This document provides an introduction to engineering economy. It defines economics as the study of how limited resources are used to satisfy unlimited human needs. Engineering economy examines how to allocate resources for engineering projects. Key resources include land, labor, capital, and manufactured capital. The field originated in the 19th century to address economic analysis in projects like railroad building. Engineering economy uses a structured process and mathematical modeling to evaluate alternatives based on factors like costs, benefits, and risks to select the preferred design.

1. INTRODUCTION TOINTRODUCTION TO
ENGINEERING ECONOMYENGINEERING ECONOMY
$$ $$

2. WHAT IS ECONOMICS ?WHAT IS ECONOMICS ?
The study of how limitedThe study of how limited
resources is used toresources is used to
satisfy unlimited humansatisfy unlimited human
needs.needs.

3. WHAT IS ECONOMICS ?WHAT IS ECONOMICS ?
The study of how individualsThe study of how individuals
and societiesand societies choosechoose to useto use
scarce resources that naturescarce resources that nature
and previous generationsand previous generations
have provided.have provided.

4. ResourcesResources
• Land
• Labor
• Capital

5. LANDLAND
All gifts of nature, such as: water,All gifts of nature, such as: water,
air, minerals, sunshine, plant andair, minerals, sunshine, plant and
tree growth, as well as the landtree growth, as well as the land
itself which is applied to theitself which is applied to the
production process.production process.

6. LABORLABOR
The efforts, skills, and knowledgeThe efforts, skills, and knowledge
of people which are applied to theof people which are applied to the
production process.production process.

7. CAPITALCAPITAL
• Real Capital (Physical Capital )Real Capital (Physical Capital )
– Tools, buildings, machinery -- things whichTools, buildings, machinery -- things which
have been produced which are used in furtherhave been produced which are used in further
productionproduction
• Financial CapitalFinancial Capital
– Assets and money which are used in theAssets and money which are used in the
production processproduction process
• Human CapitalHuman Capital
– Education and training applied to laborEducation and training applied to labor
in the production processin the production process

8. Origins of EngineeringOrigins of Engineering
EconomyEconomy
The perspective that ultimate economyThe perspective that ultimate economy
is a concern to the engineer and theis a concern to the engineer and the
availability of sound techniques toavailability of sound techniques to
address this concern differentiate thisaddress this concern differentiate this
aspect of modern engineering practiceaspect of modern engineering practice
from that of the past.from that of the past.

9. Origins of EngineeringOrigins of Engineering
EconomyEconomy
• PioneerPioneer: Arthur M. Wellington, civil: Arthur M. Wellington, civil
engineerengineer
latter part of nineteenth century;latter part of nineteenth century;
addressed role of economic analysis inaddressed role of economic analysis in
engineering projects;engineering projects;
area of interest: railroad buildingarea of interest: railroad building
• Followed by other contributions whichFollowed by other contributions which
emphasized techniques depending onemphasized techniques depending on
financial and actuarial mathematics.financial and actuarial mathematics.

10. PRINCIPLES OF ENGINEERINGPRINCIPLES OF ENGINEERING
ECONOMYECONOMY
1. Develop the Alternatives;1. Develop the Alternatives;
2. Focus on the Differences;2. Focus on the Differences;
3. Use a Consistent Viewpoint;3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;6. Make Uncertainty Explicit;
7. Revisit Your Decisions7. Revisit Your Decisions

11. DEVELOP THE ALTERNATIVESDEVELOP THE ALTERNATIVES
The final choice (decision) isThe final choice (decision) is
among alternatives. Theamong alternatives. The
alternatives need to be identifiedalternatives need to be identified
and then defined for subsequentand then defined for subsequent
analysis.analysis.

12. FOCUS ON THE DIFFERENCESFOCUS ON THE DIFFERENCES
Only the differences in expected futureOnly the differences in expected future
outcomes among the alternatives areoutcomes among the alternatives are
relevant to their comparison andrelevant to their comparison and
should be considered in the decision.should be considered in the decision.

13. USE A CONSISTENT VIEWPOINTUSE A CONSISTENT VIEWPOINT
The prospective outcomes of theThe prospective outcomes of the
alternatives, economic and other,alternatives, economic and other,
should be consistently developed fromshould be consistently developed from
a defined viewpoint (perspective).a defined viewpoint (perspective).

14. USE A COMMON UNIT OFUSE A COMMON UNIT OF
MEASUREMEASURE
Using a common unit of measurementUsing a common unit of measurement
to enumerate as many of theto enumerate as many of the
prospective outcomes as possible willprospective outcomes as possible will
make easier the analysis andmake easier the analysis and
comparison of alternatives.comparison of alternatives.

15. CONSIDER ALL RELEVANTCONSIDER ALL RELEVANT
CRITERIACRITERIA
Selection of a preferred alternativeSelection of a preferred alternative
(decision making) requires the use of a(decision making) requires the use of a
criterion (or several criteria). Thecriterion (or several criteria). The
decision process should consider thedecision process should consider the
outcomes enumerated in the monetaryoutcomes enumerated in the monetary
unit and those expressed in some otherunit and those expressed in some other
unit of measurement or made explicit inunit of measurement or made explicit in
a descriptive manner.a descriptive manner.

16. MAKE UNCERTAINTY EXPLICITMAKE UNCERTAINTY EXPLICIT
Uncertainty is inherent in projectingUncertainty is inherent in projecting
(or estimating) the future outcomes of(or estimating) the future outcomes of
the alternatives and should bethe alternatives and should be
recognized in their analysis andrecognized in their analysis and
comparison.comparison.

17. REVISIT YOUR DECISIONSREVISIT YOUR DECISIONS
Improved decision making results from anImproved decision making results from an
adaptive process; to the extent practicable,adaptive process; to the extent practicable,
the initial projected outcomes of thethe initial projected outcomes of the
selected alternative should beselected alternative should be
subsequently compared with actual resultssubsequently compared with actual results
achieved.achieved.

18. ENGINEERING ECONOMY ANDENGINEERING ECONOMY AND
THE DESIGN PROCESSTHE DESIGN PROCESS
An engineering economy study isAn engineering economy study is
accomplished using a structuredaccomplished using a structured
procedure and mathematical modelingprocedure and mathematical modeling
techniques. The economic results aretechniques. The economic results are
then used in a decision situation thatthen used in a decision situation that
involves two or more alternatives andinvolves two or more alternatives and
normally includes other engineeringnormally includes other engineering
knowledge and input.knowledge and input.

19. ENGINEERING ECONOMIC ANALYSISENGINEERING ECONOMIC ANALYSIS
PROCEDUREPROCEDURE
1. Problem recognition, formulation, and1. Problem recognition, formulation, and
evaluation.evaluation.
2. Development of the feasible alternatives.2. Development of the feasible alternatives.
3. Development of the cash flows for each3. Development of the cash flows for each
alternative.alternative.
4. Selection of a criterion ( or criteria).4. Selection of a criterion ( or criteria).
5. Analysis and comparison of the alternatives.5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.6. Selection of the preferred alternative.
7. Performance monitoring and post-evaluation7. Performance monitoring and post-evaluation
results.results.

20. ACCOUNTING AND ENGINEERINGACCOUNTING AND ENGINEERING
ECONOMY STUDIESECONOMY STUDIES
Modern cost accountingModern cost accounting maymay satisfy any or all ofsatisfy any or all of
the following objectives:the following objectives:
1. To determine the cost of products or services1. To determine the cost of products or services
2. To provide a rational basis for pricing goods2. To provide a rational basis for pricing goods
or servicesor services
3. To provide a means for controlling3. To provide a means for controlling
expendituresexpenditures
4. To provide information on which operating4. To provide information on which operating
decisions may be based and the resultsdecisions may be based and the results
evaluatedevaluated