Engineering

Economic
Decisions
Lecture No.1
Chapter 1
Contemporary Engineering Economics
Copyright 2010

Contemporary Engineering Economics 5th edition, (c) 2010

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.

Contemporary Engineering Economics 5th edition, (c) 2010

Role of Engineers in
Business
Create & Design
Engineering Projects

Analyze

Production Methods
Engineering Safety
Environmental Impacts
Market Assessment

Evaluate

Evaluate

Expected
Profitability
Timing of
Cash Flows
Degree of
Financial Risk

Impact on
Financial Statements
Firms Market Value
Stock Price

Contemporary Engineering Economics 5th edition, (c) 2010

ring
Economi
c
Decision
s
Plan for the
acquisition of
equipment
(capital
expenditure)
that will enable
the firm to
design and
produce
products
economically

Manufacturin
g

Profit

Planning
Investment

Contemporary Engineering Economics 5th edition, (c) 2010

Marketing

What Makes Engineering

Economic Decisions Difficult?
Estimating a

Required investment
Forecasting a
product demand
Estimating a selling
price
Estimating a
manufacturing cost
Estimating a product
life

Contemporary Engineering Economics 5th edition, (c) 2010

Accounting Vs. Engineering

Economy
Evaluating past performance

Accounting

Evaluating and predicting future events

Engineering Economy

Past

Future
Present

Contemporary Engineering Economics 5th edition, (c) 2010

Common Types of
Strategic Engineering
Economic Decisions
Equipment or process selection
Equipment replacement decisions
New product and product expansion
Cost reduction
Improvement in service or quality

Contemporary Engineering Economics 5th edition, (c) 2010

Fundamental Principles of
Engineering Economics
Principle 1: A nearby dollar is worth

more than a distant dollar

Principle 2: All it counts is the
differences among alternatives
Principle 3: Marginal revenue must
exceed marginal cost
Principle 4: Additional risk is not taken
without the expected additional return

Contemporary Engineering Economics 5th edition, (c) 2010

Principle 1: A nearby dollar is worth more than a

distant dollar

Today

6-month later

Contemporary Engineering Economics 5th edition, (c) 2010

Principle 2: All it counts is the

differences among alternatives
Optio
n

Monthl Monthl Cash

y Fuel
y
outlay
Cost
Mainte at
nance
signing

Buy

$960

$550

Lease

$960

$550

$6,50
0
$2,40
0

Monthl
y
payme
nt

Salvag
e Value
at end
of year
3

$350

$9,00
0
0

$550

Irrelevant items in decision making

Contemporary Engineering Economics 5th edition, (c) 2010

10

Principle 3: Marginal revenue

must exceed marginal cost
Marginal
cost
Manufacturing cost 1 unit

Sales revenue

1 unit

Contemporary Engineering Economics 5th edition, (c) 2010

Marginal
revenue

11

Principle 4: Additional risk is not taken

without the expected additional return
Investment
Class

Potential
Risk

Expected
Return

Savings
account
(cash)

Low/None

1.5%

Bond (debt)

Moderate

4.8%

Stock
(equity)

High

Contemporary Engineering Economics 5th edition, (c) 2010

11.5%

12

Two Factors in Engineering

Economic Decisions

Time
Uncertainty

Contemporary Engineering Economics 5th edition, (c) 2010

13