Engineering Economic Decisions

Lecture No. 1
Chapter 1
Contemporary Engineering Economics, 6th ed.
Copyright 2016

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
What Is an Engineering Economic
Decision?
Role of engineers in business
Understanding the term engineering
economic decision
An overview of a variety of engineering
economic decision problems
Understanding the fundamental principles of
engineering economics

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Role of Engineers in Business
Create and Design

Engineering Projects

Analyze Evaluate Evaluate

Production Methods Expected Impact on

Engineering Safety Profitability Financial Statements
Environmental Impacts Timing of Firms Market Value
Market Assessment Cash Flows Stock Price
Degree of
Financial Risk

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Engineering Economic Decisions

Investment Marketing

Planning Manufacturing Profit

Plan for the acquisition of equipment (capital expenditure) that will

enable the firm to design and produce products economically

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
What Makes Engineering Economic
Decisions Difficult?

Estimating a required investment

Forecasting a product demand
Estimating a selling price
Estimating a manufacturing cost
Estimating a product life

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
Accounting Vs. Engineering Economy

Evaluation Evaluation and

of past prediction of
performance future events

Accounting Engineering Economy

Past Future
Present

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Common Types of Strategic
Engineering Economic Decisions

Equipment or process selection

Equipment replacement decisions
New products and product expansion
Cost reduction
Improvement in service or quality
Design decisions

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Fundamental Principles of
Engineering Economics

Principle 1: A dollar earned today is worth more

than a dollar earned in the future.
Principle 2: The only thing that matters is the
difference between alternatives.
Principle 3: Marginal revenue must exceed
marginal cost.
Principle 4: Additional risk is not taken without
the expected additional return.

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 1: A dollar earned today is worth
more than a dollar earned in the future.

Interest rate = 10%

$121
$110 two
one years
$100 year later
today later
Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 2: The only thing that matters is the
difference between alternatives.
Option Monthly Monthly Cash Monthly Salvage
fuel cost maintenance outlay at payment value at
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

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
Principle 3: Marginal revenue must exceed
marginal cost.

Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
 Principle 4: Additional risk is not taken
without the expected additional return.
Investment Potential Risk Expected Return
Class

Stock (equity) High 11.5%

Increase risk
Bond (debt) Moderate 4.8%
Savings account Low/None 1.5%
(cash)

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved
Two Factors in Engineering Economic
Decisions

Time
Uncertainty

Contemporary Engineering Economics, 6th edition Copyright 2016 by Pearson Education, Inc.
Park All Rights Reserved