2. The Principles of Engineering
Economy
The development, study, and application of any discipline must begin with a basic
foundation. We define the foundation for engineering economy to be a set of principles that
provide a comprehensive doctrine for developing the methodology. Following set of
principle provide a comprehensive doctrine for developing the methodology for
engineering economics
3. The Principles of Engineering
Economy
1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Risk and Uncertainty Explicit
7. Revisit Your Decisions
4. The Principles of Engineering
Economy
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.
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.
5. The Principles of Engineering
Economy
Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic and other, should be consistently
developed from a defined viewpoint (perspective).
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.
6. The Principles of Engineering
Economy
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.
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. The Principles of Engineering
Economy
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.
8. 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.
7-step Procedure:
Problem recognition, definition, & evaluation. Analysis and comparison of the
alternatives.
Development of the feasible alternative Selection of the preferred alternative.
Development of the outcomes and cash flows
for each alternative.
Performance monitoring and post evaluation
of results
Selection of a criterion (or criteria).
9. Application of the Engineering
Economic Analysis Procedure
A friend of yours bought a small apartment building for $100,000 in a college town. She
spent $10,000 of her own money for the building and obtained a mortgage from a local
bank for the remaining $90,000. The annual mortgage payment to the bank is $10,500.
Your friend also expects that annual maintenance on the building and grounds will be
$15,000. There are four apartments (two bedrooms each) in the building that can each be
rented for $360 per month.
10. Using Spreadsheets in
Engineering Economic Analysis
Spreadsheets are a useful tool for solving engineering economy problems.
Spreadsheets allow the analyst to develop an application rapidly, without being inundated
by the housekeeping details of programming languages.
They relieve the analyst of the drudgery of number crunching but still focus on problem
formulation.
11. Using Spreadsheets in
Engineering Economic Analysis
Most engineering economy problems are amenable to spreadsheet solution for the following
reasons:
1. They consist of structured, repetitive calculations that can be expressed as formulas that
rely on a few functional relationships.
2. The parameters of the problem are subject to change.
3. The results and the underlying calculations must be documented.
4. Graphical output is often required, as well as control over the format of the graphs.
