
one or more
attributes

Evaluate each
alternative

Select the best

alternative

Implement the
solution

Monitor the
results

The decision making

process
1.

Understand the problem and define the objective. ( Need to lease a car)

2.

Collect relevant information. (Gather technical and financial data)

3.

Define the feasible alternative solutions and make realistic estimates.

(Select cars to consider, for instance Saturn and Honda)

4.

Identify the criteria for decision making using one or more attributes.
(Wanted: small cash outlay, safety, good performance, aesthetics, so on

)
5.

Evaluate each alternative, using sensitivity analysis to enhance the

evaluation.

6.

Select the best alternative. (Select a car, Honda)

7.

Implement the solution. (Drive the car)

8.

Monitor the results. (Compare the estimated outcomes and realized

outcomes, For instance estimated petroleum usage 4,5 liters per 100 km,
realized petroleum usage 5,2 liters per 100 km)

Principles of
engineering economy
1. Develop different alternatives
2. Focus on differences between the alternatives
3. Develop the alternatives with a consistent perspective.
4. Use common unit in comparison of different alternatives.
5. Determine the criteria for decision making using one or
more attributes.
6. Do not overlook the risk and ambiguity in the
alternatives.
7. Compare the estimated outcomes and realized
outcomes.

Accounting vs. Engineering Economy

Evaluating past performance

Accounting

Evaluating and predicting future events

Engineering Economy

Past

Future
Present

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