Chapter 1: What Is Chapter 1: What Is Engineering Economics?Engineering Economics?

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A subset of engineering that requires a technical economic analysis, with a goal of deciding which course of action best meets a technical performance criteria and uses scarce capital in a prudent manner.

To be a subject to study the theories and techniques of maximizing an efficiency of the usage of the

Efficiency=Output Input

Definition of EE

Engineering Economics

To be defined as a subject of a decision science for a real investment project such as a purchase of machineries & equipments, a process improvement, and a development of a new process & product.

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Identify a problem

Determine all possible alternatives

Obtain data necessary to analyze

Evaluate economicallyall the alternatives

•Cutting a steel pannel

•Steel saw•Electric saw•Automatic cutting euqipment

• Initial investment cost•Operating expenses•Profit, etc.

Post Audit

•NPV•AW• IRR

•To post audit the project currently being implemented

Capital Budgeting Process

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Feasibility Study

Market Analysis

Analyze

1. a market characteristics

2. A supply_demand

3. A market share

4. Estimate demand

in future

Prod. Tech Analysis

Examine

1. Product Characteristics

2. Man-power plan

3. Establish a production plan

4. Estimate a product cost

Financial Analysis

1. Estimate a required capital

2. Analyze an in-outcome

3. Prepare financial statements

4. Analyze a cash flows

4. Evaluate profitability

Engineering Economics as Decision Science

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Analysis oriented with a cash flow

Investment : a series of actions to take to get more utility of wealth in the future by sacrifycing a current utility of wealth

(Traits: uncertainty, irreversibility, and flexibility of investment timing)

Sources of Fund i) equity: stocks ii) liability: bonds and term-loan

Economic Investment Decision-Making : Engineering Projects Economic Investment Decision-Making : Engineering Projects

A final decision about a firm’s investment is made in a stock market

A Theoretical Evolution of EE

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*Engineering: A profession in which knowledge of

the mathematical and natural science gained by

study, experience, and practice is applied with

judgement to develop the ways to utilize,

economically, the materials and forces of nature for

the benefits of mankind.

Economics: the study of how societies use scarce

resources to produce valuable commodities and

distribute them among different people.

Engineering and Economics

The Right Aptitude of An Investment Appraiser

Agreement

16Trillion won

(without a heavy work for Han & Nakdong)

8Tri 350bil won

2.3

300,000

25.26million ton

24hours

Disagreement

50Trillion won

(add up the extra costs)

3Tri 665.4Bill won

0.05

380

5.60 million ton

72hours

Issues

1.Construction Cost

2.Income of an aggregate sale

3.B/C ratio

4.Creation of Jobs

5.A canal traffic

6 .transportation hours

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A Historical Background of EE

Sumer Period in Methopotamia, Babylon and Assiria(3,000~600 B.C.) (A main transaction was for silver and grains. The silver was used for a

provincial government and the grains were used for a central government. The maximum annual interest rates were fixed at 33.33% and 20% for the grains and silver, respectively)

Fibonacci introduced the Arabic numbers to Europe in 1202 with a compound interest rate.

Pacioli published his book in 1494 and suggested some problems regarding to a simple and compound interest rate.

Jean Trenchant first published the interest tables in 1558 in France.(The interest tables were used to calculate the value of a loan with which the

cash in and outflows were obviously transacted.) Wellington first used the interest tables and present value method to

economically evaluate the real investment project for installing a railroad in 1887.

Pennel(1914), Deventer(1915), Goldman(1920), Fisher(1915), Grant(1930) EE Committee(1936), The Engineering Economist(1955 by Lesser at SIT

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Prin. 1: The value of 10,000 won today be equivalent to the value of 20,000won tomorrow.

Prin. 2: Consider only the differences in the cash flows.

Prin. 3: A marginal income must be greater than a marginal cost.

Prin. 4: Risk is accompanied with Return.

4 Principles of EE

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Investment must be exploited to maximize the quality of human beings’ life as much as possible

Investment is not a linkage to simply transfer one’s income to other’s

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