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MGTS 301 – Engineering ECONOMY

Hari Charan Ghimire

Department of Mechanical Engineering School of Engineering

Course Objectives:

This course covers the basic topics of engineering economic analysis upon which the practice of financial project analysis is built and tools to evaluate engineering projects. Engineering economy is the heart of decision-making. This will eventually provide students a sound understanding of the principles, basic concepts and methodology of engineering economy and help them develop proficiency with these methods and with the process for making rational decisions regarding situations they are likely to encounter in professional practice.

Lecture Arrangements:

For CE + CS

Tuesday

9.00-11.00 hrs

Wednesday

9.00-11.00 hrs

For EE

Tuesday

2.00-4.00 hrs

Friday

10.00-12.00 hrs

Course Materials:

Students are strongly advised and encouraged to refer the textbooks and other reference materials from university library and web pages. Reference materials for the lectures and discussions shall be taken from the following book and web site. WG Sullivan et al, Engineering Economy, PEA 2001 URL: www.prenhall.com/sullivan_engineering Chan S. Park, Contemporary Engineering Economics URL: www.prenhall.com/park

Assessments:

Students will be evaluated continuously based upon their performances in the classes, quizzes, case studies and other woks/assignments allocated during the course work. Class tests will carry less than 50%; case studies and assignments will carry more than 40%, and class activities/participation/attendance will carry 10% of the total internal marks. Students are required to do the numerical problems (assignment) in Excel and as well as in the hard copy. Some of the tests will be also taken in the computer. At the end of the semester, the students will be required to select a live project and the economic analysis of the project is required to be done. As per the KU law, students maintaining less than 75% attendance will not be eligible to appear in the end-semester examination.

Lesson Plan:

The course has been divided in to different modules. Approximately 50 lectures will be taken for completing the course.

Module 1 Introduction to Engineering Economy Origin, principles, engineering economy and design process, engineering economic analysis procedure, accounting and engineering economic studies , types of organization

Module 2 Method of raising capital, Cost Concepts and Design Economics Introduction, cost estimating and cost terminology, the general economic environment, break-even point, cost-driven design optimization

Module 3 Money-Time Relationships and Equivalence Introduction, simple and compound interests, Equivalence-concept, cash flow diagrams, simple interest formula for present, future and annual equivalents

Module 4 Applications of Money-Time Relationships MARR, PW, FW and AW method, IRR and ERR method, payback period method

Module 5 Comparing Alternatives Useful lives equal to study period, useful lives are different among alternatives, capitalized worth method, mutually exclusive combinations of projects

Module 6 Depreciation and Income Taxes Introduction, depreciation concepts and terminology, classical depreciation Methods.Taxation in Nepal- Taxation laws, corporate tax structure, individual tax structure and depreciation rates in taxes

Module 7 Cost Estimation Techniques Integrated approach to develop the net cash flows, parametric cost estimating, cost estimation in the design process, value engineering

Module 8 Price Changes and Exchange Rates Consumer price index and the producer price index, foreign exchange rates, price inflation or deflation, project analysis with price changes

Module 9 Replacement Analysis Reasons and factors for replacement studies, economic life

Module 10 Dealing with Uncertainty Risk and uncertainty, sensitivity analysis, risk adjusted MARR

NOTE: FOR THE NUMERICAL PORTION, THE WAYS OF SOLVING PROBLEMS IN EXCEL WILL ALSO BE DISCUSSED IN THE CLASS.

Module 1 introduces the subject of engineering economy, discusses its critical role in engineering design and analysis and discusses the basic principles of the subject. It also discusses about the different types of organization.

Module 2 describes some of the basic cost terminology and concepts that are used in this course and illustrates how they should be used in engineering analysis and decision-making. It also describes about the ways of raising of funds.

Module 3 discusses the return to capital in the form of interest (or profit) and illustrates how basic calculations are made with respect to time value of capital in engineering economy studies.

Module 4 illustrates various basic methods for making engineering economy studies considering the time value of money and describes briefly underlying assumptions and interrelationships among these methods.

Module 5 develops and demonstrates methodology for the economic analysis and comparison of mutually exclusive design alternatives for an engineering project.

Module

6

discusses

some

of

the

concepts

and

mechanics

of

depreciation

and

depletion

and

describes

their

role

in

after-tax

analysis.

Module 7 describes an integrated approach used to develop cash flows for the alternatives being analyzed in a study and delineates and illustrates selected techniques that will be useful in making such estimates.

Module 8 introduces a methodology for dealing with price changes caused by inflation and deflation and develops and illustrates proper techniques to account for these effects in engineering economic analysis.

Module 9 discusses the considerations involved in replacement studies and addresses the key question of whether an asset should be kept one or more years or immediately replaced with the best available challenger.

Module 10 presents and discusses methods that are useful in analyzing the economic consequences of engineering projects where uncertainty exists.