INTRODUCTION
ENGINEERING ECONOMY
ENGINEERING ECONOMY DEFINED
• As defined by Arreola, “Engineering economy” is that branch of economics which involve the
application of definite laws of economics, theories of investment and business practices to
engineering problems involving cost. It is also defined to be the study of economic theories
and their application to engineering problems with concept of obtaining the maximum benefit
at the least cost as a basis for decision. It also involves the study of cost features and other
financial data and their application in the field of engineering as a basis for decision.
• As defined by Kasner, “Engineering economics” is equated with practicality and economic
feasibility. It is also the search for the recognition of alternatives which are then compared
and evaluated in order to come up with the most practical design and creation.
• As defined by Sullivan, et al. “Engineering economy” is the systematic evaluation of the
economic merits of proposed solutions to engineering problems.
IMPORTANT USES OF ENGINEERING
ECONOMY
• Seeking new objectives for the application of engineering – An important use of engineering
economy is to seek new objectives for engineering application. Engineers are constantly
seeking new and wider application of their technical knowledge for the benefit of mankind
and in line with this, engineering economy provides basic principles and laws.
• Discovery of factors limiting the success of a venture or enterprise – upon knowing the
objectives, next is to determine ways and means to attain such objectives. With Engineering
Economy the so-called limiting factors which may hinder the success of a project are being
discovered.
• Comparison of alternatives as a basis for decision – The principles of engineering economy
helps to point out the analysis of choosing the best alternatives on a quantitative basis.
IMPORTANT USES OF ENGINEERING
ECONOMY
• Analysis of possible investment of capital – Engineering economy enables engineers to
consider all aspects of investment from both the technical and financial viewpoints. It
provides several patterns of analysis to determine rate of return, annual costs and pay
out periods, which all serves as bases for decision.
• Determination of bases for decision – Engineers‟ main concern is on future actions, that
is on what to do and not on what has been accomplished. Decisions on future actions
are more valid and accurate if the principles of engineering economy are correctly
applied.
WHAT ARE THE PRINCIPLES OF ENGINEERING
ECONOMY?
• Principle 1. Develop the alternatives. The choice is among alternatives.
• Principle 2. Focus on the differences. Only the difference in expected outcomes is
considered.
• Principle 3. Use a consistent viewpoint. Prospective outcomes of the alternatives,
economic, etc. should be considered.
• Principle 4. Use a common unit of measure. Using a common unit of measurement of the
possible outcomes in comparing alternatives.
WHAT ARE THE PRINCIPLES OF ENGINEERING
ECONOMY?
• Principle 5. Consider all relevant criteria. Consider both monetary and other unit of
measure in measurement of outcomes.
• Principle 6. Make uncertainty explicit. Uncertainty is inherent in projecting future
outcomes and should considered in their analysis and comparison.
• Principle 7. Revisit your decisions. Projected results and decisions should be compared
with actual results to improved the decision process.
THE ENGINEERING ECONOMIC ANALYSIS
PROCEDURE
1. Problem recognition, definition, 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 alternative.
6. Performance monitoring and post evaluation results
