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ENGINEERING ECONOMICS

!""# %& '()*(+, - . %/0 1/%-

2)3+4 34 54*+6"758(93"+6 % : 1

;9" ?"ABC")3 34 D+ E4) F(

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INTRO TO COURSE

J"+64)(> 2)3+4A*

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Personal Introduction

D+I K(C(+( O3(C.?2E.(P M3C())6#= O"3.C()).6#=P

o Q">4@ 4H 38" TU L=B8"+ MA*

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Teaching Philosophy

4

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Course Description & Approach

E"V*=+"A H4+ ?JMWR5 . X"=

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How to Prepare for Midterms?

E"(A 38" 3"N3X44#

?33")A >",c 6*BB"63"A 9+("3" 38" (66=B)C")36 b6=C=>(+ 34 C=A3"+C6c

?6# V*"63=4)6 4) J=(dd( e.f ?)6@"+ V*"63=4)6

4) J=(dd( bX"63 @(, 34 >"(+) =6 34 3"("C6H+4C 3"N3X44# b64>*3=4)6 9463"A 4)

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Expectations

J84)"6 ()A (>> 9"+64)(> ">"" (3 (>> 3=C"6b^4 3(>#=)B0 Q4*A H44A0 ;)4+=)B0 ?*A=(> )43=`= ">"

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CHAPTER 1

F(#=)B M

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Chapter 1 Learning Objectives

D=63=)B*=68 X"3@"") 6=C9>"0 =)3"+C"A=(3" ()A "N

9+4X>"C6

E"" ()A 9*+946" 4H ")B=)""+=)B

",6=6

MN9>(=) 38" )=)" 63"96 4H 38" "> 6

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Decision Making

D"6 34 ()(>,d" ()A 64>G" 38"

""C6 38", H("C6

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A Sea of Problems

J+4X>"C6 "G">6 4H A=H`=3,&

o ;=C9>" b)43 C*A

@" X*, (3 ( 3=C"no

2)3"+C"A=(3" b9+=C(+=>, " 9+4m"*(3"A ", X*3 C(, (>64 =)*A" )4)["

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The Role of Engineering Economic Analysis

K8" 9+4X>"C6 684*>A&

o X" =C94+3()3 ")4*B8 34 m*63=H, 6"+=4*6 384*B83 ()A

"HH4+3o X" )43 "(6=>, @4+#"A 4*3 =) 4)"h6 8"(Ao4+B()=d(3=4)

+"V*=+"A

o "

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Examples of Engineering Economic Analysis

S4 ")B=)""+=)B A"6=B)6 > H4+ 69")A=)B C4)",

M)B=)""+=)B V*"63=4)6&

o !8="n

o L4@ 684*>A 9+4m"6o

L4@ 34 (6n

o F(#=)B 38" X"63 =)G"63C")3 A"

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Economics

M=3, 34 6(3=6H, (>> 4H

( 643"+)(3=G" B=G") *9 =6 38" 4994+3*)=3,

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Some Engineering Concerns

K8" 3(6# 4H A"3"+C=)=)B&%I !8(3 64

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The Decision-Making Process

16

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The Decision-Making Process

%I

E""CI

1I

D"`=)" 38" B4(> 4+ 4Xm"" +">"G()3 A(3(I

aI

2A")3=H, H"(6=X>" (>3"+)(3=G"6I

-I

;">"3"+)(3=G"I

lI

54)63+*3"+)(3=G"I

kI

?*A=3 38" +"6*>3I17

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1. Recognize the Problem

K8" 63(+3=)B 94=)3 =) +(3=4)(> A"

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2. Define the Goal or Objective

? B4(> 4+ 4Xm"

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3. Assemble Relevant Data

2)H4+C(3=4) C(, X"&

o J*X>=68"A b'4*+)(>67 J*X>=

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4. Identify Feasible Alternatives

K8" X"63 (>3"+)(3=G" 684*>A X" =C9>"C")3"A

o ;4C"3=C"60 38" X"63 (>3"+)(3=G" =6 34 C(=)3(=) 38"

(>3"+)(3=G"6&

o pR+(=)634+C=)Bq

o 54)G")3=4)(> ()A *)" (>3"+)(3=G"6 684*>A X" +"3(=)"A H4+H*+38"+ ()(>,6=6

21

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5. Select the Criterionfor Determining the Best Alternative

? 3"+)(3=G"6 34 A"3"+C=)" @8=(3=G"0 )43 (X64>*3"I

;">"64

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Maximize Profit

!8"+" 38" 63()A(+A =6 34 64>">, pC(N=C=d"9+4`=30q 38"+" (+" 38+"" 3,9"6 4H 9+4X>"C6&

o

S=N"A 2)9*3& =)9*3 +"64*+

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Sustainability

L4@"G"+ C4+" >4@=)B63()A(+A6 684*>A (>@(,6 (>64 X" 466"6 4H >46"+6I

o F(N=C=d" 9+4`=3 4+ 6(>"6I

o F=)=C=d" 9+4m"

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6. Construct a Model

F4A"> 3"+)(3=G"6

o ;">">, C(38"C(3=I

? C4A"> =6 ( +"9+"6")3(3=4) 4H +"(>=3,I 23 C*63&

o E"9+"6")3 38" =C94+3()3 9(+36 4H 38" 6,63"C (3 8()A

o R" (A"V*(3" 34 64>G" 38" 9+4X>"C

25

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7. Predict the Outcomes for Each

Alternative

K8" C4A"> ()A A(3( (+" *6"A 34 9+"A=3"+)(3=G"6I

2) 4+A"+ 34 3"+)(3=G"6 C*63 X"

"G(>*(3"A =) ( " @(,&

o rH3") =) 38" H4+C 4H C4)", b=3, C"3+=3"+)(3=G" =C9>="6 38(3)438=)B ">6"

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8. Choose the Best Alternative

D"*"6 "N9+"66"A =) ;3"9 1I

^43"& K8" ">=C=)(3=4) 4H H"(6=X>" (>3"+)(3=G"6b"(+>="+ =) 38=6 9+4

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9. Audit the Results

54C9(+" 38" +"6*>36 34 38" 9+"A=())"A ()A 38" +"6*>36 (+" (6 "N9"())"A =63=< ",6=6 ()A =C9>"C")3(3=4)

o J+4G=A"6 H""AX(9 #""9 ( 9+4m"

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Decision Making: Problem 1

?

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Decision Making: Solution 1

r*39*36 (+" `=N"A0 38"+"H4+" C=)=C=d"

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Decision Making: Problem 2

'48)0 () (*34 C"(+ @(B"6I

L" @4*>A >=#" 34 B"3 () =), 34 B"3 () =)3"+"63 4H-j ,"(+ H4+ 38" +"63 4H 8=6 >=H"I

!=>> '48) C(#" ")4*B8 C4)", @=38 8=6 =)G"63C")36 34V*=3 8=6 m4Xn

31

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Decision Making: Solution 2

'48)h6 ,"(+>, "(+)=)B6

_ %-ba/cb-1c u %-b%I-cb%/cb-1c _ sa10k//

'48)h6 =)G"63C")3 =)

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Ethical Dimensions inEngineering Decision Making

M38=, (6 pM)B=)""+6 5()(A(q! @@@I")B=)""+6

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Gaining Knowledge and Building Trustversus Favours for Influence

;(>"6 3("6 3(

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Cost, Quality, and Functionality

K8" 943")3=(> 3+(A"[4HH6 X"3@"")&

o 5463

o

g*(>=3,o S*)=3,

L4@ A4 ,4* 3+"(3 38=6n

!8(3 A4"6 38=6 A"9")A 4)n

35

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The Environment We Live In

Q(+B"[6" 9+4m", =)G4>G" 64C"")G=+4)C")3(> =C9(

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Safety and Cost

K8"+" (+" 3+(A"[4HH6 X"3@"") 6(H"3, ()A , m*63 w6(H" ")4*B8hn

o

23 =6 p344 6(H"0q 38"+"H4+" 344 "N9")6=G"n

5() @" 38=)# 4H (), +"(>[>=H" "N(C9>"6 4H 38=6n

37

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Emerging Global Issues

W4G"+)C")36 8(G" 63(+3"A 34 9+"G")30 >=C=30 ()A"N946" `=)() ()A "38= @+4)B[A4=)B @=38=)

4X(>=d(3=4) =6 () =C94+3()3 9(+3 4H "38=A=63=)(3=4)(> 4@& 38" >4 63()A(+A0 4+ 9"+8(9638" 8=B8"+ =)3"+)(3=4)(> b()A C4+" "N9")6=G"c

63()A(+An !8="G()3n

38

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Importance of Ethics in EngineeringEconomic Analysis

M38= ()A 84@ 84)"63>, A"

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Review of Learning Objectives

D=63=)B*=68 X"3@"") 6=C9>"0 =)3"+C"A=(3" ()A "N

9+4X>"C6

E"" ()A 9*+946" 4H ")B=)""+=)B

",6=6

MN9>(=) 38" )=)" 63"96 4H 38" "> 6

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Suggested Textbook Practice Problems

58(93"+ %&

o %[Z0 %[\0 %[%/0 %[%%0 %[%a0 %[%]0 %[1a0 %[Za0 %[a\0

%[-%0 %[--0 %[-\0 %[-k0 %[lZ0 %[ll

58(93"+ 1&o

1[10 1[a0 1[l0 1[]0 1[%/0 1[%a0 1[1/0 1[1%0 1[1-0 1[1\0

1[Z%0 1[Z10 1[Za0 1[Z-0 1[Zl0 1[Zk0 1[a%0 1[aZ0 1[al01[a]0 1[-Z0 1[-a0 1[--

K8"6" (+" 63+4)B>, 6*BB"63"A0 ()A @=>> X" 6=C=>(+34 38" (66=B)C")3 V*"63=4)6I

v4* (+" H+"" 34 A4 C4+" 38() m*63 38" 6*BB"63"A9+4X>"C6 H4+ "N3+( 9+(

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CHAPTER 2

M)B=)""+=)B 54636 ()A 5463 M63=C(3=)B

42

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Chapter 2 Learning Objectives

D"`=)" ()A A=HH"+")3=(3" X"3@"") G(+=4*6 =d" 4@ A=(B+(C6

43

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Engineering Costs

54636& 38" "*" 4H 38" +"64*+(+="60 C(3"+=(>9*+

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Classification of Costs

S=N"A& "66 4H 84@ C*"& A"9")A6 4) >"G"> 4H 4*39*3 4+ ("G">o Q=)"(+ b9+494+3=4)(>c 4+ )4)[>=)"(+

! ?C4*)3 4H +(@ C(3"+=(> *6"A A"9")A6 4) 84@ C(), *)=36(+" C(A"I

K43(>

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Figure of Classification of Costs

K43(> 5463 _ 343(> `=N"A G(+=(X>"

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Profit and Loss Terms

K43(> +"G")*" _ T)=3 9+=

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Profit and Loss Terms Explained

R+"(#["G") 94=)3& K8" >"G"> 4H ( +"G")*" =6B+"(3"+ 38() 343(> "66 38() 38"

X+"(#["G") 94=)30 @8"+" 343(> +"G")*"I

48

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Figure of Profit and Loss Terms

49

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Break-Even, Profit, and Loss: Problem

? >4@=)B " 4@=)B

(c 38" 343(> )*CX"+ 4H

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Break-Even, Profit, and Loss: Solution

(c K4 X+"(#"G")& K43(> +"G")*"

1a/0/// u 11/ b%1c)_ a// b%1c)

)_ 1a/0///Y xba// . 11/cb%1cy _ %%%

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Profit and Loss

(Non-Linear Revenue and Cost)

52

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Past and Future Costs

;*)# 5463& F4)", (>+"(A, 69")3 A*" 34 ( 9(63A"A X" A=6+"B(+A"A =) ")B=)""+=)B ",6=6

o

^438=)B

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Expense Types

E""& 2>>)"667 ?() H4+ >(+B" )4)[+"

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Incremental Costs

2) 5463& 5463 A=HH"+")3"+)(3=G"6

55

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Cash Costs versus Book Costs

5(68 , 9(,C")3 4) () (*34 >4()

R44#

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Life-Cycle Costs

Q=H"[

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Phases of Life-Cycle Costs

%I

^""A6 (66"66C")3 ()A m*63=`==C=)(+, A"6=B)

ZI

D"3(=>"A A"6=B)

aI J+4A*

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Life-Cycle Costing

2) B")"+(>0 38" >(3"+ ( 9+4A*=H"[4 X" =)

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Figures: Life-Cycle Costs

5*C*>(3=G" >=H"[>(+6 69")3

!"#$%&'&($ *$+",- &./-,$ &0+1+ /-*$/+$ 0# &./-,$

60

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Cost Estimating

M)B=)""+=)B ",6=6 =6 H*3*+" X(6"AI

o S*3*+" =(X>"

38" A"

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Types of Estimates

E4*B8 M63=C(3"6 bB*3 >"G">c

o g*="A M63=C(3"6

o

M63=C(3"6 C(A" H+4C A"3(=>"A A"6=B)6 *6=)B

V*()3=3(3=G" C4A">6 ()A G")A4+ V*43"6I L=B8 >"G"> 4H(

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Difficulties in Estimation

r)"[4H[([U=)A M63=C(3"6

o S=+63[3=C" 9+4m"(X>" b8*C() H(=3, ()A (=3, b()A C4+"+">=(X>"c "63=C(3"6 b, >=C=3"A "N9"+=")

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Estimating Models

64

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Estimating Models Contd

65

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Estimating Models Contd

66

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The Learning Curve: Problem

2) ( "N (66"CX>, 49"+(3=4)0 =3 =6 H4*)A 38">"(+)=)B (3" 38" 3=C" +"V*=+"A H4+ 38" 1//38 *)=3I

67

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The Learning Curve: Solution

68

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Estimating Benefits

M,6=6 4H3") +"V*=+"6

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54636 ()A R")"`=36 4G"+ 3=C" =)3"+9+"3(3=4) =6 946=3=G" H4+ 4@6

b+"G")*"6c ()A )"B(3=G" H4+ 4@6 b"N9")6"6cI

K8" >")B38 4H 38" (++4@ +"9+"6")36 38" C(B)=3*A" bsc 4H 38" 4@I

K=C" A=C")6=4)& 94=)36 =) 3=C" @8") 38" 946=3=G" ()A )"B(3=G" 4@6 4

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Categories of Cash Flows

%I S=+63 5463G(B" i(>*"+" +"" 4H9+4A*

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Drawing Cash Flow Diagramswith a Spreadsheet

72

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Example 1 Cash Flow: Annuity

73

End of

Year

Cash

Flow

0 -$10,000

1 $5,000

2 $5,000

3 $5,000

4 $5,000

5 $5,000

6 $5,000

7 $5,000

8 $5,000

9 $5,000

10 $5,000

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Example 2 Cash Flow: Irregular

74

End of

Year

Cash

Flow

0 -$10,000

1 $3,000

2 $2,000

3 $1,000

4 $5,000

5 $6,000

6 -$2,000

7 $6,000

8 -$3,000

9 $4,000

10 $8,000

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Example 3 Cash Flow: Geometric Series

75

End of

Year

Cash

Flow

0 -$10,000

1 $3,000

2 $3,600

3 $4,320

4 $5,184

5 $6,221

6 $7,465

7 $8,958

8 $10,750

9 $12,899

10 $15,479

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Review Chapter 2 Learning Objectives

D"`=)" ()A A=HH"+")3=(3" X"3@"") G(+=4*6 ,d" 38" Q"(+)=)B5*+G" "HH" C4A">6 H4+