Chapter 1

Chapter 1
Foundations Of
Engineering
Economy
Engineering Economy
7th edition
Leland Blank
Anthony Tarquin
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Abdul Baseer Qazi
BSc Electrical Engineering

 UET Peshawar, 1994-98
1-year Diploma in Computer Science
 NWFP Board of Technical Education, 1996-97
MS in Info. & Comm. Systems
 Technical University Hamburg 1999-01
MBA in Technology Management
 Northern Institute of Technology, Germany
PhD in Technical Change
 UNU-MERIT, Maastricht, The Netherlands
Entrepreneurial Activities
Founding PrintWorks
 Printing and Publishing company
Co-founding Comso Computer Works
 Computer Sales & Service, Imports
Co-founding KTC International
 Trading company
OECD Negotiator for PISA study
 Program for International Student Assessment
Founding Member PIF
 Pakistan Innovation Foundation
Corporate and Teaching Experience
Projects at German Aerospace Center (DLR) and Siemens
6 months at IBM
 Mainz, Germany
3 years at Philips
 Stuttgart, Hamburg, Eindhoven
3 years teaching, UET, CECOS, PCE
 Peshawar
~5 years teaching and program coordination at MAJU/CUST
Director VIS (Volunteers in Service)
LEARNING OUTCOMES
1. Role in decision
7. Economic equivalence
making
8. Simple and compound
2. Study approach
interest
3. Ethics and economics
9. Minimum attractive
4. Interest rate rate of return
5. Terms and symbols
6. Cash flows

Why Engineering Economy is Important to
Engineers
 Engineers design and create

 Designing involves economic decisions
 Engineers must be able to incorporate economic analysis
into their creative efforts
 Often engineers must select and implement from multiple
alternatives
 Understanding and applying time value of money,
economic equivalence, and cost estimation are vital for
engineers
 A proper economic analysis for selection and execution is
a fundamental task of engineering
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
7
Which Car to Lease?
Corolla vs. Honda
1. Recognize a decision problem  Need a car
2. Define the goals or objectives  Want mechanical security
3. Collect all the relevant information  Gather technical as well as
4. Identify a set of feasible decision financial data
alternatives  Choose between Corolla and
5. Select the decision criterion to use Honda
6. Select the best alternative  Want minimum total cash
outlay
 Select Honda
Engineering Economic Decisions
Manufacturing Profit
Planning Investment
Marketing
What Makes the Engineering Economic
Decisions Difficult? - Predicting the Future
 Estimating a Required
investment
 Forecasting a product
demand
 Estimating a selling price
 Estimating a manufacturing
cost
 Estimating a product life
Role of Engineers in Business
Create & Design
• Engineering Projects
Analyze Evaluate Evaluate
• Production Methods • Expected • Impact on

• Engineering Safety Profitability Financial Statements
• Environmental Impacts • Timing of • Firm’s Market Value
• Market Assessment Cash Flows • Stock Price
• Degree of
Financial Risk
Accounting Vs. Engineering Economy
Evaluating past performance Evaluating and predicting future events
Accounting Engineering Economy

Past Future
Present
Two Factors in Engineering Economic
Decisions
The factors of time and uncertainty are

the defining aspects of any
engineering economic decisions
A Large-Scale Engineering Project
 Requires a large sum of
investment
 Takes a long time to see the
financial outcomes
 Difficult to predict the
revenue and cost streams
Types of Strategic Engineering
Economic Decisions in Manufacturing
Sector
1. Equipment and Process Selection

2. Equipment Replacement
3. New Product and Product Expansion
4. Cost Reduction
Equipment & Process Selection
How do you choose between the Plastic SMC and

the Steel sheet stock for an auto body panel?
The choice of material will dictate the
manufacturing process for an automotive body
panel as well as manufacturing costs.
Which Material to Choose?
Equipment Replacement Problem
 Now is the time to replace

the old machine?
 If not, when is the right time
to replace the old
equipment?
New Product and Product Expansion
 Shall we build or acquire a

new facility to meet the
increased demand?
 Is it worth spending money to
market a new product?
Example - MACH 3 Project
 R&D investment: $750 million
 Product promotion through
advertising: $300 million
 Priced to sell at 35% higher than
Sensor Excel (about $1.50 extra Gillette’s MACH3
per shave). Project
 Question 1: Would consumers pay
$1.50 extra for a shave with greater
smoothness and less irritation?
 Question 2: What would happen if
the blade consumption dropped
more than 10% due to the longer
blade life of the new razor?
Cost Reduction
 Should a company buy

equipment to perform an
operation now done
manually?
 Should spend money now in
order to save more money
later?
Should Levis buy Robotic Tailors?
 How many more jeans would Levis need to sell to justify the
cost of additional robotic tailors?
Types of Strategic Engineering Economic
Decisions in Service Sector
 Commercial Transportation
 Logistics and Distribution
 Healthcare Industry
 Electronic Markets and Auctions
 Financial Engineering
 Retails
 Hospitality and Entertainment
 Customer Service and Maintenance
Fundamental Principles of Engineering
Economics
Principle 1: A nearby dollar is worth more than a

distant dollar
Principle 2: All what counts are the differences
among alternatives
Principle 3: Marginal revenue must exceed
marginal cost
Principle 4: Additional risk is not taken without the
expected additional return
Principle 1: A nearby dollar is worth more
than a distant dollar
Today 6-month later

Principle 2: All it counts is the differences
among alternatives
Option Monthly Monthly Cash Monthly Salvage
Fuel Maintena outlay at payment Value at
Cost nce signing end of
year 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
Irrelevant items in decision making

Principle 3: Marginal revenue must exceed
marginal cost
Marginal
cost
Manufacturing cost 1 unit
Marginal
Sales revenue 1 unit revenue
Principle 4: Additional risk is not taken
without the expected additional return
Investment Class Potential Expected

Risk Return
Savings account Low/None 1.5%

(cash)
Bond (debt) Moderate 4.8%

Stock (equity) High 11.5%
Assignment No. 1
Q1. Work in small groups and brainstorm

ideas about how a common appliance,
device or tool could be redesigned to
improve it in some way. Identify the steps
involved and the economic factors, which
you would need to consider prior to making
a decision to manufacture the redesigned
product. A detailed design and actual cost
estimates are not required.
29
Time Value of Money (TVM)
Description: TVM explains the change in the amount of money
over time for funds owed by or owned by a corporation (or
individual)
 Corporate investments are expected to earn a return

 Investment involves money
 Money has a ‘time value’
The time value of money is the most important

concept in engineering economy
Chapter Opening Story —Take a Lump Sum or Annual
Installments
 Mr. Inam Ahmed won a lottery
worth $5.6 million.
 Before playing the lottery, he was
offered to choose between a single
lump sum $2.912 million, or $5.6
million paid out over 20 years (or
$280,000 per year).
 He ended up taking the annual
installment option, as he forgot to
mark the “Cash Value box”, by
default.
 What basis do we compare these
two options?
Year Option A Option B
(Lump Sum) (Installment Plan)
0 $2.912M $283,770
1 $280,000
2 $280,000
3 $280,000
19 $280,000
What Do We Need to Know?
To make such comparisons (the lottery decision

problem), we must be able to compare the value
of money at different point in time.
To do this, we need to develop a method for
reducing a sequence of benefits and costs to a
single point in time. Then, we will make our
comparisons on that basis.
Contemporary Engineering Economics, 4th edition © 2007

Time Value of Money
1. Money has a time value because
it can earn more money over time
(earning power).
2. Money has a time value because
its purchasing power changes
over time (inflation).
 Time value of money is measured
in terms of interest rate.
 Interest is the cost of money—a
cost to the borrower and an
earning to the lender
This a two-edged sword whereby

earning grows, but purchasing power
decreases (due to inflation), as time
goes by.
The Interest Rate

Interest and Interest Rate
 Interest – the manifestation of the time value of money
• Fee that one pays to use someone else’s money
• Difference between an ending amount of money and a
beginning amount of money
 Interest = amount owed now – principal
 Interest rate – Interest paid over a time period expressed as

a percentage of principal

1-36
Rate of Return
 Interest earned over a period of time is expressed as a

percentage of the original amount (principal)
interest accrued per time unit
Rate of return (%) = x 100%
original amount
 Borrower’s perspective – interest rate paid

 Lender’s or investor’s perspective – rate of return earned

1-37
Interest paid Interest earned
Interest rate Rate of return

1-38
Commonly used Symbols
t = time, usually in periods such as years or months
P = value or amount of money at a time t
designated as present or time 0
F = value or amount of money at some future
time, such as at t = n periods in the future
A = series of consecutive, equal, end-of-period
amounts of money
n = number of interest periods; years, months
i = interest rate or rate of return per time period;
percent per year or month
1-39
Cash Flow Transactions for Two Types of
Loan Repayment
End of Year Receipts Payments
Plan 1 Plan 2
Year 0 $20,000.00 $200.00 $200.00
Year 1 5,141.85 0
Year 2 5,141.85 0
Year 3 5,141.85 0
Year 4 5,141.85 0
Year 5 5,141.85 30,772.48
The amount of loan = $20,000, origination fee = $200, interest rate = 9% APR
(annual percentage rate)

Cash Flow Diagram for Plan 2

End-of-Period Convention

Methods of Calculating Interest
 Simple interest: the practice of charging
an interest rate only to an initial sum
(principal amount).
 Compound interest: the practice of
charging an interest rate to an initial sum
and to any previously accumulated
interest that has not been withdrawn.

Simple Interest
 P = Principal amount
 i = Interest rate End of Beginning Interest Ending
Year Balance earned Balance
 N = Number of
interest periods 0 $1,000
 Example:
1 $1,000 $100 $1,100
 P = $1,000
 i = 10% 2 $1,100 $100 $1,200
 N = 3 years
3 $1,200 $100 $1,300

Simple Interest Formula
F  P  (iP ) N
where
P = Principal amount
i = simple interest rate
N = number of interest periods
F = total amount accumulated at the end of period N
F  $1, 000  (0.10)($1, 000)(3)

 $1,300
Compound Interest
 P = Principal amount
 i = Interest rate End Beginning Interest Ending
of Balance earned Balance
 N = Number of Year
interest periods 0 $1,000
 Example:
1 $1,000 $100 $1,100
 P = $1,000
 i = 10% 2 $1,100 $110 $1,210
 N = 3 years
3 $1,210 $121 $1,331

Compounding Process
$1,100
$1,210
0 $1,331
1
$1,000
2
3
$1,100
$1,210
Cash Flow Diagram
$1,331
0 1 2
F  $1, 000(1  0.10)3

$1,000
 $1,331

Relationship Between Simple Interest and
Compound Interest

Compound Interest Formula
n  0: P
n  1: F1  P (1  i )
n  2 : F2  F1 (1  i )  P (1  i ) 2

n  N : F  P (1  i ) N

Some Fundamental Laws
F  m a
V  i R
E  m c 2
The Fundamental Law of Engineering Economy
F  P (1  i ) N

Compound Interest
“The greatest mathematical discovery of all

time,”
Albert Einstein
Simple and Compound Interest
 Calculating Simple Interest accumulated

Interest is calculated using principal only
Interest = (principal)(number of periods)(interest rate)
I = Pni
Example: $100,000 lent for 3 years at simple i = 10%

per year. What is repayment after 3 years?
Interest = 100,000(3)(0.10) = $30,000
Total due = 100,000 + 30,000 = $130,000

1-53
Simple and Compound Interest
 Compound Interest
Interest is based on principal plus all accrued interest
That is, interest compounds over time
Interest = (principal + all accrued interest) (interest rate)

1-54
Compound Interest Example
Example: $100,000 lent for 3 years at i = 10% per
year compounded. What is repayment after 3
years?
Interest, year 1: I1 = 100,000(0.10) = $10,000
Total due, year 1: T1 = 100,000 + 10,000 = $110,000
Interest, year 2: I2 = 110,000(0.10) = $11,000
Total due, year 2: T2 = 110,000 + 11,000 = $121,000
Interest, year 3: I3 = 121,000(0.10) = $12,100
Total due, year 3: T3 = 121,000 + 12,100 = $133,100
Compounded: $133,100 Simple: $130,000
1-55
EXCEL Template
In 1626 the Indians sold Manhattan Island to Peter Minuit
of the Dutch West Company for $24.
• If they saved just $1 from the proceeds in a bank account

that paid 8% interest, how much would their descendants
have now?
• As of Year 2006 (2016), the total US population would be close to

300 (319) millions. If the total sum would be distributed equally
among the population, how much would each person receive?

Excel Solution
P  $1
i  8%
N  380 years
F  $1(1  0.08)380  $5, 023, 739,194, 020
=FV(8%,380,0,1)
= $5,023,739,194,020
$5,023,739,194,020
Amount per person 
300,000,000
 $16,746
Amount per person (in 2016)= $10,845,876,125,750 / 319,000,000

= $33,999
Cash Flows: Terms
 Cash Inflows – Revenues (R), receipts, incomes,
savings generated by projects and activities that
flow in. Plus sign used
 Cash Outflows – Disbursements (D), costs,
expenses, taxes caused by projects and activities
that flow out. Minus sign used
 Net Cash Flow (NCF) for each time period:
NCF = cash inflows – cash outflows = R – D
 End-of-period assumption:
Funds flow at the end of a given interest period
1-58
Cash Flows: Estimating
 Point estimate – A single-value estimate of a cash
flow element of an alternative
Cash inflow: Income = $150,000 per month
 Range estimate – Min and max values that

estimate the cash flow
Cash outflow: Cost is between $2.5 M and $3.2 M
Point estimates are commonly used; however, range estimates with
probabilities attached provide a better understanding of variability of
economic parameters used to make decisions

1-59
Cash Flow Diagrams
What a typical cash flow diagram might look like
Draw a time line Always assume end-of-period cash flows
Time
0 1 2 … … … n-1 n
One time
period
F = $100
Show the cash flows (to approximate scale)
0 1 2 … … … n-1 n
Cash flows are shown as directed arrows: + (up) for inflow
P = $-80
- (down) for outflow
1-60
Cash Flow Diagram Example
Plot observed cash flows over last 8 years and estimated sale next
year for $150. Show present worth (P) arrow at present time, t = 0

1-61
Practice Problem
Problem Statement
If you deposit $100 now (n = 0) and $200 two
years from now (n = 2) in a savings account that
pays 10% interest, how much would you have at
the end of year 10?

Solution
0 1 2 3 4 5 6 7 8 9 10
$100(1  0.10)10  $100(2.59)  $259

$200(1  0.10)8  $200(2.14)  $429
$100
$200 F  $259  $429  $688

Practice problem
Problem Statement
Consider the following sequence of deposits and
withdrawals over a period of 4 years. If you earn a
10% interest, what would be the balance at the end of
4 years?
0 1
$1,210
4
?
2 3
$1,000 $1,000 $1,500

$1,210 ?
0 1 3
2 4
$1,000 $1,000
$1,500
$1,100
$1,000
$2,100 $2,310 $1,210 $2,981
-$1,210 + $1,500
$1,100 $2,710

Solution
End of Beginning Deposit Withdraw Ending
Period balance made balance
n=0 0 $1,000 0 $1,000
n=1 $1,000(1 + 0.10) $1,000 0 $2,100

=$1,100
n=2 $2,100(1 + 0.10) 0 $1,210 $1,100

=$2,310
n=3 $1,100(1 + 0.10) $1,500 0 $2,710

=$1,210
n=4 $2,710(1 + 0.10) 0 0 $2,981

=$2,981
Economic Equivalence
 What do we mean by “economic
equivalence?”
 Why do we need to establish an economic
equivalence?
 How do we establish an economic
equivalence?
Contemporary Engineering Economics, 4th edition, © 2007

Definition: Combination of interest rate (rate of
return) and time value of money to determine
different amounts of money at different points in
time that are economically equivalent
How it works: Use rate i and time t in upcoming

relations to move money (values of P, F and A)
between time points t = 0, 1, …, n to make them
equivalent (not equal) at the rate i

1-68
Economic equivalence exists between cash flows

that have the same economic effect and could
therefore be traded for one another.
Even though the amounts and timing of the cash
flows may differ, the appropriate interest rate
makes them equal.

Example of Equivalence
Different sums of money at different times may be
equivalent in economic value at a given rate
$110
Year
0 1
Rate of return = 10% per year
$100 now
$100 now is economically equivalent to $110 one year from now, if

the $100 is invested at a rate of 10% per year.

1-70
Equivalence from Personal Financing Point
of View
F
 If you deposit P dollars

today for N periods at F  P(1  i) N
i, you will have F
0
dollars at the end of
N
period N.
PF P

Alternate Way of Defining Equivalence
P
 F dollars at the end of
period N is equal to a
single sum P dollars
now, if your earning 0 N
power is measured in
terms of interest rate i. = F
P  F (1  i ) N
0 N
Practice Problem
At an 8% interest, what is the equivalent worth
of $2,042 now in 5 years?
$2,042 If you deposit $2,042 today in a savings

account that pays an 8% interest annually.
how much would you have at the end of
5 years?
0 1 2 3 4 5
F
=
0 5
Solution
F  $2,042(1  0.08) 5
 $3,000
Example 3.3
At what interest rate
would these two amounts be equivalent?
$2,042
i=? $3,000
0 5

Equivalence Between Two Cash Flows
 Step 1: Determine the

$2,042 $3,000
base period, say, year 5.
 Step 2: Identify the
interest rate to use.
 Step 3: Calculate
equivalence value. 0 5
i  6%, F  $2,042(1  0.06)5  $2,733

i  8%, F  $2,042(1  0.08) 5  $3,000
i  10%, F  $2,042(1  0.10)5  $3,289
Example - Equivalence
Various dollar amounts that will be economically equivalent to
$3,000 in 5 years, given an interest rate of 8%.
$3,000
P  $2,042
(1  0.08)5
P F
$2,042 $2,205 $2,382 $2,572 $2,778 $3,000
0 1 2 3 4 5
Equivalent Cash Flows Are Equivalent at
Any Common Point in Time

Practice Problem
$200 V
$100
$120
$150
$100
=
$80
0 1 2 3 4 5 0 1 2 3 4 5
Compute the equivalent lump-sum amount at n = 3 at 10% annual interest.

Approach
V
$200
$150
$120
$100 $100
$80
0 1 2 3 4 5

V3  $511.90  $264.46
V
 $776.36
$200
$200(1  0.10) 1  $100(1  0.10) 2
$150  $264.46
$120
$100 $100
$80
0 1 2 3 4 5
100(1  0.10)3  $80(1  0.10) 2  $120(1  0.10)  $150
 $511.90

Practice Problem
$1,000
$500
At what interest rate
would you be A
indifferent between the 0 1 2 3
two cash flows?
$502 $502 $502
0 1 2 3

Approach
 Step 1: Select a base period $1,000

to compute the equivalent
value (say, n = 3) $500
 Step 2: Find the equivalent A
worth of each at n = 3. 0 1 2 3
$502 $502 $502
0 1 2 3
Establish Equivalence at n = 3
Option A : F3  $500(1  i)3  $1, 000

Option B : F3  $502(1  i ) 2  $502(1  i)  $502
 Find the solution by trial and error, say i = 8%
Option A : F3  $500(1.08)3  $1, 000

 $1, 630
Option B : F3  $502(1.08) 2  $502(1.08)  $502
 $1, 630
Practice Problem
$1,000
$500
Given: i = 10%,
A
Find: C that makes the 0 1 2 3
two cash flow streams
to be indifferent C C
B
0 1 2 3

Approach
$1,000
 Step 1: Select a base period
to use, say n = 2. $500
 Step 2: Find the equivalent A
lump sum value at n = 2 for
0 1 2 3
both A and B.
 Step 3: Equate both
equivalent values and solve C C
for unknown C.
B
0 1 2 3

Solution
 For A: $1,000
1
$500
V2  $500(1  0.10)  $1,000(1  0.10)
2
 $1,514.09 A
0 1 2 3
 For B:
V2  C (1  0.10)  C
 2.1C
C C
 To Find C: B
2.1C  $1, 514.09
0 1 2 3
C  $721
Minimum Attractive Rate of Return
 MARR is a reasonable rate
of return (percent)
established for evaluating
and selecting alternatives
 An investment is justified
economically if it is expected
to return at least the MARR
 Also termed hurdle rate,
benchmark rate and cutoff
rate

1-88
MARR Characteristics
 MARR is established by the financial managers of the
firm
 MARR is fundamentally connected to the cost of
capital
 Both types of capital financing (next slide) are used to
determine the weighted average cost of capital
(WACC) and the MARR
MARR usually considers the risk inherent to a project

1-89
Types of Financing
 Equity Financing –Funds either from retained

earnings, new stock issues, or owner’s infusion of
money.
 Debt Financing –Borrowed funds from outside
sources – loans, bonds, mortgages, venture
capital pools, etc. Interest is paid to the lender on
these funds.
For an economically justified project
ROR ≥ MARR > WACC
1-90
Opportunity Cost
 Definition: The opportunity cost of capital is the return on
the most profitable project that is not accepted
 If no MARR is set, the ROR of the first project not undertaken
establishes the opportunity cost
Example: Assume MARR = 10%. Project A, not

funded due to lack of funds, is projected to have
RORA = 13%. Project B has RORB = 15% and is
funded because it costs less than A
Opportunity cost is 13%, i.e., the opportunity to make
an additional 13% is forgone by not funding project
A
1-91
Engineering Economy
 Engineering Economy involves
 Formulating
 Estimating, and
 Evaluating
expected economic outcomes of alternatives designed
to accomplish a defined purpose
 Easy-to-use math techniques simplify the
evaluation
 Estimates of economic outcomes can be
deterministic or stochastic in nature
1-92
General Steps for Decision Making Processes
1. Understand the problem – define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply sensitivity
analysis
6. Select the “best” alternative
7. Implement the alternative and monitor results

Steps in an Engineering Economy Study

1-94
What is Meant by Ethics?
http://manofthehouse.com/money/career-advice/business-ethics-in-the-workplace
System of moral principles
Principles of right and wrong
Principles of conduct governing behavior
of an individual or a group
http://www.yourdictionary.com/library/reference/define-ethics.html
Ethics – Different Levels
 Universal morals or ethics – Fundamental beliefs:
stealing, lying, harming or murdering another are
wrong
 Personal morals or ethics – Beliefs that an
individual has and maintains over time; how a
universal moral is interpreted and used by each
person
 Professional or engineering ethics – Formal
standard or code that guides a person in work
activities and decision making
1-97
Ethics in an Engineering Course????
We have been studying engineering, such as
design, analysis, and performance
measurement.
Where does ethics fit in?
http://www.free-clep-prep.com/Business-Ethics-and-Society-DSST.html
How Ethics Fits into Engineering
Engineers . . .
Build products such as cell phones, home appliances,

heart valves, bridges, & cars. In general they advance
society by building new technology.
Develop processes, such as the process to convert salt

water into fresh water or the process to recycle bottles.
These processes change how we live and what we can
accomplish.
Products and processes have
consequences for society:
 If the bridge has an inadequate support, it will fail.
 If the gas tank is positioned too close to the
bumper, it might explode from a small accident.
 If a medical instrument isn’t accurate, improper
doses of medication can be given.
 If the process for refining gas produces too much
toxins, it harms the local community.
 E.g. Space Shuttle Challenger disaster
Decisions made by engineers usually
have serious consequences to people --
often to multitudes of people.
Ethics and ethical reasoning guide

decision-making.
Consider the March 11, 2011
8.9 magnitude earthquake
near Sendai, Japan.
103
The damage to the Fukushima I Nuclear
Power Plant (Fukushima Dai-ichi)
has led people worldwide to rethink the
ethics of nuclear power.
Notice the issues that come up in these discussions:
ISSUE #1: HEALTH AND SAFETY
RISKS: Danger to current and future

generations from leakage of radio-
104
isotopes used in nuclear power.
Plutonium-239 (half-life = 24,110 yrs)

is a particularly toxic radio-isotope.
Normally, 10 half lives are required
before a Pu-239 contaminated area
is considered safe again, in the case
of plutonium, roughly 250,000 years.
So if Pu leaked, -- say, due to an

earthquake -- it would cause a
health risk for roughly 8000
generations!!
Issues (cont.):

RISKS, FURTHER
105
CONSIDERATIONS:
a) The possibility of medical

science discovering a cure for
cancer sometime in the current or
next centuries adds uncertainty to
the long-term health risks of
leakages of radio-active isotopes.
Issues (cont.):

RISKS, FURTHER
106
CONSIDERATIONS:
b) The use of nuclear power may

increase our knowledge of
radioisotopes used for medical
purposes (possible benefit?).
Issues that come up in these
discussions:
CONSEQUENCES OF
ALTERNATIVES TO NUCLEAR
POWER.
107
ISSUE #2: DEPLETION OF
RESOURCES:
Fossil fuels, oil, natural gas and

coal, are non-renewable. These
resources also affect the goal of
health because of their impact on
pollution and climate changes.
Issues that come up in these discussions:
CONSEQUENCES OF
ALTERNATIVES TO NUCLEAR
POWER.
ISSUE #3: COMPARATIVE ECONOMIC

COSTS OF RENEWABLE SOURCES.
108
Renewable sources such as
hydro-electric-power, wind power,
solar power, geo-thermal heat,
agricultural biomass and tides do
not cause the environmental
hazards that fossil-fuels do.
But renewable sources must be balanced with the amount

of energy needed to produce and maintain them and
consequent environmental hazards. Currently, for
example, the energy required to manufacture and install
solar energy systems comes from fossil fuels.
Reasoning
The kind of reasoning that goes on in such

discussions involves certain goals
such as, in this case, health, safety and
biodiversity.
The reasoning then focuses on finding the best

– or at least the reasonably better --
means
for obtaining those goals.
This type of reasoning is often called practical reasoning.
110
It uses different methods from mathematics and the
sciences.
Ethical reasoning is a type of practical reasoning that

concerns certain societal or life-form goals, such as
justice, equality, freedom, health and safety.
The Essence of Your Engineering
Career
Engineering is one of the most important professions
in society.
As engineers we don’t just build things and develop

processes.
We build things and make processes in order to

better society.
In order to make society better we have to reflect

constantly on the products and processes that we
make.
Social Responsibility
One main connection between ethics and engineering

comes from the impact that engineered products and
processes have on society.
Engineers have to think about designing, building, and

marketing products that benefit society.
Social Responsibility requires taking into consideration

the needs of society.
Typical Ethical Issues that Engineers Encounter
Safety
Acceptable risk
Compliance
Confidentiality
Environmental health
Data integrity
Conflict of interest
Honesty/Dishonesty
Societal impact
Fairness
Professional Responsibility
Ethics has a second connection with

engineering.
It comes from the way in which being socially

responsible puts duties and obligations on us
individually.
Ethics fits into engineering through professional

responsibility.
Two Dimensions of Ethics in Engineering
Ethics is part of engineering for two main

reasons.
a)Engineers need to be socially responsible when

building products and processes for society.
b)Social responsibility requires professional

responsibility.
ABET Says . . .
By the time of graduation students will have an

understanding of professional and ethical
responsibility
http://www.boston.com/news/globe/magazine/articles/2006/09/10/its_the_engineering_stupid/
Code of Ethics for Engineers
All disciplines have a formal code of ethics. National Society of Professional
Engineers (NSPE) maintains a code specifically for engineers; many
engineering professional societies have their own code

1-117
Chapter Summary
 Engineering Economy fundamentals
 Time value of money
 Economic equivalence
 Introduction to capital funding and MARR
 Spreadsheet functions
 Interest rate and rate of return
 Simple and compound interest
 Cash flow estimation

 Cash flow diagrams
 End-of-period assumption
 Net cash flow
 Perspectives taken for cash flow estimation
 Ethics
 Universal morals and personal morals
 Professional and engineering ethics (Code of Ethics)
1-118

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© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

BSc Electrical Engineering

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

 Engineers design and create

Create & Design

Analyze Evaluate Evaluate

• Production Methods • Expected • Impact on

Evaluating past performance Evaluating and predicting future events

Accounting Engineering Economy

The factors of time and uncertainty are

1. Equipment and Process Selection

How do you choose between the Plastic SMC and

 Now is the time to replace

 Shall we build or acquire a

 Should a company buy

Principle 1: A nearby dollar is worth more than a

Today 6-month later

Buy $960 $550 $6,500 $350 $9,000

Lease $960 $550 $2,400 $550 0

Irrelevant items in decision making

Manufacturing cost 1 unit

Investment Class Potential Expected

Savings account Low/None 1.5%

Bond (debt) Moderate 4.8%

Q1. Work in small groups and brainstorm

 Corporate investments are expected to earn a return

The time value of money is the most important

To make such comparisons (the lottery decision

Contemporary Engineering Economics, 4th edition © 2007

This a two-edged sword whereby

Contemporary Engineering Economics, 4th edition © 2007

 Interest = amount owed now – principal

 Interest rate – Interest paid over a time period expressed as

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

 Interest earned over a period of time is expressed as a

 Borrower’s perspective – interest rate paid

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Interest rate Rate of return

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

F  $1, 000  (0.10)($1, 000)(3)

Contemporary Engineering Economics, 4th edition © 2007

F  $1, 000(1  0.10)3

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

Contemporary Engineering Economics, 4th edition © 2007

The Fundamental Law of Engineering Economy

Contemporary Engineering Economics, 4th edition © 2007

“The greatest mathematical discovery of all

 Calculating Simple Interest accumulated

Example: $100,000 lent for 3 years at simple i = 10%

Total due = 100,000 + 30,000 = $130,000

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Interest = (principal + all accrued interest) (interest rate)

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

• If they saved just $1 from the proceeds in a bank account

• As of Year 2006 (2016), the total US population would be close to

Contemporary Engineering Economics, 4th edition © 2007

Amount per person (in 2016)= $10,845,876,125,750 / 319,000,000