IEDA 3230: Engineering Economy

What is Engineering Economy?

A Systematic evaluation of the economic merits of

proposed solutions to engineering projects

How to evaluate feasibility?

Technical concerns (will it work? Is it reliable? Is it safe?...)
Economic concerns (how much does it cost? What is the benefit?)

focus of this course

Introduction and Agenda

Topics and Expected Learning Outcomes:

1. How to make decisions about product/process selection

based on cost and cost estimation
2. Time value of money in work and life
3. Estimating the economic viability of a project
4. How to compare alternatives based on economic analysis
5. Basics of cost accounting (assets, liabilities, depreciation,
taxes)
6. Basics of probabilistic risk analysis
7. Simple techniques for investment under uncertainty
 Motivating example (1)

How to compare these alternatives?

Motivating example (2)

A container ship can travel across the ocean at any speed

between 16 knots and 25 knots.

What speed is best?

Motivating example (3)

Monthly payment: HK$ 10,809 HK$ 14,412

[source: website of Hang Seng bank]

-- How is the monthly payment computed?

-- Which plan is better?
-- What happens if you can pay weekly instead of monthly?
 Motivating example (4)

HK-Macau-Zhuhai bridge XiQu Performing arts center, West Kowloon

(expected) Cost to build: RMB 110B Cost to build: HK$ 2.7B

Is it economically viable?
 Motivating example (5)

What is the price of risk?

Suppose you buy 1000 shares of HSBC (HK stock exchange symbol 0005.hk)

-- How much would you pay to avoid the risk that the price of the stock drops by 20%
Approach

1. Develop all alternatives

2. Focus on the differences
common factors in outcome may be ignored
3. Identify your objective
maximize expected profit.. minimize expected cost..
4. Fair comparison: use common units of measurement
same currency.. same time .. same physical units..
5. Consider all relevant criteria
lost opportunity.. different lifespan of machines..
different interest rates for loans..
6. Make uncertainty explicit (quantify if possible)
7. Revisit your decision
Summary

- Set the agenda for the course

- Saw some motivating examples

Acknowledgements:
Most of the lecture notes for this course are adapted from those of Prof Xiangtong Qi