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Group Members

Sohail Azhar (BSCT01103024) Imran Irshad (BSCT01103085)

TOPIC

Importance Of Engineering Economics

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Questions What is engineering economics? Who cares about it? Why do engineers have to study it?

Engineering Economics Application of engineering or

mathematical analysis and synthesis to decision making in economics.

The knowledge and techniques concerned with evaluating the worth of commodities and services relative to their cost.

Analysis of the economics of engineering alternatives.

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Money and Success This course has to do with money

and success. Most of us want some measure of

success in life. For better or for worse, money (and

economics) has a lot to do with success.

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Economics and Engineering Economics is a big part of an engineer's

job. The engineer must translate scientific ideas in

products and systems that better mankind. Ideas need to make sense economically and

the engineer must be able to convince others that this is so.

That is true of any organization that you might join upon graduation.

Why Engineers Study Engineering Economics Engineers students should prepared

themselves with economic empowerment so that they could manage their wealth, help them in starting their own business or during managerial period.

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Why Engineers Study Engineering Economics  It is because money is one of important

factor in completing a project. Furthermore, fresh graduates also need to manage their wealth well since a lot of graduates facing problem because lack of information about the loans that they have made.

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Steps in an Engineering Economy Study

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The Goal

For-profit organizations have for goal to make money - now and in the future.

Not-for-profit must remain financially sound.

Both types must worry about money or they will probably cease to exist.

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Economics and World Institutions

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Economics and World Institutions World: International trade, balance of

payments, currency evaluation Federal, State and Local: Tax spending,

GNP(Gross National Product), distribution of resources, support of institutions, public welfare

Organization: Revenues, costs, profit, return on investment, stock prices

You: Salary, investments, savings, borrowing

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Business Decisions are not Simple Product design Process design (inspection, operations, raw

materials) Machine selection Facility design

All decisions are interrelated. You can't make one without affecting many others. This is especially true when multiple products, periods, stages are involved.

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The Question is: How do you operate in this environment? How does the organization you work for

operate?

Engineering economics is entirely involved with evaluating the comparison of alternatives that involve spending money in hopes of earning more.

Economic Enviorment Much less of a quantitative nature is

known about economic environments -- this is due to economics being involved with the actions of people, and the structure of organization.

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Economic Environment Satisfaction of the physical and

economic environments is linked through production and construction processes. Engineers need to control systems to achieve a balance in attributes in both the physical and economic environments, and within the bounds of limited resources. 

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Fundamental Principles of Engineering Economics

Principle 1: A nearby dollar is worth more than a distant dollar

Principle 2: All it counts is the differences among alternatives

Principle 3: Marginal revenue must exceed marginal cost

Principle 4: Additional risk is not taken without the expected additional return

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`

Today 6-month later

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Principle 2: All it counts is the differences among alternatives

Option Monthly Fuel Cost

Monthly Maintenance

Cash outlay at signing

Monthly payment

Salvage Value at end of year 3

Buy $960 $550 $6,500 $350 $9,000

Lease $960 $550 $2,400 $550 0

Irrelevant items in decision making

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Principle 3: Marginal revenue must exceed marginal cost

Manufacturing cost

Sales revenueMarginal revenue

Marginal cost

1 unit

1 unit

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Principle 4: Additional risk is not taken without the expected additional return

Investment Class Potential

Risk

Expected

Return

Savings account (cash)

Low/None 1.5%

Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

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Engineering Economic Analysis - Seven Steps

1. Recognize and formulate the problem.

2. Develop feasible alternatives.

3. Develop cash flows for each alternative.

4. Select a criterion (or criteria) for determining the preferred alternative.

5. Analyze and compare alternatives.

6. Select the preferred alternative.

7. Perform monitoring and post-evaluation.

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