This document provides an overview of engineering economics and cash flow diagrams. It defines economics as the study of how resources are produced and used, and explains that engineering economy evaluates the costs and benefits of projects over time. Cash flow diagrams are used to illustrate the size, timing, and direction (inflows or outflows) of monetary amounts associated with projects. Examples of common cash flow categories like initial costs, annual costs, revenues, and salvage values are provided. The document also demonstrates how to construct a basic cash flow diagram with labeled costs and revenues plotted over time.

1. DDIT DIRE DAWA INSITUTE OF TECHNOLOGY
Construction Economics and finance
Dire Dawa University Institute of
Technology,
Construction Technology and Management
Stream

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• Basic Principle of Economics
• Terminology and Financial Statements
• Financial Ratio Analysis
• Time Value of Money & Interest Rate
• Economic evaluation of projects
The Outline of presentation

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Lecture 1
Basic Principle of Economics

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What is Economics: There are various way to illustrate economics:
 It is the study of Resources including Money.
 The science that deals with the production, distribution &
consumption of wealth, and with the various related problems of
labors, finance, taxation etc.
 Majorly Economics deals with resources and there are three
types of resources:-.
What is Economics?

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 Economics also a Study to How-Where-When & Why we spent
our money.
 The study of resources the kind of resources they are, how they
are produced and how they are used.
 How money is using in buying the resources.
What is Economics?

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Engineering is the Scientific principle to design & build machines,
structures and others items, including bridges, tunnels, roads,
vehicles and building.
Engineering Economy is deals with the concepts and techniques of
analysis useful in evaluating the worth of systems, products, and
services in relation to their costs.
What is Engineering Economy?

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Engineering economy quite simply is about determining the
economic factors and the economic criteria utilized when one or
more alternatives are considered for selection.
What is Engineering Economy?

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1. It is concerned with the monetary consequences or financial
analysis of the projects, products and processes that engineers
design.
2. Engineers are required to use economic concepts in the major
fields such as-
 increasing production,
 improving productivity,
 reducing human efforts,
 increasing wealth by maximizing profit,
 controlling and reducing cost
Importance of Engineering Economics

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3. It provides very important role to play in all engineering
decisions.
4. It gives basis for resource allocation problem.
5. It deals with identification of economic choices,
6. and concerns with the decision making of engineering problems
of economic in nature.
Importance of Engineering Economics

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Engineering economics is needed for many kinds of decision
making:
Example: For buying a good
Alternatives:
Not buying
Buying with $18,000 now, or
Buying for $600 per month for 3 years
Which is better
Importance of Engineering Economics

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It will help you make good decisions:
•In your professional life
•Regardless of whether you go into the private or public sector.
•And in your personal life!
•Knowledge of engineering economics will have a significant
impact on you personally!
Importance of Engineering Economics

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ENGINEERING ECONOMICS INVOLVES:
FORMULATING,
ESTIMATING, AND
EVALUATING ECONOMIC OUTCOMES WHEN CHOICES
OR ALTERNATIVES ARE AVAILABLE
Importance of Engineering Economics

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Engineering Economics could be important for:
•Understand the problem.
•Collect all relevant data/information.
•Define the feasible alternatives.
•Evaluate each alternative.
•Select the “best” alternative.
•Implement and monitor the decision.
Importance of Engineering Economics

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Engineering Economics could be important for:
Importance of Engineering Economics

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Engineering economics is based mainly on estimates of future costs
and benefits:
So it has to deal with risk and uncertainty.
The costs, benefits, and other parameters are typically unknown,
and can vary over time:
The values of these parameters will dictate a particular numerical
outcome
And therefore a particular decision!
Importance of Engineering Economics

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Performing an Engineering Economy

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Cash Flow- The estimated inflow and the outflow of money are
called cash flow.
The cash flow diagram is used to evaluate money along with its
equivalent with time: forward time or backward time
Cash inflows are the receipts, revenues, incomes, and savings
generated by project and business activity.
A plus sign (+) indicates a cash inflow.
Cash Flow Diagram

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Cash outflows are costs, payments, expenses, and taxes caused
by projects and business Cash flow activity.
A negative or minus sign (-) indicates a cash outflow.
Net cash flow = cash inflows - cash outflows
Cash Flow Diagram

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Engineering/Construction projects generally have economic
consequences that occur over an extended period of time.
◦For example, if an expensive piece of machinery is installed in a
plant were brought on credit, the simple process of paying for it
may take several years.
◦The resulting favourable consequences may last as long as the
equipment performs its useful function.
Cash Flow Diagram

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Each project is described as cash receipts or disbursements
(expenses) at different points in time.
When a project involves only costs, the minus sign may be
omitted for some techniques, such as benefit/cost analysis.
The costs and benefits of engineering projects over time are
summarized on a cash flow diagram (CFD).
Specifically, CFD illustrates the size, sign, and timing of individual
cash flows, and forms the basis for engineering economic analysis.
Cash Flow Diagram

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A CFD is created by first drawing a segmented time-based
horizontal line, divided into appropriate time unit.
Each time when there is a cash flow, a vertical arrow is added
pointing down for costs and up for revenues or benefits.
The cost flows are drawn to relative scale.
Cash Flow Diagram

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The expenses and receipts due to engineering projects usually
fall into one of the following categories:
◦First cost: expense to build or to buy and install.
◦Operations and maintenance (O&M): annual expense, such as
electricity, labour, plumber, and minor repairs.
◦Salvage value: receipt at project termination for sale or transfer of
the equipment (can be a salvage cost)
◦Revenues: annual receipts due to sale of products or services
◦Overhaul: major capital expenditure that occurs during the asset’s
life.
Categories of Cash Flows

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In a cash flow diagram (CFD) the end of period “t” is the same
as the beginning of period (t+1)
Beginning of period cash flows are: rent, lease, and insurance
payments etc.
End-of-period cash flows are: O&M, salvages, revenues,
overhauls etc.
The choice of time 0 is arbitrary; it can be when a project is
analysed, when funding is approved, or when construction begins.
Drawing a Cash Flow Diagram

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One person’s cash outflow (represented as a negative value) is
another person’s inflow (represented as a positive value)
It is better to show two or more cash flows occurring in the same
year individually so that there is a clear connection from the
problem statement to each cash flow in the diagram
Drawing a Cash Flow Diagram

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m
Drawing a Cash Flow Diagram

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An Example of Cash Flow Diagram

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Thank you !!!