Principles of Engineering Economy
Engineering Economy
- Involves the systematic evaluation of economic
merits of proposed solutions to engineering
problems
- It is the study of the desirability of making an
investment
- Solutions to engineering problems must
demonstrate a positive balance of long-term
benefits over long-term costs, they must also:
o promote the well-being and survival of
an organization,
o embody creative and innovative
technology and ideas,
o permit identification and scrutiny of their
estimated outcomes, and
o translate profitability to the “bottom line”
through a valid and acceptable measure
of merit.
Principles of Engineering Economy
PRINCIPLE 1: DEVELOP THE ALTERNATIVES
- The choice (decision) is among alternatives.
- The alternatives need to be identified and then
defined for subsequent analysis.
PRINCIPLE 2: 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.
PRINCIPLE3: USE A CONSISTENT VIEWPOINT
- The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint
(perspective).
PRINCIPLE 4: USE A COMMON UNIT OF MEASURE
- Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the analysis of
alternatives.
PRINCIPLE 5: 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 both the
outcomes enumerated in the monetary unit and
those expressed in some other unit of
measurement or made explicit in a descriptive
manner.
PRINCIPLE 6: MAKE UNCERTAINTY EXPLICIT
- Risk and uncertainty are inherent in estimating
the future outcomes of the alternatives and
should be recognized in their analysis and
comparison.
PRINCIPLE 7 – REVISIT YOUR DECISIONS
- Improved decision making results from an
adaptive process; to the extent practicable, initial
projected outcomes of the selected alternative
should be subsequently compared with actual
results achieved
ENGINEERING ECONOMIC ANALYSIS PROCEDURE
1. Problem recognition, formulation and
evaluation.
2. Development of the feasible alternatives.
3. Development of the outcomes and 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 of results.
COST CONCEPTS
- The word cost has meaning that vary in usage.
- Since concepts are ideas generalized from
particular instances or situations, the cost
concepts used in an engineering economy study
will depend on the problem or situation and the
decision to be made.
Fixed, Variable, and Incremental Costs
Fixed Costs – unaffected by changes in the activity
level over a feasible range of operations for the capacity
or capability available.
Variable Costs – are those associated with an operation
that vary in total with the quantity of output or other
measures of activity level.
Incremental Costs or Incremental Revenue – refers to
additional cost or revenue that results from increasing
the output of the system by one (or more) units.
