MODULE 1: Introduction

Module Rationale:

This module contains the definition, principles, design process, cost concepts for
decision making and present economic studies. The viewpoint of the student, as well as the
teaching professional, to offer suggestions and modifications to curriculum structures allowing
for the adjustment of knowledge based on decision making, teaching, learning experiences from
an engineering economy.

Module Outcomes:
At the end of the module, you are expected to:
1. Know the basic definition of engineering economy;
2. Understand the principles and process of engineering economics;
3. Analyze the cost concepts for decision making;
4. Influence the economic and industry through economic studies

LESSON 1: Definition and Principles of Engineering Economy

Estimated Time: 1.5 hours

Lesson Outcomes:

At the end of the lesson, you are expected to:

1. Define the engineering, economy and engineering economy
2. Why engineering economy is important to engineers
3. Understand the principles of engineering economics

Lesson Contents:

Engineering is a profession in which a knowledge of the mathematical and natural

sciences gained by study, experience, and practice is applied with judgment to develop ways to
utilize, economically, the materials and forces of nature for the benefit of mankind.
Economics is the study of how limited resources are used to satisfy unlimited human
wants. It also studies of how individuals and societies choose to use scarce resources that
nature and previous generations have provided. What are these resources? Land, Labor,
Capital.
1. Land is 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
2. Labor are the efforts, skills, and knowledge of people which are applied to the
production process.
3. Capital has three (3) Areas:
a. Real Capital (Physical Capital ) - are tools, buildings, machinery -- things
which have been produced which are used in further production.
b. Financial Capital – are assets and money which are used in the production
process.
c. Human Capital - education and training applied to labor in the production
process.

Engineering Economy is an economic decision making for engineering systems. This

definition may seem restricted to engineering projects and systems only, engineering economy
however is also the study of industrial economics and the economic and financial factors which
influence industry.
It is also collection of techniques that simply comparisons of alternatives on an economic
basis. However, it is not a method or process for determining what the alternatives are. It begins
only after the alternatives have been identified. If the best alternative is actually one that the
engineer has not even recognized as an alternative, then all engineering economic analysis
tools will not result in its selection.
Engineers are the people who are familiar with all the technicalities of machinery and
production therefore they are the best judges of;
a) the useful lives of an asset, and
b) they also have the technical knowledge to calculate the number of units a
proposed plant would produce when operational.

In today’s competitive world of business it has become essential that engineers should
practice financial project analysis for engineering projects and make rational decision.
Engineering economy also includes the study of accounting practices for manufacturing
concerns. The unique features of accounting for manufacturing concerns are process costing,
bath costing, cost allocation, etc.
 Engineering economy deals with justification and selection of projects. Many engineers
work on projects which address a specified activity or a problem. Any decision regarding the
project must be justified.
In business environment, many if not all, decisions are justified using monetary criteria
such as “profit”. Such decisions are made at the managerial level and many engineers become
managers in manufacturing environment.
Therefore, all engineers, regardless of their employment, should know methods and
tools used in evaluation of projects.
Even though, engineering economy deals mostly with selection of projects in business
environment, the tools and methods can be and are used by individuals and no profit
organizations such as government, hospitals, and charitable entities, etc.

Engineer Means:
 Problem solver,
 Find new ways doing things economically,
 Engineering is the art of doing that well with one dollar which any bungler can
do with two (Arthur M. Wellington, 1887)

The Challenge:
 Every problems has multiple solutions, How to choose the best one?

As engineers not only model the stress on a column, they must

also model the economic impact of their recommendations.

Engineering is more than a problem solving

activity

Why engineering economy is important to engineers?

The value of Engineering Economics poses numerous benefits because it allows those
in industry to make strategic decisions for the companies. While macroeconomic and financial
competencies are key for business operations, engineering economics further provides a
mechanism for decision making.
 The following are why engineering is important to engineers:
1. Engineers design and create- design and build- what type of design involved?
2. Designing involves economic decisions
3. Engineers must be able to incorporate economic analysis into their creative efforts
4. Often engineers must select and implement from multiple alternatives
5. Understanding and applying time value of money, economic equivalence and cost
estimation are vital for engineers
6. A proper economic analysis for selection and execution is a fundamental task of
engineering

Principles of Engineering Economics

In order to acquire the principles of engineering economics, the development, study and

application of any discipline must begin with a basic foundation. The foundation engineering

economy to be set of principles that provide a comprehensive doctrine for developing the

methodology. These principles will be mastered as you progress these module. Once a problem

or need clearly defined, the foundation of the discipline can be discussed in terms of seven (7)

fundamental principles.

1. Develop the Alternatives

Carefully define the problem! Then the choice or decision is among alternatives.

The alternatives to be identified and then defined for subsequent analysis. Developing

and defining the alternatives for detailed evaluation is important because of the resulting

impact on the quality of the decision. Creativity and innovation are essential to the

process.

2. Focus on the Differences

Only the differences in expected future outcome among the alternatives are

relevant to the in comparison and should be considered in the decision. For example, if

you feasible housing alternatives were two residences with the same purchase (or
rental) price, price would be inconsequential to your final price. Instead, the decision

would depend on other factors, such as location and annual operating and maintenance

expenses. This simple example illustrates the Principle 2, which emphasizes the basic

purpose of an engineering economic analysis; to recommend a future course of action

based on the differences among feasible alternatives.

3. Use a Consistent Viewpoint

The prospective outcome of the alternatives, economic and other should be

consistently developed form a defined view point or perspective. The perspective of the

decision maker, which is often that of the owners of the firm, would normally be

used. The viewpoint for the particular decision be first defined and then used

consistently in the description, analysis and comparison of the alternatives.

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 the alternatives. You should also try to

translate other outcomes (which do not initially appear to be economic) into the

monetary unit. Using more than one monetary unit for Economic Analysis will complicate

the overall analysis of a project.

5. Consider All Relevant Criteria

Selection of a preferred alternative (decision making) requires the use of criteria

(several criteria). The decision process should considerable both the outcome

enumerated in the monetary unit and those expressed in some other units of

measurement or made explicit in a descriptive manner. Often, though, there are other
 organizational objectives you would like to achieve with your decision, and these should

be considered and given weight in the selection of an alternative.

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. The probability

is high that today’s estimates of. Thus, dealing with uncertainty is an important aspect of

engineering economic analysis.

7. 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.

In order to apply the economic problems, you need to understand some example issue

related to this topic.

Some examples:

1. Principles 1: If you receive 100 pesos now, you can invest it and have more money

available six months from now. This concept will be the basic foundation for all

engineering project evaluation

2. Principle 2: An economic decision should be based on the differences among the

alternatives considered.

3. Principle 3:
 4. Principle 4:

Assessment:

1. Give your own examples (find a problem) and then, apply the seven fundamental

principles of engineering economy.

2. Why is it engineering economics is important to all of us? Essay form.

LESSON 2: Concepts of Decision Making

Estimated Time: 1.5 hours

Lesson Outcomes:

At the end of the lesson, you are expected to:

1. Define the decision making and its role
2. Identify general steps on decision making
3. Analyze the steps of engineering economy study

Lesson Contents:

Decision – a choice made from available alternatives

Decision Making- process of identifying problems and opportunities and resolving them.
 The term engineering economic decision refers to all investment decisions relating

to engineering projects. The five main types of engineering economic decisions are (1) service

improvement, (2) equipment and process selection, (3) equipment replacement, (4) new product

and product expansion, and (5) cost reduction.

Characteristics of Decision Making

1. Decision making is a goal-oriented process.

2. It aims at achieving certain specifies goals of the organization.

3. Selection of process in which best alternatives sources of action is chosen from

amongst alternative courses of action.

4. A continue process because the manager is required to take decisions continuously

for different activities.

5. Consider is a both science and art

6. Responsibilities of manager at different levels of management

7. Decision making involves deep and careful thinking and hence it is a mental process.

8. Decision making can be both positive or negative

9. Decision are made for further course of action based on the past experiences and

present conditions.

Importance

1. Decision making is an important aspect of planning

2. Without decision nothing can be done

3. Performing various aspect of management function like planning, organizing, etc.

4. It helps to set objectives, prepare plans of action, introduce innovation, determine

organizational structure of the concern.

Basic Decision:

Basic decision involved long range commitment and large funds. Decisions with regard

to selection of application, selection of a product line, merger of the business are known as

Basic Decision.

1. Routine decision- decision that are to carry out the day-to-day activities.

2. Group decision- are taken by a group of persons.

3. Individual decision- the decision is taken by one person.

Example: decision taken by the Board of Director and the chief executive in

the interest of the organization as whole.

4. Policy decision- is made at top levels. These decisions are taken to determine the

basic policies and goals of the organization.

5. Operating decision- are taken to executive the policy decisions. These decisions are

taken at middle and lower management levels and are related to routine activities of

business.

6. Organizational decision- are made by the executive in his/her capacity as manager in

order to achieve the best interest in organization. This decision can be delegated

other members in the organization.

Example: adoption of strategies, framing on objectives etc.

7. Personal decision- by the manager personal capacity. This decision is not delegated.

Executive personal work

Example: Leave, medical surrender, etc.

8. Major decision- the decision with regard to the quality of the product, price of the

product and developing a new product

In order to acquire, you must understand the factors of decision making of decision

making and its process.

 Certainty
 All the information the decision maker needs is fully available

Risk
 Decision has clear-cut goals
 Good information is available
 Future outcomes associated with each alternative are subject to chance

Uncertainty
 Managers know which goals they wish to achieve
 Information about alternatives and future events is incomplete
 Managers may have to come up with creative approaches to alternatives
Ambiguity
 By far the most difficult decision situation
 Goals to be achieved or the problem to be solved is unclear
 Alternatives are difficult to define
 Information about outcomes in unavailable

The Process of Decision Making

1. Identifying the problem- recognizing problem-formulating the problem clear and

completely.

2. Analyzing the problem- collection and classification (objectives or goals)

3. Developing alternative solution for the problem- sound decision- collect identify

limited factors.

4. Evaluating the alternative- choose the best one (identify)

5. Deciding the best course of action- manager take into account the economy risk

factor, the limitation of resources feasibility of its implementation etc., past

experience, experimentation and research and analysis. (select decision to use)

6. Conversion of decision into actions- converted action, implement, and

communication, develop procedure. (select the best)

7. Control- once the decision implementation next step controlling comparing actual

with expected performance.

Engineering Economic Decision

Role of Engineers in Business

In order to apply the process of decision making, you must understand the example

related to this lesson in order to master the process on how to be a successful business

man/woman someday.
Financial Data in order to make an economic decision
Predicting the Future

Your future is your success. You have to know and understand the basic principles and

process of decision making in order to have estimating idea.

1. Estimating a Required investment

2. Forecasting a product demand

3. Estimating a selling price

4. Estimating a manufacturing cost

5. Estimating a product life

When you are dealing with process and principles, you must follow the steps that help

you to be a successful business person. The following are to be assessing on this topic in order

to have good outcome.

1. Give an example of problem that follows process of decision making and how you

can handle in order to be successful.

2. What do you think the best TRAITS of PERSON when dealing with business?

References:

https://www.slideshare.net/sujathabaranisujatha/csit3

https://www.slideshare.net/srtu99ler/engineering-economy-43033579

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