ENGR 3360U

Unit 1
1.1 General Introduction to
Engineering Economic Analysis
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT
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Unit 1 General Introduction to Engineering Economic Analysis

Change Record
Version F Initial Creation

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Course Outline
1.
2.

3.
4.
5.
6.
7.
8.
9.
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Engineering Economic Analysis

General Economics
2.1 Microeconomics
2.2 Macroeconomics
2.3 Money & the Bank of Canada
Engineering Estimation
Interest and Equivalence
Present Worth Analysis
Annual Cash Flow
Rate of Return Analysis
Picking the Best Choice
Other Choosing Techniques

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10. Uncertainty and Risk

11. Income and Depreciation
12. After-tax Cash Flows
13. Replacement Analysis
14. Inflation
15. MARR Selection
16. Public Sector Issues
17. What an Engineer should know
about Accounting
18. The Business Plan

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Course Learning Objectives

Why should you take this course?
This course is a bird, right?
Engineering and economy

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Mottos
Time is money
An engineer is someone who can build for a
dime, what any damn fool can build for a dollar
There are three kinds of economists; those who
count and those who dont

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Observation
How many filthy rich economists do you
know?
Do you think that Bill Gates would pass this
course? Would he even take it?

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Economics
The dismal science (Carlyle)
founded by Scottish philosopher Adam
Smith who wrote Wealth of Nations
The invisible hand of the market place

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Carlyles snide quote

Teach a parrot to say supply and demand
and youve got an economist
Give me a one-handed economist; all of
the others say <<on one handon the other
hand>> Harry S. Truman
Is a Nobel category

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Unit 1 Road Map

1.1 Engineering Economic Analysis
1.2 Decision Making
1.3 Macro and Micro Economics
1.4 Fundamental Business Structures
1.5 Interest Rates
1.6 Spreadsheet functions
1.7 Minimum attractive rate of return
1.8 Cash flows
1.9 Doubling times
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

1.1 What is the most important

Engineering Variable?

$
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Why Engineering Economic Analysis is Important to

Engineers
Engineers design and create
Designing involves economic decisions
Engineers must be able to incorporate
economic analysis into their creative efforts
Often engineers must select and execute from
multiple alternatives
A proper economic analysis for selection and
execution is a fundamental aspect of
engineering

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Engineering Economic Analysis

The art and science that involves:
Formulating,
Estimating and
Evaluating economic outcomes

Always concerned with the selection and

possible execution of alternatives given the
economic parameters associated with the
project
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Role of Engineering Economic Analysis

in Decision Making
Decision making involves the estimation of
future events/outcomes
Engineering economy aids in quantifying past
outcomes and forecasting future outcomes
Engineering Economy provides a framework
for modeling problems involving:
Time
Money
Interest rates
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Two Concerns of Engineering

Engineers have the dual task of
determining:
1. What society wants (its needs), and
2. How best to combine economic resources,
processes, etc. to produce the goods and
services desired by society.

Efficiency: both physical and economic

efficiencies must be considered.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Physical and Economic Efficiency

Physical efficiency
Measure of the success of engineering activity
in the physical environment; ratio of outputs to
inputs
Maximum physical efficiency ratio is 1 (or
100%)
Physical units include BTUs, kw-hours, etc.

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Economic efficiency
Ratio of value or worth to cost; must exceed 1
or 100%
Engineer must produce outputs that are mostvalued (of greatest satisfaction) by society
(economic efficiency)

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 1 General Introduction to Engineering Economic Analysis

Evolution of Economic & Physical Efficiency

1950s
Physical efficiency

ECONOMIC
SPHERE
(Economic
efficiency)

ENGINEERING
SPHERE

(Physical efficiency)

Independent decision making

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1970s+
Economic Efficiency

ECONOMIC
SPHERE
ENGINEERING
SPHERE

Significant overlap

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco