Introduction To Engineering Economy

CHAPTER 1
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INTRODUCTION TO
ENGINEERING ECONOMY
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WHAT IS ECONOMICS ?
The study of how limited
resources is used to
satisfy unlimited human
wants
WHAT IS ECONOMICS ?
The study of how individuals and
societies choose to use scarce
resources that nature and previous
generations have provided.
Engineered alternatives should first be derived by a "customer" focused
process (e.g., the Pugh Method).
Concentrate your efforts on the differences of significance between design

alternatives. (Let Pareto be your guide.)
Opposing interests must be consistently represented throughout the design.

Near-term and long-term monetary consequences over the life cycle must
be taken into account for balanced decision making.
Outline and integrate all criteria considered to be important to the
success of the design.
Maximize cost-effectiveness of your efforts by communicating

your ideas to other professionals.
Improve your design by soliciting continual customer feedback.

Continual improvement is the key to long-term success.
Remember... nobody ever gets ahead by standing still.
Resources
• Land
• Labor
• Capital
LAND
All gifts of nature, such as: water, air,
minerals, sunshine, plant and tree
growth, as well as the land itself which
is applied to the production process.
LABOR
The efforts, skills, and knowledge of
people which are applied to the
production process.
CAPITAL
• Real Capital (Physical Capital )
– Tools, buildings, machinery -- things
Dollarwhich
Bills have been
produced which are used in further production
• Financial Capital
– Assets and money which are used in the production
process
• Human Capital
– Education and training applied to labor in the
production process
Origins of Engineering Economy
The perspective that ultimate economy is a

concern to the engineer and the availability of
sound techniques to address this concern
differentiate this aspect of modern engineering
practice from that of the past.
Origins of Engineering Economy
• Pioneer: Arthur M. Wellington, civil engineer

latter part of nineteenth century;
addressed role of economic analysis in engineering
projects;
area of interest: railroad building
• Followed by other contributions which emphasized
techniques depending on financial and actuarial
mathematics.
PRINCIPLES OF ENGINEERING ECONOMY
1. Develop the Alternatives;

2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
DEVELOP THE ALTERNATIVES
The final choice (decision) is among
alternatives. The alternatives need to
be identified and then defined for
subsequent analysis.
FOCUS ON THE DIFFERENCES
Only the differences in expected future
outcomes among the alternatives are
relevant to their comparison and should be
considered in the decision.
USE A CONSISTENT VIEWPOINT
The prospective outcomes of the
alternatives, economic and other, should be
consistently developed from a defined
viewpoint (perspective).
USE A COMMON UNIT OF
MEASURE
Using a common unit of measurement to
enumerate as many of the prospective outcomes
as possible will make easier the analysis and
comparison of alternatives.
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 the outcomes
enumerated in the monetary unit and those expressed in
some other unit of measurement or made explicit in a
descriptive manner.
MAKE UNCERTAINTY EXPLICIT
Uncertainty is inherent in projecting

(or estimating) the future outcomes of
the alternatives and should be
recognized in their analysis and
comparison.
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.
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 involves two
or more alternatives and normally includes other
engineering knowledge and input.
ENGINEERING ECONOMIC ANALYSIS PROCEDURE
1. Problem recognition, formulation, and evaluation.
2. Development of the feasible alternatives.
3. Development of the cash flows for each alternative.
4. Selection of a criterion ( or criteria).
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post-evaluation results.
ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
Modern cost accounting may satisfy any or all of the
following objectives:
1. To determine the cost of products or services
2. To provide a rational basis for pricing goods or services
3. To provide a means for controlling expenditures
4. To provide information on which operating decisions may
be based and the results evaluated

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CHAPTER 1

Concentrate your efforts on the differences of significance between design

Opposing interests must be consistently represented throughout the design.

Maximize cost-effectiveness of your efforts by communicating

Improve your design by soliciting continual customer feedback.

The perspective that ultimate economy is a

• Pioneer: Arthur M. Wellington, civil engineer

1. Develop the Alternatives;

Uncertainty is inherent in projecting

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