LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)

AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY

AGUSAN
MAIN CAMPUS, BUNAWAN AGUSAN DEL SURDEL SUR STATE COLLEGE
OF AGRICULTURE & TECHNOLOGY
MAIN CAMPUS, BUNAWAN, AGUSAN DEL SUR

Learning
MODULE 2 SECOND YEAR

ENGINEERING ECONOMICS

BS CIVIL ENGINEERING

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

FOREWORD

Preliminaries
Students, welcome to this Learning Module. Since you chose distance learning modality, you will be
using this material to walk you through the concepts of Science, technology and society (STS) to enable you
to face the realities brought about by science and technology, with all its socio-political, cultural, economic,
and philosophical underpinnings at play. The organization is made in a way that you will enjoy engaging in the
tasks arranged in a certain level of difficulty. This learning module is self-instructional and allows you to learn
in your own space and pace. So, relax and just enjoy doing the tasks!

To get the most out of this module, here are a few reminders:

A. Kindly take your time in reading the tasks and the topic.
B. For reference and clarification, you may take down notes. You may also discuss these points with your
instructor through Facebook Messenger and other online platforms (in case possible).
C. Accomplish and answer all tasks. The activities are designed to enhance your understanding of the ideas
and concepts being discussed. The tasks at the end of each module will give you an idea how well you
understand the lesson. Review the lessons if necessary, until you have achieved a sufficient level of
proficiency.
D. Write all your answers/responses in the spaces provided in this module. This shall be part of your formative
and summative evaluations.
E. Always keep safe.

Overview of the Module

This learning module aims to (1) enhance your competence in language and communication skills; (2)
serve as a motivation tool to improve yourself; (3) provide learning experiences that will add information to
your knowledge; and (4) contribute to your goals as a student.
The module follows the phases of 5Es Instructional Model, namely Engage, Explore, Explain,
Elaborate and Evaluate. Each lesson begins with the objectives and follows the five (5) parts vis-a-vis the
phases of 5Es Instructional Model.
The READY part is the Objectives to be achieved in each module. This part states the expectation of
the module in line with what you should know, understand or perform. The START section which is the
Engage phase starts the process of understanding the topic. This will serve as a drill. In the DISCOVER and
the Explore phase of the lesson, it relates to your common base of experience or prior knowledge like hands-
on or minds-on tasks. LEARN corresponds to the Explain phase. This will allow you to explain the concepts
you have been exploring as you will be provided with explanations about the topic. This part serves as the
discussion. In PRACTICE phase, you will practice what you have learned since this is the Elaborate phase.
You will engage in different formative tasks. EVALUATE or the Evaluate phase encourages you to assess
your understanding and abilities on the topic. This will serve as a summative assessment in understanding the
target concept or skill.
This module contains features that you need to understand as you undertake each task. There are
activities that necessitate the presence of Internet to get you to online works. This is done to tract your
progress and status with regards the module.
At the end of each lesson, answer keys to pre-assessment and practice tests are given. To really test
yourself and measure your understanding on the concept presented in each lesson, you are encouraged to
answer the activities in your own pace before counting on the answer keys through checking your own work.
The modes of delivery will be in the form of self-directed study. You are also encouraged to visit the
instructor concerned for assistance during office hours. If the office hours do not meet your schedule, notify
the instructor through Facebook or Messenger. These platforms will also be used as a communication tool
and information portal for you to access module materials, project briefs, assignments and announcements.
It is hoped that this module will achieve its aim of producing alternative learning experience on the
target concepts necessary to the development of communication abilities to effectively meet the demands of
education amidst this trying pandemic outbreak.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

MODULE CONTENT

Foreword

Introduction to College Vision, Mission, Goals and Quality Policy

History of ASSCAT | ASCAT VMGQ | Institutional Outcome | Grading System | Conclusion

I. Introduction
1. Principles of Engineering
2. Engineering Economics and Design Process
3. Cost Concept for Decision Making
4. Present Economic Studies

II. Money-Time Relationships and Equivalence

1. Interest and time value of money
2. Concepts of equivalence
3. Cash flows

III. Economic study methods

1. Minimum attractive rate of Return (ROR)
2. Basic economic methods: present worth, future worth. Annual worth, internal rate of return (IRR)
3. Other methods: discounted payback period, benefit/ cost ratio

IV. Decisions under Certainty

1. Evaluation of mutually exclusive alternatives
2. Evaluation of independent projects
3. Effects of inflation
4. Depreciation and after-tax economic analysis

V. Decision recognizing risk

1. Expected monetary value of alternatives
2. Discounted decision tree analysis

VI. Decision admitting uncertainty

1. Sensitivity analysis
2. Decision analysis
models

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

INTRODUCTION

READY

LESSON OBJECTIVES
Upon accomplishing this module, students will be able to:
A. Discuss the principles of engineering economics

LEARNERS
Second Year Students

TIME FRAME
This module will be accomplished approximately in 3 hours within 1 week to complete all the activities recommended.
This is a distance learning program, thus the time frame is flexible and largely self-directed.

REFERENCE
Vazpayee, S., Sarder, M.D., Fundamentals of Economics for Applied Engineering, 2nd Ed., 2020, Taylor &
Francis Group, LLC.
White, J., et.al, Fundamental of Engineering Economic Analysis, 2020, John Wiley & Sons, Inc.
Khan, Z., et.al, Principles of Engineering Economics with Applications, 2nd Ed. 2018, Cambridge University
Press
Yates, J.K., Engineering Economics, 2017, Taylor & Francis, LLC.
Sharma, K. Introduction to Engineering Economics, 2015, Cognella Academic Publishing

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

START
ACTIVITY 1: MAKING ECONOMIC DECISION

Hungry? Will you order food and get it delivered to your dorm room or home?
If you do, will you call the restaurant directly or use an online platform like FoodPanda, GrabFood,
AngkasFood, or LalaFood?

1. What do you think are the charges inclusive of your payment when using an online ordering platform?
(Make suggestions below)
______________________________________________________
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2. What sort of operational issues could be created in the restaurants that choose online ordering
platforms?
______________________________________________________
______________________________________________________
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______________________________________________________

3. What possible problems would the customer encounter when they opt for online ordering platforms?
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________

4. Did you think that how you ordered your food could have an economic impact?
______________________________________________________
______________________________________________________

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

DISCOVE
R 2: solving a problem
ACTIVITY
An important skill in an Economic Analysis is defining the problem since it provides the basis for the rest
of the analysis.

Let’s check your observation with a scenario below.

SCENARIO 1

A friend of yours bought a small apartment building for P100,000 in Bunawan. She spent P10,000 of her
own money for the building downpayment and obtained a loan from a local bank for the remaining P90,000.
The yearly loan payment to the bank is P10,500.
Your friend also expects that annual maintenance on the building and grounds will be P15,000. There
are four apartments (two bedrooms each) in the building that can each be rented for P360 per month.

Try to answer the following questions:

1. Does your friend have a problem? If so, what is it?

_______________________________________________________________________________________

2. What possible options can your friend do to address the problem? (Identify at least three)
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

3. What criterias are you going to use to choose the best among the options? (Give atleast three)
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

LEARN
ACTIVITY 3: EXPAND YOUR KNOWLEDGE

INTRODUCTION TO ENGINEERING ECONOMICS

Engineering economics is a field that addresses the dynamic environment of economic calculations
and principles through the prism of engineering. It is a fundamental skill that all successful engineering firms
employ in order to retain competitive advantage and market share.
Many schools across the country have integrated courses in engineering economics for their
students, thereby providing them with the tools to optimize profits, minimize costs, analyze various
scenarios, forecast fluctuations in business cycles, and more.

Engineering economics studies various financial and economic problems pervasive to engineers in a
variety of industries. Like all engineering courses, economics-based engineering courses have a strong
quantitative component; however, unlike the more traditional courses, studying engineering economics
requires extreme elasticity in learning style that is conducive towards understanding interdisciplinary material.
As a result, students who have taken courses in the aforementioned field have adopted a variety of
techniques that have been shown, both experientially and empirically, to permit higher order learning and
critical thinking.
The field of engineering economics aims to create value in two domains: real world application
and academic theory.

Two Domains in teaching Engg Econ

Academic Theory Real World Application

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

The Value of Engineering Economics

Engineering economics is a topic that all industry-bound students should learn because of its real-
world applications. Engineering economics poses numerous benefits because it allows those in industry to
make strategic decisions for their companies.
While macroeconomic and financial competencies are key for business operations, engineering
economics further provides a mechanism for decision-making. It forces engineers to think twice before
making many choices in everyday operations, such as process configurations, materials, production size, and
other economic factors.
During a mass-production manufacturing process for example, it may make sense to use an additive
manufacturing convention if the production size is relatively small. However, after a certain point, it will
become more economical to use injection molding. If the engineer decides to use injection molding, they will
then have to decide what type of materials they should use: metals, plastics, glass, etc.
The detail and accuracy with which these processes are carried out are another economic calculation
based on margins of error, tolerance, reproducibility, and affect on performance. Daily decisions by the
engineering firms (based on an economic framework) will decide how successful and profitable that company
is.
In most undergraduate engineering programs with courses in engineering economics, there are a
number of key topics, among many others, that are generally covered:
-time value of money,
-cost analysis,
-interest rates,
-economic fluctuations, and
-depreciation.

These subjects are essential for engineering economics because they provide the foundation for
engineers to make good decisions in the business environment.

Time value of money is the idea that money has a different value now than it will in the future.
- This is due to a number of dynamic variables, such as inflation and interest rates.
- These values are standardized through present and future value calculations, thereby equalizing the
timedependent variables.
- This is very important for engineers because these calculations provide an intuition as to how money
should be spent and saved, how cash flow should be negotiated in contracts, and how interest rates
can affect the present and future values.

Cost analysis is a key tenant for balancing a business’s budget, as well as for calculating the viability of a
project.
- Engineers can compare the costs and benefits of a project, and determine whether the benefits
outweigh the costs enough to entertain the project.
- Each are then further broken down into subcategories. There are fixed costs (initial infrastructure),
variable costs (each additional input), total variable costs (aggregate of all inputs), and total costs
(fixed costs plus total variable costs).
- Meanwhile, the benefits can comprise of total revenues (final sales), marginal revenues (each
additional sale), and profits (final sales minus total costs).

Interest is another concept that is important to economical engineers.

- Many times, engineering firms take out significant loans to finance construction of major projects.
Having a clear understanding of the cost of borrowing money is crucial to making appropriate
business decisions.
- For instance, if the costs of a five-year long project (after accounting for the annually compounded
interest rate) exceed the revenues collected, then it would be unwise to pursue the project.
- Many construction companies are highly cognizant of interest rates (mortgage rates in particular),
because if mortgage rates are too high, many people can’t afford to finance buying new houses.
- Thus, once the demand for homes dries up, construction companies must pursue other avenues to
make money.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

Economic fluctuations characterize the changes in the market economy as peaks, recessions, troughs, or
expansions.
- Each of these four stages has a direct impact on the choices made by businesses, particularly
construction companies.
- During a recession, decisions made by Governments provide a signal for the direction of the
economy. For example, if the Nationall Reserve decides to engage in expansionary monetary policy,
they will lower interest rates in order to make it cheaper to borrow money for business operations. In
response, many firms can take advantage of the temporary stimulus and invest heavily.

Depreciation is the loss of value in an asset over time.

- During the 2008 housing market collapse, many homeowners saw the value of their homes
depreciate tremendously, leading them to go underwater on their mortgages – many to a point where
their loans exceeded the values of their homes.
- Depreciation plays a major influence on engineering firms; it is important for engineers to calculate the
“wear and tear” that activities have on their expensive equipment.
- This allows them to calculate how much it costs their firm to operate a piece of equipment for a period
of time, and how much they should recoup annually to compensate for these costs.
- Furthermore, since capital depreciation is tax-deductible, savvy engineers can save their firms
tremendous amounts of money.

The marriage between economics and engineering is one that is crucial to the success of engineers in the
21st century; the interdisciplinary nature of the topic offers key insight into the underlying mechanisms that
drive daily business operations.
Engineering economics is an integral component to many engineering curricula across the country,
covering a wide variety of topics including the time value of money, cost analysis, interest rates, economic
fluctuations, depreciation, and everything in-between.
Furthermore, it has been noted by renowned engineer John Hayford that engineering and economics
“help to develop the very valuable habit of thinking in terms of groups rather than of individuals.” By
understanding and implementing the outcomes, framework, and tools for actively teaching engineering
economics, future engineers can continue evolving as problem solvers and innovators.

LESSON 1: PRINCIPLE OF ENGINEERING ECONOMICS

The development, study, and application of any discipline must begin with a basic foundation. We
define the foundation for engineering economy to be a set of principles that provide a comprehensive doctrine
for developing the methodology.These principles will be mastered by students as they progress through this
lesson.
Once a problem or need has been clearly defined, the foundation of the discipline can be discussed in
terms of Seven (7) principles.

Principle 1 Develop the Alternatives

Carefully define the problem! Then the choice (decision) is among alternatives. The
alternatives need to be identified and then defined for subsequent analysis.

A decision situation involves making a choice among two or more alternatives. Developing and
defining the alternatives for detailed evaluation is important because of the resulting impact on the quality of
the decision. Engineers and managers should place a high priority on this responsibility. Creativity and
innovation are essential to the process.
One alternative that may be feasible in a decision situation is making no change to the current
operation or set of conditions (i.e., doing nothing). If you judge this option feasible, make sure it is considered
in the analysis. However, do not focus on the status quo to the detriment of innovative or necessary change.

Principle 2 Consideration of different outcomes from different alternatives

Only the differences in expected future outcomes among the alternatives are relevant to
their comparison and should be considered in the decision.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

If all prospective outcomes of the feasible alternatives were exactly the same, there would be no basis or
need for comparison. We would be indifferent among the alternatives and could make a decision using a
random selection.
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 your feasible housing alternatives were two residences with the same purchase (or rental)
price, price would be inconsequential to your final choice. Instead, the decision would depend on other
factors, such as location and annual operating and maintenance expenses.
This simple example illustrates Principle 2, which emphasizes the basic purpose of an engineering
economic analysis: → to recommend a future course of action based on the differences among feasible
alternatives.

Principle 3 Use a Consistent rule of judgement

The prospective outcomes of the alternatives, economic and other, should be consistently
developed from a defined viewpoint (perspective).

The perspective of the decision maker, which is often that of the owners of the firm, would normally be
used. However, it is important that the viewpoint for the particular decision be first defined and then used
consistently in the description, analysis, and comparison of the alternatives.
- As an example, consider a public organization operating for the purpose of developing a river basin,
including the generation and wholesale distribution of electricity from dams on the river system.
- A program is being planned to upgrade and increase the capacity of the power generators at two
sites.
- What perspective should be used in defining the technical alternatives for the program? The “owners
of the firm” in this example means the segment of the public that will pay the cost of the program, and
their viewpoint should be adopted in this situation.

Now let us look at an example where the viewpoint may not be that of the owners of the firm.
Suppose that the company in this example is a private firm and that the problem deals with providing a flexible
benefits package for the employees.
Also, assume that the feasible alternatives for operating the plan all have the same future costs to the
company. The alternatives, however, have differences from the perspective of the employees, and their
satisfaction is an important decision criterion. The viewpoint for this analysis should be that of the employees
of the company as a group, and the feasible alternatives should be defined from their perspective.

Principle 4 Use a Common Unit of Measurement

Using a common unit of measurement to enumerate as many of the prospective

outcomes as possible will simplify the analysis of the alternatives.

It is desirable to make as many prospective outcomes as possible commensurable (directly

comparable). For economic consequences, a monetary unit such as dollars is the common measure. You
should also try to translate other outcomes (which do not initially appear to be economic) into the monetary
unit.
This translation, of course, will not be feasible with some of the outcomes, but the additional effort
toward this goal will enhance commensurability and make the subsequent analysis of alternatives easier.
What should you do with the outcomes that are not economic (i.e., the expected consequences that
cannot be translated (and estimated) using the monetary unit)? First, if possible, quantify the expected future
results using an appropriate unit of measurement for each outcome. If this is not feasible for one or more
outcomes, describe these consequences explicitly so that the information is useful to the decision maker in
the comparison of the alternatives.

Principle 5 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 both the outcomes enumerated in
the monetary unit and those expressed in some other unit of measurement or made

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

explicit in a descriptive manner.

The decision maker will normally select the alternative that will best serve the long-term interests of the
owners of the organization.
In engineering economic analysis, the primary criterion relates to the long-term financial interests of the
owners. This is based on the assumption that available capital will be allocated to provide maximum monetary
return to the owners. Often, though, there are other organizational objectives you would like to achieve with
your decision, and these should be considered and given weight in the selection of an alternative.
These nonmonetary attributes and multiple objectives become the basis for additional criteria in the
decision-making process.

Principle 6 Estimation of the risk and uncertainty

Risk and uncertainty are inherent in estimating the future outcomes of the alternatives
and should be recognized in their analysis and comparison.

The analysis of the alternatives involves projecting or estimating the future consequences associated with
each of them. Themagnitude and theimpact of future outcomes of any course of action are uncertain. Even if
the alternative involves no change from current operations, the probability is high that today’s estimates of, for
example, future cash receipts and expenses will not be what eventually occurs.

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.

A good decision-making process can result in a decision that has an undesirable outcome. Other
decisions, even though relatively successful, will have results significantly different from the initial estimates of
the consequences. Learning from and adapting based on our experience are essential and are indicators of a
good organization.
The evaluation of results versus the initial estimate of outcomes for the selected alternative is often
considered impracticable or not worth the effort. Too often, no feedback to the decision-making process
occurs.
Organizational discipline is needed to ensure that implemented decisions are routinely postevaluated and
that the results are used to improve future analyses and the quality of decision making.
For example, a common mistake made in the comparison of alternatives is the failure to examine
adequately the impact of uncertainty in the estimates for selected factors on the decision. Only post
evaluations will highlight this type of weakness in the engineering economy studies being done in an
organization.

LESSON 2: 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 normally
includes other engineering knowledge and input.

A sound engineering economic analysis procedure incorporates the basic principles discussed in Lesson
1 and involves several steps.
We represent the procedure in terms of the seven steps listed in the left-hand column of Table 1 below.
For example, within Step 1, information developed in evaluating the problem will be used as feedback to

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

refine the problem definition. As another example, information from the analysis of alternatives (Step 5) may
indicate the need to change one or more of them or to develop additional alternatives.
The Seven-step Procedure is also used to assist decision making within the engineering design process,
shown as the right-hand column in Table 1. In this case, activities in the design process contribute information
to related steps in the economic analysis procedure. The general relationship between the activities in the
design process and the steps of the economic analysis procedure is indicated in Table 1 below.

Table 1 - The General Relationship between the Engineering Economic Analysis Procedure and the
Engineering Design Process
Step Activity
1 Problem recognition, definition, and evaluation. Identify the problem.
2 Development of the feasible alternatives. Evaluate the problem.
Accumulate possible solutions or
alternative.
3 Development of the outcomes and cash flows for each Conduct analysis, optimization,
alternative. and evaluation of each of the
4 Selection of a criterion (or criteria). possible alternative.
5 Analysis and comparison of the alternatives.
6 Selection of the preferred alternative. Specify the preferred alternative.
7 Performance monitoring and post evaluation of results Communicate the solution.

The engineering design process may be repeated in phases to accomplish a total design effort. For
example, in the first phase, a full cycle of the process may be undertaken to select a conceptual or preliminary
design alternative. Then, in the second phase, the activities are repeated to develop the preferred detailed
design based on the selected preliminary design. The seven-step economic analysis procedure would be
repeated as required to assist decision making in each phase of the total design effort. This procedure is
discussed next.

STEP 1 PROBLEM DEFINITION (“What is the Problem?”)

The first step of the engineering economic analysis procedure (problem definition) is particularly
important, since it provides the basis for the rest of the analysis. A problem must be well understood and
stated in an explicit form before the project team proceeds with the rest of the analysis.
The term problem is used here generically. It includes all decision situations for which an engineering
economy analysis is required. Recognition of the problem is normally stimulated by internal or external
organizational needs or requirements.
An operating problem within a company (internal need) or a customer expectation about a product or
service (external requirement) are examples. Once the problem is recognized, its formulation should be
viewed from a systems perspective. That is, the boundary or extent of the situation needs to be carefully
defined, thus establishing the elements of the problem and what constitutes its environment.
Evaluation of the problem includes refinement of needs and requirements, and information from the
evaluation phase may change the original formulation of the problem. In fact, redefining the problem until a
consensus is reached may be the most important part of the problem-solving process!

STEP 2 DEVELOPMENT OF ALTERNATIVES (“What are the different alternatives?”)

The two primary actions for this step are:

(1) searching for potential alternatives and
(2) screening them to select a smaller group of feasible alternatives for detailed analysis.

The term feasible here means that each alternative selected for further analysis is judged, based on
preliminary evaluation, to meet or exceed the requirements established for the situation.

➢ SEARCHING FOR POTENTIAL ALTERNATIVE

Creativity and resourcefulness were emphasized as being absolutely essential to the development of
potential alternatives. The difference between good alternatives and great alternatives depends largely on an
individual’s or group’s problem-solving efficiency. Such efficiency can be increased in the following ways:

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

BS CIVIL ENGINEERING
INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)
AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR

1. Concentrate on one problem at a time.

2. Develop many redefinitions for the problem.
3. Avoid making judgments as new problem definitions are created.
4. Attempt to redefine a problem in terms that are dramatically different from the original Step 1 problem
definition.
5. Make sure that the true problem is well researched and understood.

In searching for superior alternatives or identifying the true problem, several limitations invariably exist,
including:
(1) lack of time and money,
(2) preconceptions of what will and what will not work, and
(3) lack of knowledge.

Consequently, the engineer or project team will be working with less-than-perfect problem solutions in the
practice of engineering.

EXAMPLE 1: Defining the Problem and Developing Alternatives

The management team of a small furniture-manufacturing company is under pressure to increase profitability
to get a much-needed loan from the bank to purchase a more modern pattern-cutting machine. One proposed
solution is to sell waste wood chips and shavings to a local charcoal manufacturer instead of using them to
fuel space heaters for the company’s office and factory areas.

(a) Define the company’s problem. Next, reformulate the problem in a variety of creative ways.
(b) Develop at least one potential alternative for your reformulated problems.

Solution
(a) The company’s problem appears to be that revenues are not sufficiently covering costs. Several
reformulations can be posed:
1. The problem is to increase revenues while reducing costs.
2. The problem is to maintain revenues while reducing costs.
3. The problem is an accounting system that provides distorted cost information.
4. The problem is that the new machine is really not needed (and hence there is no need for a bank loan).

(b) Based only on reformulation 1, an alternative is to sell wood chips and shavings as long as increased
revenue exceeds extra expenses that may be required to heat the buildings. Another alternative is to
discontinue the manufacture of specialty items and concentrate on standardized, highvolume products. Yet
another alternative is to pool purchasing, accounting, engineering, and other white-collar support services with
other small firms in the area by contracting with a local company involved in providing these services.

➢ DEVELOPING INVESTMENT ALTERNATIVES

“It takes money to make money,” as the old saying goes.

Did you know that the average company spends an amount of money as a salary for each of its
employees?
So, to make money, each company must invest a capital to support the cost of living of its
employees—but aside from that, what else should an individual company should invest also?
There are usually hundreds of opportunities for a company to make money. Engineers are at the very
heart of creating value for a manufacturing company by turning innovative and creative ideas into new or
reengineered commercial products and services. Most of these ideas require investment of money, and only a
few of all feasible ideas can be developed, due to lack of time, knowledge, or resources.
There are two (2) approaches that have found wide acceptance in industry for developing sound
investment alternatives by removing some of the barriers to creative thinking:
(1) Classical brainstorming and
(2) the Nominal Group Technique (NGT).

o CLASSICAL BRAINSTORMING

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- is the most well-known and often-used technique for idea generation.

- It is based on the fundamental principles of deferment of judgment and that quantity breeds quality.
- Generally, a brainstorming group should consist of four to seven people, although some suggest larger groups.
- There are four (4) rules for successful brainstorming:
1. Criticism is ruled out.
2. Freewheeling is welcomed.
3. Quantity is wanted.
4. Combination and improvement are sought.

Basic Steps to conduct a classical brainstorming session:

1. Preparation. The participants are selected, and a preliminary statement of the problem is circulated.
2. Brainstorming. A warm-up session with simple unrelated problems is conducted, the relevant problem and the four rules
of brainstorming are presented, and ideas are generated and recorded using checklists and other techniques if necessary.
3. Evaluation. The ideas are evaluated relative to the problem.

o NOMINAL GROUP TECHNIQUE (NGT)

- involves a structured group meeting (5 to 10 people) designed to incorporate individual ideas and judgments into
a group consensus.
- The technique, when properly applied, draws on the creativity of theindividual participants, while reducing two
undesirable effects of most group meetings:
(1) the dominance of one or more participants and
(2) the suppression of conflicting ideas.

The basic format of an NGT session is as follows:

1. Individual silent generation of ideas
2. Individual round-robin feedback and recording of ideas
3. Group clarification of each idea
4. Individual voting and ranking to prioritize ideas
5. Discussion of group consensus results

STEP 3 DEVELOPMENT OF PROSPECTIVE OUTCOMES

(“What are the possible economic outcomes?”)

In this step it incorporates the Engineering Economy Principles 2, 3, & 4 from Lesson 1. This step
uses the basic cash-flow approach employed in engineering economy.
A cash flow occurs when money is transferred from one organization or individual to another. Thus, a
cash flow represents the economic effects of an alternative in terms of money spent and received.
Consider the concept of an organization having only one “window” to its external environment through which
all monetary transactions occur—receipts of revenues and payments to suppliers, creditors, and employees.
The key to developing the related cash flows for an alternative is estimating what would happen to the
revenues and costs, as seen at this window, if the particular alternative were implemented. The net cash flow
for an alternative is the difference between all cash inflows (receipts or savings) and cash outflows (costs or
expenses) during each time period.
In addition to the economic aspects of decision making, nonmonetary factors (attributes) often play a
significant role in the final recommendation. Examples of objectives other than profit maximization or cost
minimization that can be important to an organization include the following:
1. Meeting or exceeding customer expectations
2. Safety to employees and to the public
3. Improving employee satisfaction
4. Maintaining production flexibility to meet changing demands
5. Meeting or exceeding all environmental requirements
6. Achieving good public relations or being an exemplary member of the
community

STEP 4 SELECTION OF A DECISION CRITERION (“What are the right criterias?”)

The selection of a decision criterion incorporates Engineering Economy Principle 5.

The decision maker will normally select the alternative that will best serve the long-term interests of
the owners of the organization.
It is also true that the economic decision criterion should reflect a consistent and proper viewpoint to
be maintained throughout an engineering economy study.

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STEP 5 ANALYSIS AND COMPARISON OF ALTERNATIVES

(“What are the results of comparing the alternatives?”)

Analysis of the economic aspects of an engineering problem is largely based on cash-flow estimates
for the feasible alternatives selected for detailed study.
A substantial effort is normally required to obtain reasonably accurate forecasts of cash flows and
other factors in view of, for example, inflationary (or deflationary) pressures, exchange rate movements, and
regulatory (legal) mandates that often occur.
Clearly, the consideration of future is an essential part of an engineering economy study. When cash
flow and other required estimates are eventually determined, alternatives can be compared based on their
differences as called for by Principle 2. Usually, these differences will be quantified in terms of a monetary unit
such as dollars.

STEP 6 SELECTION OF THE PREFERRED ALTERNATIVE

(“What is the BEST solution/alternative?”)

When the first five steps of the engineering economic analysis procedure have been done properly,
the preferred alternative is simply a result of the total effort.
Thus, the soundness of the technical-economic modeling and analysis techniques dictates the quality
of the results obtained and the recommended course of action.

STEP 7 PERFORMANCE MONITORING AND POSTEVALUATION OF RESULTS

(“What needs to be improved based on performance?”)

This step implements Engineering Economy Principle 7 and is accomplished during and after the time
that the results achieved from the selected alternative are collected.
Monitoring project performance during its operational phase improves the achievement of related
goals and objectives and reduces the variability in desired results.
This step is also the follow-up step to a previous analysis, comparing actual results achieved with the
previously estimated outcomes. The aim is to learn how to do better analyses, and the feedback from
postimplementation evaluation is important to the continuing improvement of operations in any organization.
Unfortunately, like Step 1, this final step is often not done consistently or well in engineering practice;
therefore, it needs particular attention to ensure feedback for use in ongoing and subsequent studies.

EXAMPLE 2: Application of the Engineering Economic Analysis Procedure

A friend of yours bought a small apartment building for P100,000 in Bunawan. She spent P10,000 of her
own money for the building downpayment and obtained a loan from a local bank for the remaining P90,000.
The yearly loan payment to the bank is P10,500. Your friend also expects that annual maintenance on the
building and grounds will be P15,000. There are four apartments (two bedrooms each) in the building that can
each be rented for P360 per month.

Refer to the seven-step procedure in Table 1 (left-hand side) to answer these questions:
(a) Does your friend have a problem? If so, what is it?
(b) What are her alternatives? (Identify at least three.)
(c) Estimate the economic consequences and other required data for the alternatives in Part (b).
(d) Select a criterion for discriminating among alternatives, and use it to advise
your friend on which course of action to pursue.
(e) Attempt to analyze and compare the alternatives in view of at least one
criterion in addition to cost.
(f) What should your friend do based on the information you and she have
generated?

Solution
(a) A quick set of calculations shows that your friend does indeed have a problem.

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Rent per room = P360

Maintenance cost = P15,500
Yearly loan payment = 10,500

Yearly income = P360 x 4 rooms x 12 months = P17, 280

Yearly expenses = P15, 500 (Maintenance) + 10, 500 (loan payment) = P25,500

Profit = Income – expenses = P17,280 – 25, 500 = - P8,220

The problem could be that the monthly rent is too low. She’s losing P8,220 per year. Losing money is a
problem!

(b) Option (1). Raise the rent.

Option (2). Lower maintenance expenses (but not so far as to cause safety problems).
Option (3). Sell the apartment building. (What about a loss?)
Option (4). Abandon the building (bad for your friend’s reputation).

(c) Estimates of the economic consequences for each option:

Option (1): Raise the minimum total monthly rent to P531.25.

Rent per room = P531.25**** This is almost 2x the original rent!
Minimum yearly income is P25,500.
Yearly loan payment = 10,500
Maintenance cost = P15,500
Profit = 0

Option (2): Lower monthly expenses to P6,780

Rent per room = P360
Minimum yearly income is P25,500.
Yearly loan payment = 10,500
Maintenance cost = P6780**** This is almost half the original maintenance cost!
Profit = 0

Option (3): Try to sell the apartment building for P18,220

Regain the P10,000 downpayment.
Regain the P8,220 annual loss

Total amount to regain = P10,000 + 8,220 = P18,220****

Option (4): Walk away from the venture and kiss your investment good-bye. The bank would likely assume
possession through foreclosure and may try to collect fees from your friend. This option would also be very
bad for your friend’s credit rating.

Loss of the investment = -P8,220****

(d) One criterion could be to minimize the expected loss of money. In this case, you might advise your friend
to pursue Option (1) or (3).

(e) For example, let’s use “credit worthiness” as an additional criterion. Option (4) is immediately ruled out.
Exercising Option (3) could also harm your friend’s credit rating. Thus, Options (1) and (2) may be her only
realistic and acceptable alternatives.

(f) Your friend should probably do a market analysis of comparable housing in the area to see if the rent could
be raised (Option 1). Maybe a fresh coat of paint and new carpeting would make the apartments more
appealing to prospective renters. If so, the rent can probably be raised while keeping 100% occupancy of the
four apartment.

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EXAMPLE 3: Deciding among the alternatives

Linda and Jerry are faced with a car replacement opportunity where an interest rate can be ignored.
Jerry’s old clunker that averages 10 miles per gallon (mpg) of gasoline can be traded in toward a vehicle that
gets 15 mpg.
Or, as an alternative, Linda’s 25 mpg car can be traded in toward a new hybrid vehicle that averages 50
mpg.
If they drive both cars 12,000 miles per year and their goal is to minimize annual gas consumption, which
car should be replaced—Jerry’s or Linda’s? They can only afford to upgrade one car at this time.

Solution
Alternative 1: Jerry’s trade-in (10mpg to 15mpg)

Estimate distance travelled per year = 12,000 miles

Gas consumption per year using 10mpg = 12,000 miles = 1,200 gallons
10mpg
Gas consumption per year using 15mpg = 12,000 miles = 800 gallons
15mpg
Gas saved by Jerry’s trade in = 1,200 gal – 800 gal = 400 gallons

This choice will save 400 gallons per year.

Alternative 2: Linda’s trade-in (25mpg to 50mpg)

Gas consumption per year using 25mpg = 12,000 miles = 480 gallons
25mpg
Gas consumption per year using 50mpg = 12,000 miles = 240 gallons
50mpg
Gas saved by Jerry’s trade in = 480 gal – 240 gal = 240 gallons

This choice will save 240 gallons per year.

Therefore, Jerry should trade in his vehicle to save more gasoline.

Using Spreadsheets in Engineering Economic Analysis

Spreadsheets are a useful tool for solving engineering economy problems. Most engineering
economy problems are amenable to spreadsheet solution for the following reasons:

1. They consist of structured, repetitive calculations that can be expressed as formulas that rely on a few
functional relationships.
2. The parameters of the problem are subject to change.
3. The results and the underlying calculations must be documented.
4. Graphical output is often required, as well as control over the format of the graphs.

Spreadsheets allow the analyst to develop an application rapidly, without being inundated by the
housekeeping details of programming languages. They relieve the analyst of the drudgery of number
crunching but still focus on problem formulation. Computer spreadsheets created in Excel are integrated
throughout all the topics in this course.

Summary

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In this module, we defined engineering economy and presented the fundamental concepts in terms of
seven basic principles (see pp. 3–6). Experience has shown that most errors in engineering economic
analyses can be traced to some violation of these principles. We will continue to stress these principles in the
chapters that follow.
The seven-step engineering economic analysis procedure described in this module has direct ties to
the engineering design process. Following this systematic approach will assist engineers in designing
products and systems and in providing technical services that promote the economic welfare of the company
they work for. This same approach will also help you as an individual make sound financial decisions in your
personal life.
In summary, engineering economy is a collection of problem-solving tools and techniques that are
applied to engineering, business, and environmental issues. Common, yet often complex, problems involving
money are easier to understand and solve when you have a good grasp on the engineering economy
approach to problem solving and decision making. The problem-solving focus of this text will enable you to
master the theoretical and applied principles of engineering economy.

EXAMINE
ACTIVITY 4: decision making exercise
Consider the situation below:

You were involved in an accident with the other car, and the accident was your fault!
The owner of the other vehicle asked you to pay for the repair of his car. He got an estimate of
P8,030.00 from one repair shop and P8,520.00 from another repair shop.

You are now thinking of the following options to do afterwards:

1. Pay the owner of the other vehicle P8,030.00. This will not involve your insurance company, thus will not
increase your annual premium. And most of all this will also keep your driving record “clean.”
2. File a claim against your insurance company. The insurance company will cover the amount of P5,000.00
only for the repair of the other vehicle. However, this will make your insurance premium increase by
P1,200.00 per year.

Which among the two options is the most economical? Explain why this option is better than the other.
_____________________________________________________________________________________
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What other options should you have explored? Give atleast 3.

_____________________________________________________________________________________
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_____________________________________________________________________________________

EVALUATE
ACTIVITY 5: ONLINE QUIZ

Schedule of the quiz will be announced later.

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