Engineering Economic Decisions

Chapter 1
Fundamentals of Engineering Economics

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What is All about an Engineering Economic Decision?

Learning Objectives

An overview of a variety of engineering economic decision problems.

Understanding the term engineering economic decision.

Understanding the fundamental principles of engineering economics.

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Engineering Economic Decisions

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Predicting the Future

Estimating a Required investment

Forecasting a product demand

Estimating a selling price

Estimating a manufacturing cost

Estimating a product life

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Role of Engineers in Business
Create & Design

Engineering Projects

Analyze Evaluate

Production Method Expected Profitability

Engineering Safety Timing of Cash Flows
Environmental Impact Degree of Financial Risk
Market Assessment Impact on Financial Statements
Firms Market Value Stock Price

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Accounting Vs. Engineering Economy

Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

Past Future
Present

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Two Factors in Engineering Economic Decisions

The factors of time and uncertainty are the defining

aspects of any engineering economic decisions

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 Fundamental Principles of Engineering Economics

1. A nearby dollar is worth more than a distant dollar

2. All it counts is the differences among alternatives

3. Marginal revenue must exceed marginal cost

4. Additional risk is not taken without the expected additional return

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

Today 6-month later

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Principle 2: All it counts is the differences among alternatives

Monthly Fuel Monthly Cash outlay Monthly Salvage

Cost Maintenance at signing payment Value at end
Option 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

Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

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

Investment Class Potential Expected

Risk Return
Savings account Low/None 0.1%
(cash)

Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%

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

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