Course Code

ME-325

Engineering
Economics
Instructor
Muhammad Umair

3/26/21 1 SMME School of Mechanical and

Manufacturing
 Lecture 1

2 SMME School of Mechanical and

Manufacturing Engineering
 ME-325
Engineering Economics (2-0)
Textbook:
A. J. Tarquin, L. T. Blank, Engineering Economy,
McGraw Hill
Reference Books:

N. M. Fraser and E. M. Jewkes, Engineering

Economics: Financial Decision Making for Engineers

William G. Sullivan and Elin M. Wicks, Estimation of

future events

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Manufacturing Engineering
 Grading Tentative
Assignments 10%
Quizzes 10%
OHT-1 15%
OHT-2 15%
Presentation 10%
Final Exam 40%

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Manufacturing Engineering
 Course Outline
• Course content/syllabus

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Manufacturing Engineering
 Introduction
• Engineering is the application of science for
achieving progress
• Science: E=mc2
• Engineering: Nuclear power plant to generate
electricity
• Economy: Feasible utilization of engineering
product

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Manufacturing Engineering
 Decisions
• Decision making is a part of life.
• How many decisions have you made already
today?
– Should I get out of bed this morning?
– Should I shower, brush my teeth, comb my hair,
etc.?

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Manufacturing Engineering
 Economic Decisions
• Task: To install a power plant
• Option 1: Hydro electric power plant
• Option 2: Thermal Power plant
• Option 3: Nuclear Power plant
• Option 4: Solar power plant
• Option 5: Geo-thermal power plant
• Option 6: No power plant

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Manufacturing Engineering
 Economic Decisions
• Complex problems – a mixture of economic,
political, and humanistic
• When do we use engineering economic
analysis?

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Manufacturing Engineering
 Economic Decisions
Buying a car
Financial data for Automobile options: Toyota Corolla vs. Honda City
Corolla City
Price Rs. 3899000 Rs. 2699000
Transportation Charges Rs. 25000 Rs. 15000

Service life 10 years 10 years

Fuel cost/year Rs. 25000 Rs. 20000
Maintenance cost/year Rs. 35000 Rs. 45000
Insurance/year Rs. 50000 Rs. 75000
Total Cost after 10 years Rs. 5024000 Rs. 4114000

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Manufacturing Engineering
 Case study
You are employed at an industrial setup in a major
city. The job requires that you travel 100 km daily
from your home to work. You will receive a salary of
Rs. 50000/month. Assuming that you have up to Rs.
1500000 to invest in your personal vehicle,
undertake a feasibility study to compare 3 different
model of vehicles, taking into consideration initial
cost, the fuel cost, maintenance cost, insurance and
salvage worth after one year of service. Assume any
other cost you may encounter (tolls etc)
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Manufacturing Engineering
 Economic Decisions
• You get the picture. These are mini-problems
(or events that call for decisions) that we are
solving every minute of every day. 
• These are what one would call “simple
problems”, that an individual can solve. 
• Intermediate problems usually call for decisions
that are economic in nature.

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Manufacturing Engineering
 Economic Decisions
• Define the problem
• Analysis:
1)      Is it sufficiently important.
2)      Does it require organized thought.
3) Does it have an economic component.

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Manufacturing Engineering
 What is the engineer’s role in economic
decisions?
• Capital expenditures – equipment purchases
• Design of new products

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Manufacturing Engineering
 Long term Economic Decisions
• Equipment and process selection
•       Equipment replacement
•       New product and product expansion
•       Cost Reduction
•       Service Improvements

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Manufacturing Engineering
 Short term Economic Decisions
• Made on the basis of the Cost-Volume
Relationship (Price vs Quantity in Micro.)
• Volume index – unit measure of volume (based
on inputs or outputs)
– Input: man hours
– Output: products per day that are made
• Volume of activity, quantity of product
produced, is related to the cost of producing the
product (or the price charged).
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Manufacturing Engineering
 Money and currency
• What is currency
– Currency has its origin in the division of labor.
– No man can supply all his own wants himself : no
one can knead his own bread, make his own coat,
and build his own house at the same time.
– Currency provides a means to trade necessities of
life against a common standard

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Manufacturing Engineering
 Definition Engineering Economics
• Engineering economy involves the systematic
evaluation of the economic merits of proposed
solutions 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 include

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Manufacturing Engineering
 Cont.
• promote the well-being and survival of an
organization,
• embody creative and innovative technology and
ideas,
• permit identification and scrutiny of their
estimated outcomes, and
• translate profitability to the “bottom line”
through a valid and acceptable measure of merit

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Manufacturing Engineering
 The Principles of Engineering
Economy
Principle 1PRINCIPLE
Develop the Alternatives
• Carefully define the problem! Then the choice
(decision) is among alternatives. The
alternatives need to be identified and then
defined for subsequent analysis

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Manufacturing Engineering
 Principle 2
Focus on the Differences
• Only the differences in expected future
outcomes among the alternatives are relevant
to their comparison and should be considered
in the decision.

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Manufacturing Engineering
 Principle 3
Use a Consistent Viewpoint
• The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint
(perspective).

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Manufacturing Engineering
 Principle 4
Use a Common Unit of Measure
• Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the analysis
of the alternatives

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Manufacturing Engineering
 Principle 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

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Manufacturing Engineering
 Principle 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

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Manufacturing Engineering
 Principle 7
Revisit Your Decisions
• Improved decision-making results from an
adaptive process; to the extent practical, the
initial projected outcomes of the selected
alternative should be subsequently compared
with actual results achieved

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Manufacturing Engineering
 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

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Manufacturing Engineering
The General Relationship between the Engineering Economic Analysis
Procedure and the Engineering Design Process
Engineering Economic Analysis
Procedure
• Step
1. Problem recognition, definition, and
evaluation.
2. Development of the feasible
alternatives.
3. Development of the outcomes and
cash flows for each alternative.
4. Selection of a criterion (or criteria)
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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Engineering Design Process
• Activity
1. Problem/need definition.
2. Problem/need formulation and
evaluation
3. Synthesis of possible solutions
(alternatives).
4. Analysis, optimization, and evaluation.
5. Specification of preferred alternative.
6. Communication.
School of Mechanical and
SMME Manufacturing Engineering
Engineering Design Process Schematic

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Manufacturing Engineering