Lecture 1 & 2

Course Introduction
• Engineering Economics
• Credit Hours: 2

OBJECTIVE:
To provide basic concepts of economic analysis of different projects.

COURSE CONTENT:

• FUNDAMENTALS OF ENGINEERING ECONOMY

• TIME VALUE OF MONEY

• EVALUATING A PROJECT

• TAXES
 Course Books
• TEXT BOOK:

• ENGINEERING ECONOMY by William G.

Sullivan, Elin M. Wicks, C. Patrick Koeling

• Reference Book:

• Engineering Economics, Blank, L.T. & Anthony

J. Tarquin, McGraw Hill Book Co.
 Engineering & Science
• Engineering a profession in which knowledge of the
mathematical and natural sciences gained by study,
experience and practice is applied with judgment to
develop ways to
– Utilize the material and forces economically
– For the benefit of mankind
• Engineering is not a science but application of science
• Nature of engineering – application
• Role of scientist - Discover the universal laws of nature /
behaviour
• Role of engineer – Apply knowledge to particular
situation to produce products and services
 Engineering & Economics
• Engineering activities are means of satisfying
human rights and requirements
• Concerns – material / forces and needs
• Because of resource limitations, engineering is
closely associated with economics
• Its essential that an engineering proposal is
evaluated in terms of economics (worth & cost)
before it is undertaken
• Essential pre-requisite of successful
engineering application is economic feasibility
 Dependence on Engineering
• Modern civilization depends to a large degree on
engineering
• Products and services such a communication,
machines, roads etc are result of engineering
• Production is through of engineering
• Jobs and skill development
• Economic improvement
• Business and economic growth
 Engineering Economics

• Engineering economy is a collection of mathematical /

analytical techniques that simplify economic
comparison
• Engineering economy – formulation, estimation and
evaluation of the economic outcomes out of various
available alternatives to accomplish a defined purpose
• Discipline that involves the systematic evaluation of
the cost and benefit of proposed technical projects
 Principles of Engineering Economy
• Analyze the idea
• Develop the alternatives
• Focus on differences in the alternatives
• Use a consistent view point
• Use a common unit of measurement
• Consider all relevant criteria
• Make tentative plan
• Reconsider your decision
 Role of Engineering Economy in
Decision Making
• Assist people in making decisions
• Timeframe – future
• Actual value may differ from estimated one
• Sensitivity analysis – changes in decisions
with varying estimates
• Analysis of present and past situations based
on observed data to predict the future
 Engineering Economy
• Engineering economy is an answer to following
questions

– Which engineering projects are useful?

(project worth)

– Which engineering projects should have a higher

priority? (priority for available alternatives)

– How should the engineering project be designed?

(economic design)
Money Money
 Bi-Environmental Nature of
Engineering
• Engineers are confronted with two interconnected
environments the physical and economical

Engineering Production / Need

proposal consumption satisfaction
Physical
Economic
environment environment
 Bi-Environmental Nature of Engineering
• Engineers are confronted with two interconnected
environments the physical and economical
• Success of engineers to adjust physical environment to
produce goods and services depends upon the knowledge of
physical laws
• Benefits / worth of these goods and services are measured
in economic terms, that is why, all engineering products
should be economically feasible.
• Physical environment is based on physical laws (formulas,
math's, calculations), therefore, it is certain
• Economic environment is affected by the behavior of people,

• The function of engineering is to manipulate the physical

environment to create value in economic environment
 The Engineering Process
• Determination of objectives
• limiting factors vs. strategic factors
• Determination of revenues.
• Evaluation of engineering proposals
• Assistance in decision making
 Limiting Factors Vs Strategic
Factors
• Truck driver is troubled because he has difficulty in
lifting the huge box
– Limiting factors : Gravity, mass of box, strength
– Exam / analysis: reduce gravity, reduce mass,
increase strength
– Strategic factor : strength
– Way forward : lifting devices
• Strategic factors give way forward for a problem
 Product Life Cycle
Achievement Phase Operation Phase

Establish need Product

Conceptual Detail design / Use/
Production
preliminary Development Disposal
design
 Life Cycle Cost Analysis
• The ultimate value of the product that result from engineering is
measured in economic terms
• Economic aspect is not examined until detail design
• Life cycle analysis – To ensure that entire life of the system is
considered from start till end
• Engineering design – should ensure design compatibility through
life cycle
• Life cycle outcome is measured in terms of performance,
effectiveness, productivity, reliability, maintenance, quality and
cost
Economic & cost concepts
 Consumer & Producer Goods
(two classes of goods are recognized by the economist)
 Consumer goods are the goods and services that
directly satisfy human wants
TV, houses, shoes, books etc.
 Producer goods are the goods and services that satisfy
human wants indirectly as part of the production or
construction process.
Machines, dozers, equipment, energy, coal etc.
 Classification of Cost
o First cost
o It is the initial cost of capitalized property, including
transportation, installation, and other related initial
expenditures.

o Operation and Maintenance Cost

o It is that group of costs experienced continually over the useful
life of the activity
o Labor cost for operating and maintenance, fuel and power cost,
spares and repair cost, insurance and taxes.
o Marginal Cost
o Marginal cost is the cost of producing an extra unit. If the
total cost of 3 units is 1550, and the total cost of 4 units is
1900. The marginal cost of the 4th unit is 350.
o Fixed Cost
o Fixed cost is that group of costs involved in a going activity
whose value is constant in the future regardless of
operation
o Lease, rent, research, pays to permanent staff etc.
o a company's fixed costs do not vary with the volume of
production. Fixed costs remain the same regardless of
whether goods or services are produced or not.

o Variable Cost
o It is that group of costs that vary in some relationship to the
level of operational activity
o It is related to the rate of use or activity level
o Variable costs are a company's costs that are associated
with the number of goods or services it produces. A
company's variable costs increase and decrease with its
production volume. When production volume goes up, the
variable costs will increase. On the other hand, if the volume
goes down, so too will the variable costs.
Interest and Interest Rates
 Interest & Interest Rate
o Interest
o It is a rental amount charged by financial institutions for the
use of money
o It is the difference between end amount and the beginning
amount
o If the difference is zero than there is no interest
o Interest = Amount now – original amount
o Interest Rate
o Interest rate, or the rate of capital growth, is the rate of gain received
from an investment
o When interest paid over specific time period is expressed as %age of
principal (original) amount, it is called as interest rate
o Interest Rate = (Interest per unit time/original amount) *100
o Time unit of interest rate is interest period
o Interest period is normally 1 year
 Time Value of Money
o The change in the amount of money over a period of

time is called the time value of money

o A dollar received at some future date is not worth as

much as a dollar in hand at present

o Money makes money ….. If invested