Introduction To Engineering Economy: Do Its Benefits Exceed Its Cost?

IntroductiontoEngineeringEconomy
Chapter 01
EIND 4303: Engineering Economy
Dr.Sadiq Abdelall
AssistantProfessor
IndustrialEngineeringDepartment
IslamicUniversityofGaza
Page1
CourseObjective
The purpose of this course is to develop and illustrate the principles and
methodology required to answer the basic economic question of any

design: Do its benefits exceed its cost?
It is about making decision. If one understand the decisionmaking
process and has tools for obtaining realistic comparisons between

alternatives, one can expect to make better decision.
Dr.Sadiq Abdelall
AssistantProfessor
Page2
Whatisthiscourseabout?
Introduction to engineering economy
Discrete and continuous compounding
Cost
Sensitivity analysis
concepts
Environment
and
economic
Breakeven analysis
Time value of money
Present and future worth
Annual equivalent cash flow
Payback period
Internal rate of return
Uncertainty and risk analysis

Comparing alternatives
Alternatives with unequal lives
Cost/benefit analysis
Retirement and replacement analysis
Depreciation
Dealing with uncertainty
Minimum acceptable rate of return
Dr.Sadiq Abdelall
AssistantProfessor
Page3
Books
Text Book:
W. G. Sullivan, E. M. Wicks, and C. P. Koelling, "Engineering Economy," 14th edition,
Prentice Hall, 2009.
Reference Book:
J. White, K. Case, and D. Pratt, Principles of Engineering Economic Analysis 5th
edition, John Wiley & Sons. Inc. 2010

Newnan, Donald G., Ted G. Eschenbach, and Jerome P. Lavelle, Engineering
Economic Analysis 9th edition, Oxford University Press, 2004.

Thuesen and Fabrycky, Engineering Economy 8th edition, Prentice Hall, 1993 .
Other references at the IUG library
Dr.Sadiq Abdelall
AssistantProfessor
Page4
Grading
70% Exams (20% midterm, 50% final)
15% Quizzes (approx. at the end of each chapter)
15% Project
Dr.Sadiq Abdelall
AssistantProfessor
Page5
HowtoAchieveExcellent?
1. Read your textbook early (and bring it to class with
you). Also bring your calculator.

2. Avoid absences come to class. Youve paid for it,
so take full advantage of class time.

3. Do the extra credit assignment.
4. Pretest yourself (on lots of problems). Check your
answers against Appendix G.

5. Do sooner than the night before the exam.
6. Take worthwhile notes in class.
Dr.Sadiq Abdelall
AssistantProfessor
Page6
Agenda
Engineering Economy
Principles of Engineering Economy
Engineering Economy Analysis Procedure
Dr.Sadiq Abdelall
AssistantProfessor
Page7
Agenda
Engineering Economy
Principles of Engineering Economy
Engineering Economy Analysis Procedure
Dr.Sadiq Abdelall
AssistantProfessor
Page8
WhatisEngineering?
According to Accreditation Board for Engineering and Technology (ABET)
Engineering is: the profession in which a knowledge of mathematical

and natural sciences gained by study, experience, and practice is applied
with judgment to develop ways to utilize, economically, the materials
and forces of nature for the benefits of mankind.
Dr.Sadiq Abdelall
AssistantProfessor
Page9
WhyisEngineeringEconomyImportant?
Engineers DESIGN things and perform PROJECTS
Therefore, engineers must be concerned with the economic aspects of designs
that they recommend, and projects that they perform
What can go wrong when we dont have the concepts of engineering
economics?
An engineer who is unprepared to excel at engineering economy is not properly
equipped for her/his job.
Dr.Sadiq Abdelall
AssistantProfessor
Page10
WhatisEconomics?
The study of how limited resources is used to satisfy unlimited human
wants.
The study of how individuals and societies choose to use scarce
resources that nature and previous generations have provided.
Dr.Sadiq Abdelall
AssistantProfessor
Page11
EngineeringEconomy
Involves the systematic formulation and evaluation of the economic
outcomes of proposed solutions to engineering problems.

Engineering economy is the dollerandcent side of the decisions that
engineers make or recommend as they work to position a firm to be

profitable in a highly competitive marketplace.
Inherent to these decisions are tradeoffs among different types of costs
and performance (response time, safety, weight, reliability, etc.)

provided by the proposed design or problem solution.
The mission of engineering economy is to balance these tadeoffs in the
most economical manner.

Dr.Sadiq Abdelall
AssistantProfessor
Page12
WhatKindsofQuestionsCanEngineeringEconomyAnswer?
It will help you make good decisions:
Professional life (Regardless of whether you go into the private or public sector):
Which engineering projects are worthwhile?
Which engineering projects have a higher priority?
How should the engineering projects designed?
Personal life:
Is going to university a good investment?
How to achieve the long term financial goal?
how to make short and long term investment decisions?
Knowledge of engineering economics will have a significant impact on
you personally!
Dr.Sadiq Abdelall
AssistantProfessor
Page13
EngineeringEconomyAnalysisCanPlayaRoleinManyTypes
ofSituations:
Choosing the best design for a highefficiency gas furnace.
Selecting the most suitable robot for a welding operation on an
automotive assembly line.

Determining the optimal staffing plan for a computer help desk.
Making a recommendation about whether jet airplanes for an overnight
delivery service should be purchased or leased.

Example:
If an engineer at an auto company invents a new transmission lubricant that increases
fuel mileage by 10% and extends the life of the transmission by 30,000 miles, how
much can the company afford to spend to implement this invention? Engineering
economy can provide an answer
Dr.Sadiq Abdelall
AssistantProfessor
Page14
HowDoesEngineeringEconomyDoThis?
BYUSINGSPECIFIC
MATHEMATICALRELATIONSHIPS
TOCOMPARETHECASHFLOWSOFTHEDIFFERENTALTERNATIVES
Dr.Sadiq Abdelall
AssistantProfessor
Page15
SevenFundamentalPrinciplesofEngineeringEconomy
Principle 1 Develop the alternatives
Principle 2 Focus on the differences
Principle3 Use a consistent viewpoint
Principle 4 Use a common unit of measure
Principle 5 Consider all relevant criteria
Principle 6 Make uncertainty explicit
Principle 7 Revisit your decisions
Dr.Sadiq Abdelall
AssistantProfessor
Page16
Principle1:DeveloptheAlternatives
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
Dr.Sadiq Abdelall
AssistantProfessor
Page17
Principle2:FocusontheDifferences
Only the differences in expected future outcomes among the
alternatives are relevant to their comparison and should be considered

in the decision.
If all perspective outcomes of the feasible alternatives were exactly the same,
there would be no need for comparison

Outcomes that are common to all alternatives can be disregarded in the
comparison and decision.
Dr.Sadiq Abdelall
AssistantProfessor
Page18
Principle3:UseaConsistentViewpoint
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.
Dr.Sadiq Abdelall
AssistantProfessor
Page19
Principle4:UseaCommonUnitofMeasure
Using a common unit of measurement to enumerate as many of the
prospective outcomes as possible will simplify the analysis of the

alternatives.
For economic consequences, a monetary unit such as dollars is the common
measure.
Other outcomes (which do not initially appear to be economic) should be
translated into monetary unit.

If not possible to quantify the expected future outcomes, describe these
consequences explicitly so the information is useful to the decision maker in the

comparison of the alternatives.
Dr.Sadiq Abdelall
AssistantProfessor
Page20
10
Principle5:ConsiderAllRelevantCriteria
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 in a descriptive
manner.
The primary criterion relates to the longterm financial interests of the owners of
the organization.
Other organizational objectives of nonmonetary attributes could be an additional
criteria in the decisionmaking process.
Dr.Sadiq Abdelall
AssistantProfessor
Page21
Principle6:MakeRiskandUncertaintyExplicit
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.

The magnitude and the impact of future outcomes of any course of action are
uncertain.
The probability is high that today's estimates of future cash receipts and expenses
will not be what eventually occurs.
Dr.Sadiq Abdelall
AssistantProfessor
Page22
11
Principle7:RevisitYourDecisions
Improve decision making results from an adaptive process; to the
extend practicable, the initial projected outcomes of the selected

alternative should be subsequently compared with actual results
achieved.
A good decisionmaking process can result in a decision that has an undesirable
outcome.
Other decision, even though relatively successful, will have results significantly
different from the initial estimates of the consequences.

Learning from and adapting based on experience are essential and are indicators
of a good organization
Dr.Sadiq Abdelall
AssistantProfessor
Page23
EngineeringEconomyAnalysisProcedure
Here is an approach to problemsolving:
Problem recognition, definition, and evaluation
Define the goal or objectives
Define the feasible alternatives
Collect all relevant data/information (difficult)
Evaluate each alternative
Select the best alternative
Implement and monitor the decision
Dr.Sadiq Abdelall
AssistantProfessor
Thisisthemajorroleof
engineeringeconomics
Page24
12
Example1.1
The management team of small furniture manufacturing company is
under pressure to increase profitability to purchase a more modern

patterncutting machine. One proposed solution is to sell waste wood
chips to local charcoal manufacturer instead of using them to fuel space
heaters for the company's office and factory areas.
a.
Define the companys problem. Next, reformulate the problem in a variety of

creative ways.
b.
Develop at least one potential alternative for your reformulated problems in part
(a).
Dr.Sadiq Abdelall
AssistantProfessor
Page25
Example1.2
A friend of yours brought a small apartment building for $100,000 in a
college town. She spent $10,000 of her own money for the building and
obtained a mortgage from a local bank for the remaining $90,000. the
annual mortgage payment to the bank is $10,500. Your friend also
expect annual maintenance on the building and grounds will be
$15,000. There are four apartments (two bedrooms each) in the
building that can each be rented for $360 per month.
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).
Dr.Sadiq Abdelall
AssistantProfessor
Page26
13
References
Shortcut
Source
[Sul09]
W.G.Sullivan,Elin M.Wicks,andJamesT.Luxhoj,"EngineeringEconomy,"14thed.,PrenticeHall,2009
[New04]
Newnan,DonaldG.,TedG.Eschenbach,andJeromeP.Lavelle,EngineeringEconomicAnalysis,9th ed.,NewYork:
OxfordUniversityPress,2004
Dr.Sadiq Abdelall
AssistantProfessor
Page27
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IntroductiontoEngineeringEconomy

methodology required to answer the basic economic question of any

process and has tools for obtaining realistic comparisons between

Discrete and continuous compounding

Uncertainty and risk analysis

Minimum acceptable rate of return

Prentice Hall, 2009.

edition, John Wiley & Sons. Inc. 2010

Economic Analysis 9th edition, Oxford University Press, 2004.

you). Also bring your calculator.

so take full advantage of class time.

answers against Appendix G.

Engineering is: the profession in which a knowledge of mathematical

that they recommend, and projects that they perform

What can go wrong when we dont have the concepts of engineering

equipped for her/his job.

resources that nature and previous generations have provided.

outcomes of proposed solutions to engineering problems.

engineers make or recommend as they work to position a firm to be

and performance (response time, safety, weight, reliability, etc.)

most economical manner.

Knowledge of engineering economics will have a significant impact on

automotive assembly line.

delivery service should be purchased or leased.

identified and then defined for subsequent analysis.

because of the resulting impact on the quality of the decision.

Creativity and innovation are essential to the process.

alternatives are relevant to their comparison and should be considered

there would be no need for comparison

comparison and decision.

should be consistently developed from a defined viewpoint

firm, would normally be used.

prospective outcomes as possible will simplify the analysis of the

translated into monetary unit.

consequences explicitly so the information is useful to the decision maker in the

of a criterion (or several criteria). The decision process should consider

criteria in the decisionmaking process.

the alternatives and should be recognized in their analysis and

consequences associated with each of them.

will not be what eventually occurs.

extend practicable, the initial projected outcomes of the selected

different from the initial estimates of the consequences.

under pressure to increase profitability to purchase a more modern

Define the companys problem. Next, reformulate the problem in a variety of

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

What are her alternatives? (Identify at least three)

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