2/24/2018

ENGINEERING ECNOMICS
AND
PROJECT MANAGEMNT

Samah Ragab , PhD

Objective
This course Develops the tools to
properly analyze and solve the economic
problems that are commonly faced by
engineers

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Engineering economics
The theories, principles, and models that deal with how the market process works. It
attempts to explain how wealth is created and distributed in communities, how people
allocate resources that are scarce and have many alternative uses, and other such matters
that arise in dealing with human wants and their satisfaction.

‫ﻮ ذاﻟﻚ اﻟﻌﻠﻢ اﻟﺬي ﻳﺪرس ﻛﻴﻔﻴﺔ ﺗﻮﻇﻴﻒ أﻓﺮاد اﳌﺠﺘﻤﻊ ﳌﻮارد ﻢ ﻗﺘﺼﺎدﻳﺔ اﻟﻨﺎدرة ذات‬
‫ﺳﺘﺨﺪاﻣﺎت اﳌﺘﻌﺪدة ﻹﻧﺘﺎج ﻣﺠﻤﻮﻋﺔ ﻣﺘﺒﺎﻳﻨﺔ ﻣﻦ اﻟﺴﻠﻊ و ﺗﻮز ﻌ ﺎ ﺑ ن اﳌﻮاﻃﻨ ن ﻟﻼﺳ ﻼك ا ﺎﺿﺮ‬
‫واﳌﺴﺘﻘﺒﻞ وذاﻟﻚ ﻹﺷﺒﺎع ﺣﺎﺟﺎ ﻢ و رﻏﺒﺎ ﻢ‬

Engineering economics

• Feasibility study (definition /importance/concept/components)

• Engineering Costs and Cost Estimating
• Cash Flow Diagrams
• Time Value of Money (interest/present value )
• Economic evaluation Criteria (NPV/IRR)
• DEPRECIATION
• TAXE

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MAKING ECONOMIC DECISION

A careful look at the world around us clearly demonstrates that we are surrounded by a
sea of problems.
There does not seem to be any exact way of classifying them, simply because they are
so diverse in complexity and "personality." One approach would be to arrange problems
by their difficulty.

Simple Problems Intermediate Problems Complex Problems

MAKING ECONOMIC DECISION

Simple Problems Intermediate Problems
Shall I buy or lease my next
Should I pay cash or use my car?
credit card? ·Which equipment should be
selected for a new assembly
line? ·Which materials should
These are pretty simple
be used as roofing, siding,
problems, and good
and structural support for a
solutions do not require new building
much time or effort.
Complex Problems
Problems that are indeed complex. They
represent a mixture of economic , political,
and humanistic elements
• government pass legislation to prevent the
overseas plant? What about labor unions
• The annual budget of a corporation-is an
allocation of resources ,but the budget
process is heavily influenced by non
economic forces such as power struggle
geographical balancing, and impact on
individuals, programs, and profits.

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MAKING ECONOMIC DECISION

Decisions are made routinely to choose one alternative over another by individuals in
everyday life;
• by engineers on the job;
• by managers who supervise the activities of others;
• by corporate presidents who operate a business;
• and by government officials who work for the public good.

Most decisions involve money, called capital or capital funds , which is usually limited in
amount.
The decision of where and how to invest this limited capital is motivated by a primary goal of
adding value as future, anticipated results of the selected alternative are realized.

MAKING ECONOMIC DECISION

• Engineers play a vital role in capital investment
decisions based upon:
their ability and experience to design, analyze, and
synthesize.
• The factors
engineering upon
economy which
involves a decision
formulating, estimating,is based
and are
evaluating the expected
economic
commonly outcomes of alternatives designed to accomplish
a combination of economic and non-economic a defined purpose.
Mathematical techniques simplify the economic evaluation of alternatives
elements.
engineering economy deals with the economic
factors.

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MAKING ECONOMIC DECISION

• Since most decisions affect what will be done, the time frame of engineering
economy is primarily the future ,Therefore, the numbers used in engineering economy
are best estimates of what is expected to occur .
• The estimates and the decision usually involve four essential elements:

» Cash flows
» Times of occurrence of cash flows
» Interest rates for time value of money
» Measure of economic worth for selecting an alternative

MAKING ECONOMIC DECISION

Since the estimates of cash fl ow amounts and timing are about the future, they will be some
what different than what is actually observed, due to changing circumstances and unplanned
events.
In short,
the variation between an amount or time estimated now and that observed in the future is
caused by random nature of all economic events.
Sensitivity analysis is utilized to determine how a decision might change according to varying
estimates, especially those expected to vary widely.

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MAKING ECONOMIC DECISION

Example
illustrates the fundamental nature of variation in estimates and how this variation may be included in the analysis at a very basic
level.

• An engineer is performing an analysis of warranty costs for drive train repairs within the first year of ownership of luxury cars purchased in the
United States.
• He found the average cost (to the nearest dollar) to be $570 per repair from data taken over a 5-year period.

• What range of repair costs should the engineer use to ensure that the analysis is sensitive to changing warranty costs?

year 2006 2007 2008 2009 2010

Average Cost, $/repair 525 430 619 650 625

MAKING ECONOMIC DECISION

Example
illustrates the fundamental nature of variation in estimates and how this variation may be included in the analysis at a very basic
level.

+,- 5%
Average 630$

year 2006 2007 2008 2009 2010

Average Cost, $/repair 525 430 619 650 625

Average 570$

-25% +15%

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ECONOMIC Decision-making Process

Recognize the problem.
Define the goal or objective: What is the task?
Assemble relevant data:
What are the facts? Are more data needed, and is it worth more than the cost
to obtain it?

Identify feasible alternatives.

Select the criterion for choosing the best alternative:
possible criteria include political, economic, environmental, and humanitarian.
The single criterion may be a composite of several different criteria.

Mathematically model the various inter relationships.

Predict the outcomes for each alternative.
Choose the best alternative.
Audit the results

ECONOMIC Decision-making Process

Choose the best alternative.

To choose the best alternative, the outcomes for each alternative must be stated in comparable way.

Usually the consequences of each alternative are stated in terms of money, that is, in the form
of costs and benefits.
This resolution of consequences is done with all monetary and nonmonetary consequences. The
consequences can also be categorized as follows:
• Market consequences-where there are established market prices available
• Extra-market consequences-no direct market prices, so priced indirectly
• Intangible consequences-valued by judgment not monetary prices.

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ENGINEERING ECNOMICS
AND
PROJECT MANAGEMNT

Lecture no 2 :
Feasibility study
ENGINEERING COSTS
Samah Ragab , PhD

Papers 20/100

Mid Term 20/100 Final

Total
Exam
100/100
Quiz 10/100 40/100

Attendance 10/100

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Engineering feasibility study

Engineering feasibility study

Feasibility studies are preliminary studies undertaken in the very early stage of a projects , they
tend to be carried out when a project is large or complex ,or where there is some doubt or
controversy regarding the proposed development ,
the purpose of feasibility studies is to :

• Establish whether the project is viable

• Help identify feasible options .
• Assist in the development of the business case , project execution plan strategic
brief .

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Engineering feasibility study

Definition
The feasibility study is an evaluation and analysis of the potential of the proposed projects which
is based on extensive investigation and researches to support the process of decision making .
Feasibility study is an analysis of the viability of an idea ,

The feasibility study focuses on helping answer the essential question of should we
proceed with the proposed project idea , All activities of the study should toward
helping answer this question
Should we proceed with the proposed project idea ?
• A feasibility study is a formal report that documents decisions concluding in a choice of one
from two or more alternatives ,
• It establishes possibilities , evaluates economics and force reflections on the perceptions of a
decision (social ,political)

Why is feasibility study important

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Engineering feasibility considerations

A well designed feasibility study should provide a historical background of the business or
project , a description of the product or service ,details of the operations and management ,
marketing research and policies , financial data , legal requirements and tax obligations
Feasibility studies should address issues from which are .

Engineering feasibility topics

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Engineering feasibility topics

Engineering feasibility topics

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Engineering feasibility topics

Engineering feasibility topics

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ENGINEERING COSTS

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ENGINEERING COSTS

Objective
Understanding engineering costs is fundamental to the
engineering economic analysis process, and therefore
this addresses an important question:
Where do the numbers come?

ENGINEERING COSTS

• Defines fundamental cost concepts (include fixed and variable costs, marginal and average
costs, opportunity costs, recurring and nonrecurring costs,
• life-cycle costs and the various types of estimates and difficulties sometimes encountered

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ENGINEERING COSTS

• Fixed costs are constant or unchanging regardless of the level of output or activity. In
• contrast

• variable costs depend on the level of output or activity

• the average cost

Total cost / no of units

Decision makers use average cost to attain an overall cost picture of the investment on a per
unit basis.

ENGINEERING COSTS

Example
An entrepreneur named jena was considering the money-making potential of chartering a bus to make
people from his hometown to an event in a larger city.
Jena planned to provide transportation, tickets to the event, and refreshments on the bus for his
customers .
He gathered data the predicted expenses as either fixed or variable.
• Bus rental $80 , Gas expense 75, Other fuels 20, Bus driver 50, Event ticket $12.50 per person,
Refreshments 7.50 per person

Develop an expression of jena's total fixed and total variable costs for chartering this trip.

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ENGINEERING COSTS

Example
At any construction project

Give examples for the fixed cost and variable cost

Head office Engineers
Supervision engineers
Labor accommodation
Cranes
Site offices
Material
Taxes
Design cost
Management cost

ENGINEERING COSTS

The relationship between total cost and fixed and variable cost are :

the variable costs are linear (y equals a constant

times x)

wants to evaluate the potential to make money from this chartered bus trip.

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ENGINEERING COSTS

Example
An entrepreneur named jena was considering the money-making potential of chartering a bus to make
people from his hometown to an event in a larger city.
Jena planned to provide transportation, tickets to the event, and refreshments on the bus for his
customers .
He gathered data the predicted expenses as either fixed or variable.
• Bus rental $80 , Gas expense 75, Other fuels 20, Bus driver 50, Event ticket $12.50 per person,
Refreshments 7.50 per person

Develop an expression of jena's total fixed and total variable costs for chartering this trip.

Jena wants to evaluate the potential to make money from this chartered bus trip.

ENGINEERING COSTS
Total cost = total fixed cost +total variable cost Example
= $225 + ($20)(number of people on the trip)
where number of people on the trip = X
Total cost = 225 + 20x

Jena believes that she could attract 30 people at a charter ticket price of $35.

Total revenue= (Charter ticket price)(Number of people on the trip) = (Ticket price) (x)

Total profit = (Total revenue) - (Total costs) = (35x) - (225 + 20x)= 15x - 225

Total profit = (35 x 30) - (225 + (20 x 30) = $225

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ENGINEERING COSTS
Example
Note that the breakeven point for the number of persons on the charter
trip is 15 people. For more than 15people, the project will be made a profit. If fewer than 15 sign up

ENGINEERING COSTS

Breakeven point
The level of business activity at which the total costs to provide the product, good, or service are
equal to the revenue (or savings) generated by Providing the service

Profit region:
The output level of the variable x greater than the breakeven point, where total revenue is greater than total costs.

Loss region:
The output level of the variable x less than the breakeven point, where total costs are greater than total
revenue.

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ENGINEERING COSTS

Recurring and Nonrecurring Costs

Recurring costs refer to any expense that is known, anticipated, and occurs at regular intervals.
Nonrecurring costs : are one-of-a-kind expenses that occur at irregular intervals and thus are
sometimes difficult to plan for or anticipate from a budgeting perspective.

Life-cycle costing :
refers to the concept of designing products, goods, and services with a full and explicit
recognition of the associated costs over the various phases of their life cycles

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