Engineering Economy

Learning Objectives
• Define what is economics and engineering
economy.
• Determine the role of engineering economy
in the decision-making process.
• Identify what is needed to successfully
perform an engineering economy study.
• Identify the engineering economy
terminologies and symbols.
 What is Economics?
• Economics
– A social science concerned with man’s
problem of using scarce resources to
satisfy human wants.
What is Engineering Economy?
• Engineering Economy
– Define as branch of economics which involves the
application of definite laws of economics, theories of
investment and business practices to engineering
problems involving cost.

– It also involves the study of cost features and other

financial data and their application in the field of
engineering as bases for decision.
– It involves the systematic evaluation of the
economic merits of proposed solutions to
engineering problems. To be economically
acceptable, solution to engineering problems must
demonstrate a positive balance of long term
benefit over long term cost, and they must also
• Promote the well being and survival of an
organization
• Embody creative and innovative technology and
ideas
• Permit identification and scrutiny of their
estimated outcomes
• Translate profitability to the bottom line through a
valid and acceptable measure of merit.
 Reason of Studying Engineering
Economics
• Engineers have wrought immense changes in
improving the economic well being of mankind
through their inventions and their applications of
scientific principles to varied problems in industry.
• In the professional life of engineers, it is readily
observed that the most successful ones are those who
gradually divorce themselves from the technical aspect
of engineering and who devote their time and efforts
to financial problems related to engineering works.
 Important Applications of
Engineering Economy
• Seeking of new objectives for the
applications of engineering.
• Discovery of factors limiting the success of a
venture or enterprise.
• Analysis of possible investment of capital.
• Comparison of alternatives as a basis for
decision.
• Determination of bases for decision.
Engineering Economy Technique

• Economy analysis
– Consider all factors affecting the economy of the
project which can be reduced to specific monetary
values. Example: ROR, Initial Capital, Working
capital…etc

• Financial Analysis
– Primary purpose is the determination of the
methods and sources of financing the project either
equity capital or borrowed capital.
• Intangible Analysis
– Determines all aspects of the project which
cannot be reduced to monetary values and
considers the uncertainty and risk inherent in
the project.
– Also include the so called judgment factor
whose analysis depends upon the judgment
of responsible persons involved in the project.
 Seven Principles of Engineering Economy

• Develop alternatives
• Focus on differences
• Use a consistent view point
• Use a common unit of measure
• Consider all relevant criteria
• Make uncertainty explicit
• Revisit your decisions
 General Relationship between Engineering
Economic Analysis and Engineering Design Process

Engineering Economic Procedure Engineering Design Process

1. Problem recognition, definition and
evaluation.
2. Development of the feasible
alternatives
3. Development of the outcomes and
cash flow for each alternative.
4. Selection of a criterion (or criteria)
5. Analysis and comparison of the
alternative
6. Selection of the preferred
alternative
7. Performance monitoring and post-
evaluation of result
1. Problem/ need definition
2. Problem/need formulation and
evaluation
3. Synthesis of possible solutions
(alternatives
4. Analysis, Optimization and
evaluation
5. Specification of preferred alternative
6. Communication
 Basic Terms in Principles of
Economics
• Goods – anything that yields satisfaction to
human
• Economic resources – inputs used in the
production of goods and services.
• Economic goods – a good which is both
useful and scarce.
• Land – natural resources
• Labor – human effort expended in production
• Capital – materials used in the production of
goods and services including money.
• Entrepreneur – organizes all other factors of
production to be used in the creation of goods
and services.
• Essentials – goods which are used to satisfy
the basic needs of man.
• Luxury goods – goods man can do without.
• Opportunity costs – cost or benefits foregone
in the alternative use of a resource
• Normative Economics – an analysis of
economics, which deals with what should be
• Positive economics – an analysis of
economics, which deals with what actually
is.
• Macroeconomics – is the division of
economics that deals with aggregates.
• Microeconomics – is the division of
economics that studies the economy in
parts
• Tangible factors – which can be expressed in terms
of monetary values.
• Intangible factors – are those which are difficult or
impossible to express definitely in terms of monetary
values.
• Perfect competition – occur when a certain product
is offered for sale by many vendors or suppliers and
no restriction against other vendor from entering the
market.
• Monopoly – opposite of perfect competition.
• Oligopoly – occurs when there are few suppliers and
any action taken by anyone of them will definitely
affect the course of action of the others.
• Market – define to be a place where sellers
and buyers come together.
• Demand – is the quantity of a certain
commodity that is bought at a certain price at
a given place and time.
• Law of Demand – states as price increases,
the demand decreases
• Supply – is the quantity of a certain
commodity that is offered for sale at a
certain price at a given place and time.
• Law of Supply – states that as price
increases, the supply also increases.
• Law of Diminishing Utility
– States that an increase in the quantity of any
good consumed or acquired by an individual
will decrease will decrease the amount of
satisfaction derived from that good.
• Law of Diminishing Returns
– States when one factor of production is fixed
in quantity or is difficult to increase, increasing
the other factors of production will result in a
less than proportionate increase in output.
 PRESENT ECONOMY
• Present Economy – involves the analysis
of problems for manufacturing a product or
rendering a service based on present or
immediate cost. The effects of time such
as interest and depreciation are negligible.
 Situations of Present Economy

• Selection of Materials
– Cost of materials and their processing are taken
into account.
• Selection of Method
– Reduces by determining the most economical
among the different methods.
• Site Selection
– Choice of factory site many factors are to be
considered which are cost of land, construction
cost…etc
• Comparison of Proficiency of Workers
– Efficiency of the workers is a factor affecting costs,
it is usually observed that worker have varying
efficiencies.
• Economy of Tool and Equipment Maintenance
– In many activities, tools have to be sharpened from
time to time and equipment have to be kept in
optimum operating condition all the time.
• Economy in the utilization of personnel
– Economy dictates that only a sufficient number of
workers be assigned to minimize idleness.
Problem 1.0
• A machine part to be machined may be made
either from an alloy of aluminum or steel. There is
an order for 8,000 units. Steel costs. P3.80 per kg.
while aluminum costs P8.70 per kg. If steel is
used, the steel per unit weighs 110 grams, for
aluminum, 30 grams. When steel is used, 50 units
can produced per hour, for aluminum, 80 units per
hour with the aid of a tool costing P640, which will
be useless after the 8,000 units are finished. The
cost of the machine and the operator is P10.80 per
hour. If all other cost are identical, determine the
material will be more economical
Problem 2.0
• A certain manufacturing company received an order for
producing 100,000 pieces of a certain machine part. A jig is
necessary for production and two design are presented
whose properties are as follows
If the only consideration is economy of operation, determine
which jig should be used.
Jig A Jig B

Estimated Life 100,000.00 100,000.00

First Cost P5000 P4200
Hr wage of
operator P30 P25
No. of pieces/hr 100 80
Problem 3.0
• The ore of a gold mine in the Mountain
Province contains, on the average, 0.5
gram of gold per ton. One method of
processing cost P1650 per ton and
recovers 93% of the gold while another
method costs only P1500 per ton and
recovers 81% of the gold. If gold can be
sold at P8500 per gram, which method is
better and by how much.
Problem 4.0
• A man decided to paint his house himself
after office hours. He can paint 25sq.m per
hr on the average. It takes him 15mins to
prepare his materials and 20 minutes to
keep the materials after painting. If there
are 900 sq.m to be painted, how long will it
take him to paint his house if he devotes
2.5hrs each day.
Problem 5.0
• An equipment installation job in the completion
stage can be completed in 40 days of 8 hour day
work, with 40 men working. With the contract
expiring in 30 days, the mechanical engineer
contractor decided to add 10 men on the job,
overtime not being permitted. If the liquidated
damages is P2,000 per day of delay, and the
men are paid P80 per day, how much money he
saved if he add workers
• Ans: P16,000
 Example 6.0
• By selling balut P5 per dozen,a vendor
gains 20%. The cost of the egg rises by
12.5%. If he sell at the same price as
before, find his new gain in %

• Ans: 6.58%
 Problem 7.0
• An engineer bidding on the asphalting of 7km stretch or road is
confronted with a problem of choosing between two possible sites
on which to set up the asphalt mixing machine.
Site A Site B
Average hauling distance 2.5km 2.75km
Monthly rental P35,000 P6,500
Installing and dismantling of P20,000 P10,000
machine

• At site A, it would be necessary to hire 2 flagmen at P150 per

working day. The job can be completed in 32 weeks working 6 days
a week. The project requires 16,670 cu.m of asphalt mix per
kilometer of road. If the asphalt mix is to be hauled by a contractor at
P42 per cubic meter - km of haul, which site is more economical.
• Ans: P949,645
 Exercises 1.0
• A paint manufacturing company uses a sand mill for fine
grinding of paint with an output of 100 liters per hour using
glass beads as grinding media. Media load in the mill is 25
kgs costing P200per kg and is fully replenished in 2 months
time at 8 hrs per day operation,25 days a month. A ceramic
grinding media is offered to paint this company, costing
P400 per kg and needs 30kg load in the sand mill but
guarantees an output of 120 liter per hour and full
replenishment of media in 3 months. If profit on paint
production is P15 per liter, which media is more profitable
and how much is the difference in profit.

• Ans: P473,000
 Exercise 2.0
• The assembly of a certain components for television
sets has been done by two skilled workers, each of
whom is paid P4 per hour and can produce 10 units
per hour. Of the 10 units, one will be defective and will
have to be discarded at a material loss of P2.50. it has
been proposed that this operation could be done by 3
persons of lesser skill who could be paid only P3.50
per hour and who as a group could complete 13 units
per hour. It is estimated that the number defects per
hour would not be changed if this alternative
procedure is used. Which procedure will you
recommend and how much is the unit cost of this
procedure.
 Exercise 3.0
• Mineral water contains 2.5kg of magnesium per ton.
By using processing method of A, 82% of the metal
can be recovered at a cost of P4 per ton of water
pump and processed. It method B is used 68% of the
available metal is recovered at a cost of only P2.80
per ton of water pumped and processed. The two
processes are substantially equal as to investment
cost and time requirements.
– If the extracted metal can be sold for P2.50 per kg which
processing method should be used and what would be the
difference in profit for your selection.
– At what selling price for the metal would the two processes be
equally economical.
 Exercise 4.0
• Jojo bought a second hand Betamax, VCR
and then sold it to Rudy at a profit of 40%
Rudy then sold the VCR to Noel at a profit
of 20%. If Noel paid P2,856 more than it
cost Jojo, How much did Jojo pay for the
unit?
THE END...