ENGINEERING ECONOMY

BTV3433
Chapter 1
Introduction to Engineering Economy
Nadzirah bte Mohd Mokhtar, Ph.D
Universiti Malaysia Pahang, UMP
Contact
Hour
Lecture (3 hrs/week)
Every Wednesday
10.00 a.m. - 1.00 p.m. (Morning)
TBK-03
 Course Synopsis
Overview of energy forms, sources, generation, devices,
systems, and materials. Review of the physics of energy
transformation and conservation. Energy efficiencies of
components and systems from stationary and
transportation sectors. Energy-efficient design in residential,
commercial, industrial, and manufacturing systems.
Sustainability, environmental impacts, economic and social
issues, and global governmental policies. Potential of
alternative energy sources. Use of eco-friendly materials to
improve efficiency. Topics from an applied perspective of
technology practices, management, responsibilities, and
policies involved with implementing energy conservation
designs.
By the end of this course, students should be
able to:
CO1 Understand basic principles of engineering
economy, cost estimation, money-time Majority
relationships. assessments
CO2 Apply analytical and numerical methods for WILL follow
evaluation of engineering projects to come up CO1 and CO2
with best alternatives.
CO3 Use computer to solve problems using Microsoft
programs such as Excel etc.
 PASSING MARK: 40%

1. Quiz : 5%
2. Test : 25%
3. Assignment : 10%
4. Mini Project : 20%
5. Final : 40%
CO1 CO2
Engineering Economics Project: Overview

Exploring the Economic Merit of Drinking Water Filter System

 Write up: 10-15pages Done as Group report
Brief description of the technology you are considering

Describe the scope of your analysis

What did you consider?
Each group should analyze the economic merit of at least
three types of water filters

Results
What is the economic merit of?
Evaluate your engineering projects to come up with best
alternatives.

Sensitivity
What conditions / assumptions effect your results

Recommendation & Conclusion.

Each group must submit the proposal report on WEEK 6 (24th
March 2017). The proposal and final reports of your mini project
should be written in standard format (refer to UMP thesis format).

Spreadsheet One per group submit on WEEK 12.

Excel data tables used to do sensitivity analysis above

Final report One per group submit on WEEK 14.

Presentation: 15 minutes Done as Group (expected on WEEK 13)

Remember, only 3 members are allowed for each group.

Introduction to Cost Concepts
Cost-Estimation
Engineering and Design
Techniques
Economy Economics

Comparison and
The Time Value Evaluating a
Selection among
of Money Single Project
Alternatives

Depreciation
CHAPTERS and Income
Taxes
 Course Syllabus

Timeline : Engineering Economy (BTV3433)

CHAPTER 3 CHAPTER 4 (Contd)

CHAPTER 1 Introduction Relating Present and Future Equivalent
Introduction An Integrated Approach Values of Single Cash Flows
Relating a Uniform Series (Annuity) to Its Tutorial/
The Principle of Engineering Selected Estimating
Present and Future Equivalent Values Revision
Economy Techniques (Models)
Engineering Economy and Summary of Interest Formulas and +
Parametric Cost Estimating
Design Process Cost Estimating Relationship Relationships for Discrete Compounding TEST 1

WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 5 WEEK 6 WEEK 7

CHAPTER 4
CHAPTER 2 CHAPTER 4 (Contd)
Introduction
Cost terminology Deferred Annuities (Uniform Series)
Simple Interest
The general Economic Environment Equivalence Calculations Involving Multiple
Compound Interest
Cost-Driven Design Optimization Interest Formulas
The Concept of Equivalence
Present Economy Studied Uniform (Arithmetic) Gradient of Cash Flows
Notation and Cash-Flow Diagrams and
Geometric Sequences of Cash Flows
Tables
 Course Syllabus Timeline : Engineering Economy (BTV3433)

CHAPTER 4 (Contd) CHAPTER 7 (Contd)

Interest Rates that Vary with Time CHAPTER 6 Introduction to income taxes
Nominal and Effective Interest Rates Introduction The effective (Marginal) Corporate
Compounding More Often than Basic concepts for comparing alternatives Income Tax Rate
Once per Year The study (Analysis) period Tutorial/
Gain (Loss) on the Disposal of an Asset
Interest Formulas for Continuous Useful lives are equal to the study period Revision
General Procedure for making after tax
Compounding and Discrete Cash Useful lives are unequal among the economic analyses +
Flows alternatives Economy value added TEST 2
Personal finances

WEEK 8 WEEK 9 WEEK 10 WEEK 11 WEEK 12 WEEK 13 WEEK 14

PROJECT PRESENTATION
CHAPTER 7
CHAPTER 5
Introduction
Introduction
Depreciation concepts and terminology
Determining the minimum attractive
The classical (Historical) Depreciation methods
rate of return (MARR)
The modified Accelerated cost recovery
The present worth method
system
The future worth method
A comprehensive depreciation example
The annual worth method
The internal rate of return method
The external rate of return method
 Learning References

1. Sullivan, W.G., Wicks, E.M., Luxhoj, J.T., 2015.

Engineering Economy. 16th edition. Pearson
International, Upper Saddle River, NJ. (Textbook)
2. Blank, L. and Tarquin, A., 2012. Engineering Economy,
7th Ed. McGraw-Hill, NY.
Topic Outcomes in Chapter 1:
Introduction to Engineering Economy

1.1 Introduction
1.2 The Principle of Engineering Economy
1.3 Engineering Economy and The Design Process
1.4 Using Spreadsheet in Engineering Economic
Analysis
1.5 Summary
1.1 Introduction
Engineering economy involves the systematic evaluation of the
economic merits of proposed solution to engineering problems.
To be economically acceptable (i.e., affordable), solutions to
engineering problems must demonstrate a positive balance of long-
term benefits over long-term costs, and they must also

promote the well-being and survival of an organization

embody creative and innovative technology and ideas
permit identification and scrutiny of their estimated outcomes
translate profitability to the bottom line through a valid and
acceptable measure of merit.
 Decision Making and Problem Solving
Simple Problems
Can be analyzed in ones head without extensive analysis
Do I buy a semester parking pass, use meters, or buy a bicycle?
How often should I eat out?

Intermediate Problems (Principle subject of this course!!!)

They are sufficiently important to justify serious thought and action
They cant be worked in ones head; must be organized
The economic aspects are significant component in the analysis
leading to a decision

Complex Problems
Represent a mixture of economic, political, and humanistic
elements
Selection of a president of USA.
Building a nuclear power plant.
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Engineering Economic Analysis
Key Questions:
Which engineering projects are worthwhile?
Which projects should have higher priority?
How the project should be designed?
How to achieve long-term financial goals?
How to compare different ways to finance purchases?
How to make short and long-term financial decisions?
18
Engineering Economic Analysis
Examples of Non-Monetary Factors:

Meeting customer expectations consistently

Maximization of employee satisfaction
Maintaining flexibility to meet changing demand
Maintenance of a desired public image
Leveling cyclic fluctuations in production
Improvement of safety in operations
Reduction of pollutants

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1.2 The principles of engineering economy
1. Develop the alternatives
The choice (decision) is among alternatives. The
alternatives need to be identified and then
defined for subsequent analysis.
2. Focus on differences
Only the differences in expected future
outcomes among the alternatives are relevant to
their comparison and should be considered in
the decision
3. Use a Consistent Viewpoint
The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint
(perspective).
4. Use a Common Unit Measure
Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the analysis
of the alternatives.
5. Consider all relevant criteria
Selection of a preferred alternative (decision
making) requires the use of a criterion (or several
criteria). The decision process should consider
both the outcomes enumerated in the monetary
unit and those expressed in some other unit of
measurement or made explicit in a descriptive
manner.
6. Make risk and uncertainty explicit
Risk and uncertainty are inherent in
estimating the future outcomes of the
alternatives and should be recognized in their
analysis and comparison.
7. Revisit your decisions
Improved decision making results from an
adaptive process, to the extent practicable,
the initial projected outcomes of the selected
alternative should be subsequently compared
with actual results achieved
CHAPTER
1

The Principles of Engineering Economy

Develop the Focus on the

alternatives differences

Use a consistent Use a common unit

viewpoint measure

Consider all Make risk and

relevant criteria uncertainty explicit

Revisit your
decisions
1.3 Engineering Economy and the Design
Process

An engineering economy study is accomplished using a

structured procedure and mathematical modeling
techniques. The economic results are then used in a
decision situation that normally includes other
engineering knowledge and input
The general relationship between the engineering economic
analysis procedure and the engineering design process

Step Activity
1. Problem recognition, definition, and
1. Problem / need definition
evaluation.
2. Problem / need formulation and
2. Development of the feasible evaluation
alternatives. 3. Synthesis of possible solution
(alternatives).
3. Development of the outcomes and
cash flows for each alternative.
4. Analysis, optimization, and
4. Selection of a criterion (or criteria).
evaluation.
5. Analysis and comparison of the
alternatives
6. Selection of the preferred 5. Specification of preferred
alternative. alternative
7. Performance monitoring and post
6. Communication.
evaluation of results.
1.4 Using spreadsheets in Engineering Economy
Analysis
Spreadsheets are a useful tool for solving engineering economy
problems. Most engineering economy problems are amenable to
spreadsheet solution for the following reasons:
They consist of structured, repetitive calculations that can be
expressed as formulas that rely on a few functional relationships.
The parameters of the problem are subject to change
The results and the underlying calculations must be
documented.
Graphical output is often required, as well as control over the
format of the graphs.
1.5 summary
We defined engineering economy and presented the
fundamental concepts in terms of 7 basic principles

Engineering economy is a collection of problem-

solving tools techniques that are applied to
engineering, business, and environmental issues.