Jocelyn Corpuz Jan.

25, 2018
ChE 436 (Code: 5463) Engr. Ramiro Emerson C. Amon
INTRODUCTION
Definitions, Principles of Engineering Economy
Engineering economy, the analysis of the economic consequences of engineering
decisions, was originated by A. M. Wellington in his The Economic Theory of Railway
Location, published in 1887. It involves the systematic evaluation of the economic merits of
proposed solutions to engineering problems. Engineering Economy is the application of
economic factors and criteria to evaluate alternatives by computing a specific measure of
worth of estimated cash flows over a specific period of time.
Principles of Engineering Economy:
1. Develop the Alternatives
The final choice (decision) is among alterntives. The alternatives need to be identified
and then defined for subsequent analysis.
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.
3. Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic and other, should be
consistently developed from a defines viewpoint (perspective).
4. Use a Common Unit of Measure
Using a common unit of measure to enumerate as many of the prospective outcomes
as possible will make the easier analysis and comparison of the alternatives.
5. Consider All Relevant Criteria
Selection of a preferred alternaive (decision making) requires the use of a criterion (or
several criteria).
6. Make Uncertainty Explicit
Uncertainty is inherent in projecting (or estimating) the future outcomes of the
alternatives and should be recognized in their analysis and comparison.
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.
Engineering Economy and the Design Process
THE DESIGN PROCESS. The basic five-step process usually used in a problem-solving
works for design problems as well. Since design problems are usually defined more vaguely
Jocelyn Corpuz Jan. 25, 2018
ChE 436 (Code: 5463) Engr. Ramiro Emerson C. Amon
and have a multitude of correct answers, the process may require backtracking and iteration.
Solving a design problem is a contingent process and the solution is subject to unforeseen
complications and changes as it develops. Until the Wright brothers actually built and tested
their early gliders, they did not know the problems and difficulties they would face
controlling a powered plane.
1. Define the Problem
You need to begin the solution to a design problem with a clear, unambiguous definition of
the problem. Unlike an analysis problem, a design problem often begins as a vague, abstract
idea in the mind of the designer.
2. Gather Pertinent Information
Before you can go further in the design process, you need to collect all the information
available that relates to the problem.
3. Generate Multiple Solutions
The next step in the design process begins with creativity in generating new ideas that may
solve the problem. Creativity is much more than just a systematic application of rules and
theory to solve a technical problem.
4. Analyze and Select a Solution
Once you've conceived alternative solutions to your design problem, you need to analyze
those solutions and then decide which solution is best suited for implementation. Analysis is
the evaluation of the proposed designs.
5. Test and Implement the Solution
The final phase of the design process is implementation, which refers to the testing,
construction, and manufacturing of the solution to the design problem. You must consider
several methods of implementation, such as prototyping and concurrent engineering, as well
as distinct activities that occur during implementation, such as documenting the design
solution and applying for patents.
Cost Concepts for Decision Making
1. A fixed cost is constant, independent of the output or activity level.
2. A variable cost does depend on the output or activity level.
3. A marginal cost is the variable cost associated with one additional unit of output or
activity.
4. The average cost is the total cost of an output or activity divided by the total output or
activity in units.
5. The breakeven point is the output level at which total revenue is equal to total cost.
Jocelyn Corpuz Jan. 25, 2018
ChE 436 (Code: 5463) Engr. Ramiro Emerson C. Amon
6. A sunk cost is a past cost that cannot be changed and is therefore irrelevant in engineering
economic analysis.
7. An opportunity cost is the cost associated with an opportunity that is declined. It
represents the benefit that would have been received if the opportunity were accepted.
8. A recurring cost is one that occurs at regular intervals and is anticipated. The cost to
provide electricity to a production facility is a recurring cost.
9. A nonrecurring cost is one that occurs at irregular intervals and is not generally
anticipated.
10. An incremental cost represents the difference between some type of cost for two
alternatives.
11. A cash cost is a cash transaction, or cash flow.
12. A book cost is not a cash flow, but it is an accounting entry that represents some change
in value.
13. Life-cycle costs refer to costs that occur over the various phases of a product or service
life cycle, from needs assessment through design, production, and operation to decline and
retirement.
Present Economy Studies
Present economy studies are engineering economic analyses where alternatives for
accomplishing a specific task are being compared over one year or less and the influence of
time on money can be ignored.
Two rules shall be followed in conducting present economy studies. These rules, or
criteria, will be used to select the preferred alternative when defect-free output (yield) is
variable or constant among the alternatives being considered.
Rule 1
When revenues and other economic benefits are present and vary among alternatives, choose
the alternative that maximizes overall profitability based on the number of defect-free units of
a product or service produced.
Rule 2
When revenues and other economic benefits are NOT present or are constant among all
alternatives, consider only the costs and select the alternative that minimizes total cost per
defect-free unit of product or service output.
Jocelyn Corpuz Jan. 25, 2018
ChE 436 (Code: 5463) Engr. Ramiro Emerson C. Amon
References

Calvert, J. (2005). Engineering economy. Retrieved January 25, 2018 from

https://mysite.du.edu/~jcalvert/econ/enecon.htm

Eschenbach, T., Lavelle, J., & Newnan, D. (2014). Engineering economic analysis, twelfth
edition. Retrieved January 25, 2018 from
http://global.oup.com/us/companion.websites/9780199339273/student/interactive/ecc
e/engineeringcosts/

Khandani, S. (2005). Engineering process design. Retrieved January 25, 2018 from
https://www.saylor.org/site/wp-content/uploads/2012/09/ME101-4.1-Engineering-
Design-Process.pdf

Manama, Y. (2014). Engineering economy. Retrieved January 25, 2018 from

http://site.iugaza.edu.ps/amanama/files/2014/10/Chapter-1-Introduction-to-
Engineering-Economy.pdf

Sicangco, E. (2014). Present economy studies. Retrieved January 25, 2018 from
https://prezi.com/emqbtvnkkwzz/present-economy-studies/