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The Four Fundamental Principles of Engineering Economics
The Four Fundamental Principles of Engineering Economics
The Four Fundamental Principles of Engineering Economics
Engineering Economics
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Principle 1
An instant Pula is worth more than a
distant Pula…
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Principle 2
Only the cost (resource) difference
among alternatives counts
Option Monthly Monthly Cash paid Monthly Salvage
Fuel Cost Maintenance at signing payment Value at end
(cash of year 3
outlay )
The data shown in the green fields are irrelevant items for decision
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making, since their financial impact is identical in both cases
Principle 3
Marginal (unit) revenue has to
exceed marginal cost, in order to
increase production
Marginal
cost
Manufacturing cost 1 unit
Marginal
revenue
Sales revenue 1 unit
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Principle 4
Additional risk is not taken without a
suitable expected additional return
Investment Class Potential Expected
Risk Return
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What is Engineering Economy?
◼ Economic decision making for engineering systems is called engineering
economy. This definition may seem restricted to engineering projects and
systems only, engineering economy however is also the study of industrial
economics and the economic and financial factors which influence industry.
◼ Engineers are the people who are familiar with all the technicalities of
machinery and production therefore they are the best judges of the useful
lives of an asset and they also have the technical knowledge to calculate
the number of units a proposed plant would produce when operational.
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◼ Engineering economy deals with justification and selection of projects. Many
engineers work on projects which address a specified activity or a problem.
Any decision regarding the project must be justified.
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SOME EXAMPLES
Let us present few examples in different environments where engineering
economy can facilitate the decision making process.
◼ Individuals: A new college graduate needs a new car. Should this new car
be bought or leased? Methods from engineering economy can be used for
determining the best choice.
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❑ Economic factors are as important as regard for the physical laws and
science that determine what can be accomplished with engineering. The
following figure shows how engineering is composed of physical and
economic components:
System output(s)
Physical (efficiency) = -------------------------
System input(s)
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◼ Following are some examples where engineering
economy plays a crucial role:
1. Choosing the best design for a high-efficiency gas furnace
2. Selecting the most suitable robot for a welding operation on an
automotive assembly line
3. Making a recommendation about whether jet airplanes for an overnight
delivery service should be purchased or leased
4. Considering the choice between reusable and disposable bottles for
high-demand beverages
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Engineering Economics
Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic
decisions
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Rational Decision-Making Process
1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion
to use
6. Select the best alternative
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Which Car to Lease?
Saturn vs. Honda
1. Recognize a decision ◼ Need a car
problem
2. Define the goals or ◼ Want mechanical
objectives security
3. Collect all the relevant ◼ Gather technical as well
information as financial data
4. Identify a set of feasible ◼ Choose between
decision alternatives Saturn and Honda
5. Select the decision ◼ Want minimum total
criterion to use cash outlay
6. Select the best alternative ◼ Select Honda
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Financial Data Required to Make an Economic
Decision
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Engineering Economic Decisions
Manufacturing Profit
Planning Investment
Marketing
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Predicting the Future
◼ Estimating a Required
investment
◼ Forecasting a product
demand
◼ Estimating a selling
price
◼ Estimating a
manufacturing cost
◼ Estimating a product
life
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Role of Engineers in Business
• Engineering Projects
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Two Factors in Engineering
Economic Decisions
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Summary