Lecture 1st

8/3/2019 Lecture 1st

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Engineering Economics

Sajid Naseem

Department of Polymer and Process Engineering

U.E.T Lahore


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INTRODUCTION TO

ENGINEERING ECONOMY

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WHAT IS ECONOMICS ?

The study of how limited

resources is used tosatisfy unlimited human

wants


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WHAT IS ECONOMICS ?

The study of how individuals

and societies chooseto usescarce resources that natureand previous generations

have provided.


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ResourcesResources

Land

Labor Capital


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LAND

All gifts of nature, such as: water,air, minerals, sunshine, plant and

tree growth, as well as the landitself which is applied to theproduction process.


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LABOR

The efforts, skills, and knowledgeof people which are applied to the

production process.


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Dollar Bills

CAPITAL

Real Capital (Physical Capital )

Tools, buildings, machinery -- things whichhave been produced which are used in further

production

Financial Capital

Assets and money which are used in the

production process Human Capital

Education and training applied to labor

in the production process


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Engineering Economics

The application of economic

principles to engineering problems, forexample in comparing the comparativecosts of two alternative capital

projects or in determining the optimumengineering course from the costaspect.


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Origins of Engineering

Economics Pioneer: Arthur M. Wellington, civil

engineer

latter part of nineteenth century;addressed role of economic analysis inengineering projects;

area of interest: railroad building Followed by other contributions which

emphasized techniques depending on

financial and actuarial mathematics.


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PRINCIPLES OF ENGINEERINGECONOMICS

1. Develop the Alternatives;

2. Focus on the Differences;

3. Use a Consistent Viewpoint;

4. Use a Common Unit of Measure;

5. Consider All Relevant Criteria;6. Make Uncertainty Explicit;

7. Revisit Your Decisions


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DEVELOP THE ALTERNATIVES

The final choice (decision) isamong alternatives. Thealternatives need to be identifiedand then defined for subsequentanalysis.


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FOCUS ON THE DIFFERENCES

Only the differences in expected futureoutcomes among the alternatives arerelevant to their comparison and

should be considered in the decision.


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USE A CONSISTENT VIEWPOINT

The prospective outcomes of thealternatives, economic and other,should be consistently developed from

a defined viewpoint (perspective).

O O O


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USE A COMMON UNIT OFMEASURE

Using a common unit of measurementto enumerate as many of the

prospective outcomes as possible willmake easier the analysis andcomparison of alternatives.


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CONSIDER ALL RELEVANTCRITERIA

Selection of a preferred alternative(decision making) requires the use ofa criterion (or several criteria). The

decision process should consider theoutcomes enumerated in the monetaryunit and those expressed in some

other unit of measurement or madeexplicit in a descriptive manner.


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MAKE UNCERTAINTY EXPLICIT

Uncertainty is inherent in projecting(or estimating) the future outcomes ofthe alternatives and should be

recognized in their analysis andcomparison.


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REVISIT YOUR DECISIONSImproved decision making resultsfrom an adaptive process; to the extentpracticable, the initial projectedoutcomes of the selected alternativeshould be subsequently comparedwith actual results achieved.


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ENGINEERING ECONOMY ANDTHE DESIGN PROCESS

An engineering economy study isaccomplished using a structuredprocedure and mathematical modelingtechniques. The economic results arethen used in a decision situation thatinvolves two or more alternatives andnormally includes other engineeringknowledge and input.


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ENGINEERING ECONOMIC ANALYSISPROCEDURE

1. Problem recognition, formulation, and

evaluation.2. Development of the feasible alternatives.

3. Development of the cash flows for each

alternative.

4. Selection of a criterion ( or criteria).

5. Analysis and comparison of thealternatives.

6. Selection of the preferred alternative.

7. Performance monitoring and post-evaluation results.


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ACCOUNTING AND ENGINEERINGECONOMY STUDIES

Modern cost accounting may satisfy any orall of the following objectives:

1. To determine the cost of products orservices

2. To provide a rational basis for pricinggoods or services

3. To provide a means for controllingexpenditures

4. To provide information on which operatingdecisions may be based and the resultsevaluated


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Books:

1.Engineering Economy, 11th ed,

W Sullivan, E Wicks, and J Luxhoj,Prentice Hall, 2003

2.Plant design and Economics for

Chemical Engineers,5th ed,

Peters, Timmerhaus, West

Lecture 1st

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