Contemporary Engineering Economics 5th edition, (c) 2010 1

Engineering Economic Decisions

What is the role of the engineering staff within a firm?

They participate in a variety of decisions:

Manufacturing
Marketing
Financial decisions
Etc

We will see: economic decisions related to engineering projects: engineering

economic decisions.

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Engineering Economic Decisions
One of the engineers primary task is to plan for the acquisition of
equipment (capital expenditure) that will enable the firm to design
and produce products economically.

An inaccurate estimate of the need for assets can have serious

consequences.

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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

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Common Types of Strategic
Engineering Economic Decisions
Equipment or process selection
Equipment replacement decisions
New product and product expansion
Cost reduction
Improvement in service or quality

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Fundamental Principles of Engineering
Economics
Principle 1: A nearby dollar is worth more than a distant
dollar
Principle 2: All it counts is the differences among
alternatives
Principle 3: Marginal revenue must exceed marginal cost
Principle 4: Additional risk is not taken without the
expected additional return

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Principle 1: A nearby dollar is worth
more than a distant dollar
 Principle 2: All it counts is the differences
among alternatives
Option Monthly Monthly Cash outlay Monthly Salvage
Fuel Cost Maintenance at signing payment Value at end
of year 3

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

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

Irrelevant items in decision making

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Principle 3: Marginal revenue must exceed
marginal cost
Marginal
cost

Manufacturing cost 1 unit

Marginal
Sales revenue 1 unit revenue

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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%

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Two Factors in Engineering Economic
Decisions

Time
Uncertainty

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