CE 22

Engineering Economy

Lecture 1 : Introduction to Engineering Economy

Lecture 1

Introduction to Engineering Economy

CE 22 – Engineering Economy

Marjorie C. Turiano
Assistant Professor
Institute of Civil Engineering
College of Engineering
University of the Philippines Diliman
 Outline
• Scope of Engineering Economics
• Engineering Economic Decisions

Lecture 1 : Introduction to Engineering Economy

• Principles of Engineering Economy
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 2

 Overview of Engineering Economy
Engineered
• Products Cost-effectiveness
• Projects vs

Lecture 1 : Introduction to Engineering Economy

• Processes Engineering Efficiency

Making engineering decisions by balancing expenses and

revenues that occur now and in the future.
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Time value of money

What is cheaper in the long run?

A.Y. 2019-2020, First Semester 3

 Overview of Engineering Economy
• Some applications of Engineering Economy
• Choice of possible loans for a car or a house
• Choice between a concrete and a steel structure

Lecture 1 : Introduction to Engineering Economy

• Choice of thickness of insulation
• Is a mineral or oil deposit worth developing
• Investing in a software or state-of-the-art equipment
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A.Y. 2019-2020, First Semester 4

 Engineering Economy
• Engineering • Economics
• The discipline, art, skill and • The study of how individuals
profession of acquiring and and societies choose to use

Lecture 1 : Introduction to Engineering Economy

applying scientific,
mathematical, economic, social
and practical knowledge, in
order to design and build
CE 22 – Engineering Economy
scarce resources that nature
and previous generations have
provided.

structures, machines, devices,

systems, materials and
processes that promotes
improvements to the lives of
people.

A.Y. 2019-2020, First Semester 5

 Engineering Economy

Engineering Economy provides a systematic framework for

evaluating the economic aspects of competing design solutions.

Lecture 1 : Introduction to Engineering Economy

To be economically acceptable, solutions to engineering
problems must demonstrate a positive balance of long-term
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benefits over long-term costs.

A.Y. 2019-2020, First Semester 6

 Scope of Engineering Economics

Engineering economy involves formulating, estimating and

evaluating the economic outcomes when alternatives to

Lecture 1 : Introduction to Engineering Economy

accomplish a defined purpose are available.
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A.Y. 2019-2020, First Semester 7

 Engineering Economic Decisions
Manufacturing

Design

Lecture 1 : Introduction to Engineering Economy

CE 22 – Engineering Economy

Financial Investment
planning and loan
Marketing

A.Y. 2019-2020, First Semester 8

 Engineering Economic Decisions
• Challenges
• Estimating the required investments
• Estimating product manufacturing costs

Lecture 1 : Introduction to Engineering Economy

• Forecasting the demand for a brand new product
• Estimating a “good” selling price
• Estimating product life and the profitability of continuing production
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 9

 Principles of Engineering Economy
1. Develop the alternatives
2. Focus on the differences
3. Use a consistent viewpoint

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 10

 Principles of Engineering Economy
1. Develop the alternatives
• Carefully define the problem. Then the
2. Focus on the differences
3. Use a consistent viewpoint
choice is among the alternatives. The
alternatives need to be identified and

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria defined for subsequent analysis.
6. Make uncertainty explicit
7. Revisit your decisions
• The status quo (“do nothing”) may be an
CE 22 – Engineering Economy

alternative to be considered.

A.Y. 2019-2020, First Semester 11

 Principles of Engineering Economy
1. Develop the alternatives
• Only the differences in expected future
2. Focus on the differences
3. Use a consistent viewpoint
outcome among the alternatives are
relevant to their comparison and should

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria be considered in the decision.
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 12

 Principles of Engineering Economy
1. Develop the alternatives
• The prospective outcomes of the
2. Focus on the differences
3. Use a consistent viewpoint
alternatives, economic and other, should
be consistently developed from a

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria defined viewpoint (perspective).
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 13

 Principles of Engineering Economy
1. Develop the alternatives
• Using a common unit of measurement to
2. Focus on the differences
3. Use a consistent viewpoint
enumerate as many of the prospective
outcomes as possible will simplify the

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria analysis of the alternatives.
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 14

 Principles of Engineering Economy
1. Develop the alternatives
• Selection of a preferred alternative
2. Focus on the differences
3. Use a consistent viewpoint
(decision making) requires the use of a
criterion (or several criteria). The

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy
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.

A.Y. 2019-2020, First Semester 15

 Principles of Engineering Economy
1. Develop the alternatives
• Risk and uncertainty are inherent in
2. Focus on the differences
3. Use a consistent viewpoint
estimating the future outcomes of the
alternatives and should be recognized in

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria their analysis and comparison.
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 16

 Principles of Engineering Economy
1. Develop the alternatives
• Improved decision making results from
2. Focus on the differences
3. Use a consistent viewpoint
an adaptive process; to the extent
practicable, the initial projected

Lecture 1 : Introduction to Engineering Economy

4. Use a common unit of measure
5. Consider all relevant criteria
6. Make uncertainty explicit
7. Revisit your decisions
CE 22 – Engineering Economy
outcomes of the selected alternative
should be compared with the results
achieved.

A.Y. 2019-2020, First Semester 17

 Engineering Economic Analysis Procedure
PRINCIPLES OF ENGINEERING
ECONOMY
1. Problem recognition, definition, and
evaluation
1. Develop the alternatives
2. Focus on the differences 2. Development of the feasible alternatives

Lecture 1 : Introduction to Engineering Economy

3. Use a consistent viewpoint 3. Development of the outcomes and cash
4. Use a common unit of measure flows for each alternative
5. Consider all relevant criteria
4. Selection of a criterion (or criteria)
6. Make uncertainty explicit
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7. Revisit your decisions

5. Analysis and comparison of the
alternatives
6. Selection of the preferred alternative
7. Performance monitoring and post-
evaluation of results
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 Accounting vs Engineering Economy
Evaluating past performance Evaluating and predicting future events

Lecture 1 : Introduction to Engineering Economy

CE 22 – Engineering Economy

Accounting Engineering Economy

Past Present Future

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 Engineering Economic Analysis Procedure
Example 1.1
A friend of yours bought a small apartment building for 4M Php. She spent
400,000 Php of her own money for the building and obtained a loan from a
bank for the remaining 3.6M Php. The annual payment to the bank is

Lecture 1 : Introduction to Engineering Economy

420,000 Php and the expected annual maintenance fee of the building is
600,000 Php. There are four apartment rooms in the building that can each
be rented for 14,400 Php per month. Apply the 7-step procedure.
a) Does your friend have a problem? If so, what is it?
CE 22 – Engineering Economy

b) What are her alternatives? (Identify at least 3)

c) Estimate the economic consequences and other required data for the
alternatives in part (b)
d) Select a criterion for discriminating among alternatives, and use it to
advise your friend on which course of action to pursue.

A.Y. 2019-2020, First Semester 20

 Engineering Economic Analysis Procedure
Example 1.2
Linda and Jerry are faced with a car replacement opportunity
where an interest rate can be ignored. Jerry’s old car that

Lecture 1 : Introduction to Engineering Economy

averages 10 miles per gallon of gasoline can be traded in toward
a vehicle that gets 15 mpg. Or as an alternative, Linda’s 25 mpg
car can be traded in toward a new hybrid vehicle that averages
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50 mpg. If they drive both cars 12,000 miles per year and their
goal is to minimize annual gas consumption, which car should be
replaced – Jerry’s or Linda’s? They can only afford to upgrade
one car at this time.

A.Y. 2019-2020, First Semester 21

 References
• Sullivan, William G. Engineering Economy. Pearson
Education, 16th ed.

Lecture 1 : Introduction to Engineering Economy

CE 22 – Engineering Economy

A.Y. 2019-2020, First Semester 22