Engineering economy involves applying economic principles to engineering project decisions. It allows engineers to evaluate design alternatives and justify projects based on both technical and financial factors. Some key applications of engineering economy include selecting equipment, determining whether to purchase or lease assets, and evaluating public infrastructure projects based on costs, benefits, and property value impacts. The rational decision-making process in engineering economy helps engineers objectively analyze alternatives and choose optimal solutions for both business and non-profit organizations.

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2. Economic decision making for engineering systems is called engineering
economy. This definition may seem restricted to engineering projects and
systems only, engineering economy however is also the study of industrial
economics and the economic and financial factors which influence
industry.
Engineers are the people who are familiar with all the technicalities of
machinery and production therefore they are the best judges of the useful
lives of an asset and they also have the technical knowledge to calculate
the number of units a proposed plant would produce when operational.
In today’s competitive world of business it has become essential that
engineers should practice financial project analysis for engineering
projects and make rational decisions.
Engineering economy also includes the study of accounting practices for
manufacturing concerns. Unique features of accounting for manufacturing
concerns are process costing, batch costing, cost allocation.
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3. Engineering economy deals with justification and selection of projects.
Many engineers work on projects which address a specified activity or a
problem. Any decision regarding the project must be justified.
In business environments, many if not all, decisions are justified using
monetary criteria such as “profit”. Such decisions are made at the
managerial level and many engineers become managers in
manufacturing environment.
Therefore, all engineers, regardless of their employment, should know
methods and tools used in evaluation of projects.
The purpose of engineering economy is to expose all engineering
students to the methods which are widely used for evaluation of projects.
Even though, engineering economy deals mostly with selection of projects
in business environment, the tools and methods can be and are used by
individuals and non-profit organizations such as government, hospitals,
and charitable entities, etc.
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4. Let us present few examples in different environments where engineering
economy can facilitate the decision making process.
Business Environment: A small manufacturing company needs to buy a
forklift truck for material handling. Two different brands, say A and B, are
being considered. Which truck should be bought? The decision will
probably be based on minimization of cost.
Non-profit Organizations: A project for widening a two lane highway to
four lanes is being considered by the county board. A four lane highway
may reduce the traffic accident rate but is expected to lower property
values in the immediate neighborhood of the highway. Should the
proposed highway be built? The county board must weigh the relative
benefit of lower accident rates against the possible loss in value of homes
as well as the construction cost.
Individuals: A new college graduate needs a new car. Should this new
car be bought or leased? Methods from engineering economy can be
used for determining the best choice.
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5.  Economic factors are as important as regard for the physical laws and
science that determine what can be accomplished with engineering. The
following figure shows how engineering is composed of physical and
economic components:
 Physical Environment: Engineers produce products and services
depending on physical laws. Physical efficiency takes the form:
System output(s)
Physical (efficiency) = -------------------------
System input(s)
 Economic Environment: Much less of a quantitative nature is known
about economic environments -- this is due to economics being involved
with the actions of people, and the structure of organizations.
 Satisfaction of the physical and economic environments is linked through
production and construction processes. Engineers need to manipulate
systems to achieve a balance in attributes in both the physical and
economic environments, and within the bounds of limited resources.
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6. Following are some examples where engineering
economy plays a crucial role:
1. Choosing the best design for a high-efficiency gas furnace
2. Selecting the most suitable robot for a welding operation on an
automotive assembly line
3. Making a recommendation about whether jet airplanes for an overnight
delivery service should be purchased or leased
4. Considering the choice between reusable and disposable bottles for
high-demand beverages
With items 1 and 2 in particular, note that coursework in
engineering should provide sufficient means to
determine a good design for a furnace, or a suitable
robot for an assembly line, but it is the economic
evaluation that allows the further definition of a best
design or the most suitable robot.
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Engineering Economic Decisions
 Rational Decision- making
Process
 The Engineer’s Role in
Business
 Types of Strategic
Engineering Economic
Decisions
 Fundamental Principles in
Engineering Economics
Bose Corporation

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Engineering Economics
Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic
decisions

9. 1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion
to use
6. Select the best alternative
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10. 1. Recognize a decision
problem
2. Define the goals or
objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision
criterion to use
6. Select the best alternative
Need a car
Want mechanical
security
Gather technical as well
as financial data
Choose between
Saturn and Honda
Want minimum total
cash outlay
Select Honda
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Planning Investment
Marketing
ProfitManufacturing

13. Estimating a Required
investment
Forecasting a product
demand
Estimating a selling
price
Estimating a
manufacturing cost
Estimating a product
life
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Create & Design
• Engineering Projects
Evaluate
• Expected
Profitability
• Timing of
Cash Flows
• Degree of
Financial Risk
Analyze
• Production Methods
• Engineering Safety
• Environmental Impacts
• Market Assessment
Evaluate
• Impact on
Financial Statements
• Firm’s Market Value
• Stock Price

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The factors of time and uncertainty
are the defining aspects of any
engineering economic decisions

16. The term engineering economic decision refers
to all investment decisions relating to
engineering projects.
The five main types of engineering economic
decisions are (1) service improvement, (2)
equipment and process selection, (3)
equipment replacement, (4) new product and
product expansion, and (5) cost reduction.
The factors of time and uncertainty are the
defining aspects of any investment project.
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