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Engineering Economy

Course Description
This course will discuss current economic issues particular to engineering problems using economic analysis and comparison of engineering alternatives by annual-cost, present worth, capitalized cost, and rate of return methods: income tax considerations.

What is Engineering?
Profession in which acknowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with udgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind.

Why is Engineering Economy so Important?


!ound decisions are based on economic and non-economic, as well as tangible and non-tangible factors. There is a challenge of making significant decisions when selecting one alternative over another. The mission of "ngineering "conomy is to balance different types of cost and performance #response, time, safety, weight, reliability, etc,.$

Role of Engineering Economy in Decision Making


The techni%ues and models of engineering economy assists people in making decisions with an anticipation of the future. !erve as the basis of characterizing the outcomes of decisions to be rendered in accordance to the analysis of observed facts.

Solutions by Engineering Economy must demonstrate positive balance of long term benefits over long term cost, and they must also: Promote the well being and survival of an organization. "mbody creative and innovative technology ideas. Permit identification and scrutiny of their estimated outcomes.

Principles of Engineering Economy


&ost consideration and comparisons are fundamental aspects of engineering practice. The study of "ngineering "conomy is based on the following principles:

1. Develop the alternatives. The final choice #decision$ is among alternatives. The alternatives need to be
identified and then defined for subse%uent analysis. The decision to be handed later will be based on sound selection from different alternatives. "ngineers and managers should place a high priority on ensuring %uality in developing and defining alternatives. Focus on the Differences. 'nly the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision. !election can be made if there are differences on the outcomes of the feasible alternatives. se a Consistent !ie"point. The prospective outcomes of the alternatives should be consistently developed from a defined viewpoint. se a Common nit of Measure. (sing a common unit of measurement to enumerate as many of the prospective outcomes as possible will make easier the analysis and comparison of alternatives. Consi#er all Relevant Criteria. !election of a preferred alternative #decision making$ re%uires the use of a criterion #or several criteria$. The decision process should consider the outcomes enumerated in the

2. 3. 4. 5.

6. 7.

monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner., Make ncertainty E$plicit. (ncertainty is inherent in pro ecting #or estimating$ the future outcomes of the alternatives and should be recognized in their analysis and comparison. Revisit your Decisions. )mproved decision making results from an adaptive process* to the extent practicable, the initial pro ected outcomes of the selected alternative should be subse%uently compared with actual results achieved.

Economic Design Principle


The design must meet the economic needs and attain competitive operations that depends on prudently balancing what is technically feasible and what is economically acceptable. The cost concepts and other economic principles used in engineering economy depend on the problem situation and on decision to be made.

Cost Estimating
The cost, revenues, residual values, and other data pertaining to the design of alternatives are the most difficult, expensive and time consuming part of an engineering study. The primary difficulty in cost estimating is the absence of accurate past data for comparative analysis. +ecisions must be made with reference to design re%uirements and expected future conditions.

Fi$e#% !aria&le% an# Incremental Cost


Fixed Cost , are those unaffected by changes in activity level over a feasible range of operations for the capacity of capability available. "xamples are insurance and taxes on machines and facilities, license fees, and interest costs on borrowed capital. Variable Cost are those associated with an operation that vary in total with the %uantity of output or other measures of activity level. "xample is the cost of material and labor used in product or service. Incremental Cost , is the additional cost, or revenue, that results from increasing the output of a system by one or more units.

Recurring an# 'onrecurring Costs


Recurring Costs -epetitive when a firm produces similar goods and services on continuing basis. They repeat with each unit of output. . fixed cost that is paid on a repeatable basis. Ex. Office Rentals onrecurring Costs

Non-repetitive, even though the total expenditure may be cumulative over a relatively hort period o! time. "ypically involve developing or e tabli hing a capability or capacity to operate. Ex. Purchase cost for real estate upon which a plant will be built and the construction costs of the plant itself. (tan#ar# Costs
Direct Cost are those that can be reasonably measured and allocated to a specific output or work activity. Ex. !he labor and material cost directly associated "ith a product, service, or construction activity. Indirect Cost , are those that are difficult to attribute or allocate to a specific output or work activity. The term normally refers to types of cost that would involve too much effort to allocate directly to a specific output.

Cash Cost vs. )ook Cost


Cash Cost Book Cost cost that involves payment in cash and results in cash flow. payment that does not involve cash transactions Ex. #epreciation

repre ent the recovery o! pa t expenditure over a !ixed period o! time.

(unk Cost an# *pportunity Cost


Sunk Cost $ one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative costs and revenues related to an alternative course of action. the cost of the best re ected opportunity and is hidden or implied.

Opportunity Cost

+ife Cycle Cost ,+CC the summation of all costs, both recurring and nonrecurring, related to a product, structure, system, or service during its life span.

+ife Cycle Cost ,+CC- . Investment Costs / 'on0Fuel *1M an# Repair Costs / Replacement Costs / Energy Costs / Disposal Costs 2 (alvage !alue ,if there3s any-

+ife0cycle Cost Management


/inimize the 0ife-cycle &ost 1y making the right trade-offs between costs during the ac%uisition phase and during the operation phase.

Phases of the +ife0Cycle


4he +ife0cycle may be divided into two general time periods: the ac!uisition phase and the operation phase.

"he .c%uisition Phase begins with an analysis of the economic need or want. .fter defining the
re%uirements, the conceptual design will translate the defined technical and operational re%uirements into the preferred preliminary design. The details of the design follows with the target of deployment of a prototype and as well as testing. The 'peration Phase is when the operational activities occurred.

(ome Important 4erms5


Investment Cost , is the capital re%uired for most of the activities in the ac%uisition phase. Working Capital , refers to the funds re%uired for current assets other than the fixed assets such as
e%uipment, facilities that are needed for the start up and support of operational activities.

*peration an# Maintenance Cost , includes many of the recurring annual expense items associated
with operation phase of the life cycle.

Disposal Cost , includes those recurring &osts of shutting down the operation and the retirement and
disposal of the assets at the end of the life cycle.

'ecessities% +u$uries% Price Deman#


The focus of most business establishment is to increase the value of materials and products by changing their form or location. The price of such products and services vary in location, availability and necessity. Their use have a direct or indirect effect on the needs and desires of people.

4otal Revenue Function


'ne factor to consider in determining the potential profit of a business is the effect of the competition. )t should be noted that the competition encourage attention from consumers thereby creating more demand. 2owever, it should be noted that excessive competition can saturate the market and force the lowering of selling price thereby reducing profit.

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