Engineering Economy 16th edition
Chapter 1: Introduction to Engineering Economy
Engineering economy = the systematic evaluation of the economic merits of proposed solutions to
engineering problems. To be economically acceptable, solutions to engineering problems must
demonstrate a positive balance of long-term benefits over long-term costs, and they must also:
Promote the well-being and survival of an organization
Embody creative and innovative technology and ideas
Permit identification and scrutiny of their estimated outcomes
Translate profitability to the ‘bottom line’ through a valid and acceptable measure of merit
The mission of engineering economy is to balance these trade-offs in the most economical manner.
The principles of engineering economy:
1. Develop the alternatives = define the problem. Then the choice (decision) is among
alternatives. The alternatives need to be identified and then defined for subsequent analysis.
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.
3. Use a consistent viewpoint = the prospective outcomes of the alternatives, economic and
other, should be consistently developed from a defined viewpoint (perspective).
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.
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.
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.
7. Revisit your decisions = improved decision making results from an adaptive process; to the
extent practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.
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.
Engineering economic analysis procedure:
1. Problem recognition, definition, and evaluation problem/need definition
2. Development of the feasible alternatives problem/need formulation and evaluation
3. Development of the outcomes and cash flows for each alternative analysis, optimization,
and evaluation
4. Selection of a criterion (or criteria) analysis, optimization, and evaluation
5. Analysis and comparison of the alternatives analysis, optimization and evaluation
6. Selection of the preferred alternative specification of preferred alternative
7. Performance monitoring and post-evaluation of results communication
Chapter 2: Cost concepts and design economics
Fixed costs = those unaffected by changes in activity level over a feasible range of operations for the
capacity or capability available.
Variable costs = those associated with an operation that varies in total with the quantity of output or
other measures of activity level.
Incremental cost (or incremental revenue) = the additional cost (or revenue) that results in increasing
the output of a system by one (or more) units.
1
,Direct costs = costs that can be reasonably measured and allocated to a specific output or work
activity.
Indirect costs = costs that are difficult to allocate to a specific output or work activity.
Indirect costs, overhead, and burden are used interchangeably.
Standard costs = planned costs per unit of output that are established in advance of actual
production or service delivery. They are developed from anticipated direct labor hours, materials,
and overhead categories. Because total overhead costs are associated with a certain level of
production, this is an important condition that should be remembered when dealing with standard
cost data.
Sunk cost = one that has occurred in the past and has no relevance to estimates of future costs and
revenues related to an alternative course of action.
Opportunity cost = incurred because of the use of limited resources, such that the opportunity to use
those resources to monetary advantage in an alternative use is foregone.
Phases of the life cycle and their relative cost:
Consumer goods and services = those products or services that are directly used by people to satisfy
their wants.
Producer goods and services = used to produce consumer goods and services or other producer
goods.
Goods and services are produced and desired because they have utility – the power to satisfy human
wants and needs. Utility is most commonly measured in terms of value, expressed in some medium
of exchange as the price that must be paid to obtain the particular item.
Good and services may be divided into two types:
1. Necessities
2. Luxuries
General price-demand relationship = as the selling price per unit (p) is increased, there will be less
demand (D) for the product, and as the selling price is decreased, the demand will increase.
2
, Linear function:
a is intercept on price axis and -b is the slope
Perfect competition = occurs in a situation in which any given product is supplied by a large number
of vendors and there is no restriction on additional suppliers entering the market.
Monopoly = at the opposite pole from perfect competition. A perfect monopoly exists when a unique
product or service is only available from a single supplier and that vendor can prevent the entry of all
others into the market.
Total revenue (TR):
But, most businesses would not obtain maximum profits by maximizing revenue.
Breakeven point: total revenue = total cost
Finding breakeven points
Scenario 1: demand is a function of price
3
Chapter 1: Introduction to Engineering Economy
Engineering economy = the systematic evaluation of the economic merits of proposed solutions to
engineering problems. To be economically acceptable, solutions to engineering problems must
demonstrate a positive balance of long-term benefits over long-term costs, and they must also:
Promote the well-being and survival of an organization
Embody creative and innovative technology and ideas
Permit identification and scrutiny of their estimated outcomes
Translate profitability to the ‘bottom line’ through a valid and acceptable measure of merit
The mission of engineering economy is to balance these trade-offs in the most economical manner.
The principles of engineering economy:
1. Develop the alternatives = define the problem. Then the choice (decision) is among
alternatives. The alternatives need to be identified and then defined for subsequent analysis.
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.
3. Use a consistent viewpoint = the prospective outcomes of the alternatives, economic and
other, should be consistently developed from a defined viewpoint (perspective).
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.
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.
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.
7. Revisit your decisions = improved decision making results from an adaptive process; to the
extent practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.
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.
Engineering economic analysis procedure:
1. Problem recognition, definition, and evaluation problem/need definition
2. Development of the feasible alternatives problem/need formulation and evaluation
3. Development of the outcomes and cash flows for each alternative analysis, optimization,
and evaluation
4. Selection of a criterion (or criteria) analysis, optimization, and evaluation
5. Analysis and comparison of the alternatives analysis, optimization and evaluation
6. Selection of the preferred alternative specification of preferred alternative
7. Performance monitoring and post-evaluation of results communication
Chapter 2: Cost concepts and design economics
Fixed costs = those unaffected by changes in activity level over a feasible range of operations for the
capacity or capability available.
Variable costs = those associated with an operation that varies in total with the quantity of output or
other measures of activity level.
Incremental cost (or incremental revenue) = the additional cost (or revenue) that results in increasing
the output of a system by one (or more) units.
1
,Direct costs = costs that can be reasonably measured and allocated to a specific output or work
activity.
Indirect costs = costs that are difficult to allocate to a specific output or work activity.
Indirect costs, overhead, and burden are used interchangeably.
Standard costs = planned costs per unit of output that are established in advance of actual
production or service delivery. They are developed from anticipated direct labor hours, materials,
and overhead categories. Because total overhead costs are associated with a certain level of
production, this is an important condition that should be remembered when dealing with standard
cost data.
Sunk cost = one that has occurred in the past and has no relevance to estimates of future costs and
revenues related to an alternative course of action.
Opportunity cost = incurred because of the use of limited resources, such that the opportunity to use
those resources to monetary advantage in an alternative use is foregone.
Phases of the life cycle and their relative cost:
Consumer goods and services = those products or services that are directly used by people to satisfy
their wants.
Producer goods and services = used to produce consumer goods and services or other producer
goods.
Goods and services are produced and desired because they have utility – the power to satisfy human
wants and needs. Utility is most commonly measured in terms of value, expressed in some medium
of exchange as the price that must be paid to obtain the particular item.
Good and services may be divided into two types:
1. Necessities
2. Luxuries
General price-demand relationship = as the selling price per unit (p) is increased, there will be less
demand (D) for the product, and as the selling price is decreased, the demand will increase.
2
, Linear function:
a is intercept on price axis and -b is the slope
Perfect competition = occurs in a situation in which any given product is supplied by a large number
of vendors and there is no restriction on additional suppliers entering the market.
Monopoly = at the opposite pole from perfect competition. A perfect monopoly exists when a unique
product or service is only available from a single supplier and that vendor can prevent the entry of all
others into the market.
Total revenue (TR):
But, most businesses would not obtain maximum profits by maximizing revenue.
Breakeven point: total revenue = total cost
Finding breakeven points
Scenario 1: demand is a function of price
3
