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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.
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.
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$. The decision process should consider the outcomes enumerated in the
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monetary unit and those expressed in some other unit of measurement or made explicit in a descriptive manner., Make ncertainty E$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.
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.
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.
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-
"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.
*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.